Koninklijke Ahold Delhaize NV

AEX:AD

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, good morning, and welcome to the Analysts Conference Call on the Second Quarter and Half Year 2018 Results of Ahold Delhaize. Please note that this call is being webcast and recorded.Please note that in today's call forward-looking statements may be made. All statements other than statements of historical facts may be forward-looking statements. Such statements may involve known and unknown risk and uncertainties that could cause actual results, performance or events, to differ materially from those included in the statements. Such risk and uncertainties are discussed in the interim report second quarter and half-year 2018 results and also in Ahold Delhaize public filings and other disclosures.Ahold Delhaize disclosures are available on aholddelhaize.com. Forward-looking statements reflect the current views of Ahold Delhaize's management and assumptions based on the information currently available to Ahold Delhaize management. Forward-looking statements speak only as of the day they are made, and Ahold Delhaize's does not assume any obligation to update such statements except as required by law.[Operator Instructions] 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 Mr. Henk Jan ten Brinke, Senior Vice President, Investor Relations. Please go ahead sir.

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

Thank you, operator, and good morning, ladies and gentlemen. Welcome to our second quarter 2018 results conference call and audio webcast. I'm here with Frans Muller, our CEO; and Jeff Carr, our CFO. And after a brief presentation, we will be happy to take your questions. So with that, over to you, Frans.

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

Thank you very much, Henk Jan. Ladies and gentlemen, good morning and welcome to our second quarter 2018 results conference call. As the new CEO of Ahold Delhaize, I'm pleased to report a solid quarter for our company in which we continued to deliver strong earnings and free cash flow growth.Net income grew by 15.3% and even by 20% at constant rates and free cash flow was almost EUR 700 million in this quarter. We remain on track with the execution of our strategy, building great local brands, and strengthening our leading positions in our major markets, both in our stores and online.Sales was clearly impacted by the timing of Easter and adjusted for this and the so-called remedy stores which we sold in 2017, net sales grew by 2.4% this quarter. Our online business grew sales by 23% overall, and close to 29% in The Netherlands.Synergies are coming in as planned resulting in an increased margin and allowing us to continue to invest in our customer offering. I will share some of these examples with you later on, how we are investing in health, digital and convenience, all for the benefit of our customers. But before that, let me hand over to Jeff who will take you through the numbers in a greater detail.

[Jeffrey Carr, CFO & Member of Management Board]

Good morning, ladies and gentlemen, and thanks -- thank you, Frans. As Frans mentioned, sales at EUR 15.5 billion, up 0.9% at constant rates in the quarter and clearly the quarter as mentioned was impacted by Easter and in this quarter, the sale of the remedy stores in 2017. Adjusting for these 2 factors, sales were up 2.4% and I'll note that the remedy stores were largely sold by the end of Q2 2017, therefore we won't see any significant impact in comparisons going forward. This is the last quarter we see that impact.Underlying operating margins at 4% were up 10 basis point versus last year and at EUR 616 million. Underlying operating income was up 2.3% at constant exchange rates. Lower onetime merger-related costs and lower taxes resulted in net income at EUR 410 million, up 15.3% at actual exchange rates and 20% at constant rates.Moving on looking at the United States, we saw comparable sales down in the quarter 0.1%, but adjusting for Easter, comparable sales were up 1%, 1.0%. And although total U.S. volumes were negative in Q2, we continued to see strong volume growth at Food Lion and Hannaford. However, where we're standing up the brands at Giant Landover, Giant Carlisle and especially at Stop & Shop, we saw negative volumes in this quarter. I do see this as a short-term impact as the new merchandising and marketing teams are set up across these brands and the commercial and promotional programs are handed over from the former Ahold USA teams to the local brand teams.This handover has led to lower promotional activity in the first half, and this has also been a factor in driving slightly higher shelf-price inflation. However, the handover of these activities is now complete and we expect to see improving sales trends for the U.S. in the next quarter. We continue to see improvements in underlying operating margin, up 10 basis points to 4.0%, and largely due to the ongoing synergy delivery. And that said, we do continue to see significant wage inflation in the northeast, and transportation inflation throughout the network.Now staying on the U.S. for a while, on the next chart you see Easter was positioned right at the end of Q1 and we saw a bigger than normal impact from the timing of Easter in the second quarter. Therefore, I'd like to spend a brief moment to discuss the half. Comparable sales over the first half were up 1.3% on average, with a total shelf-price inflation of 1.9% and volumes down 0.6%.With respect to shelf-price inflation, specifically in the second quarter, let me give you a brief explanation. First we see CPI data for the northeast and the D.C.-Baltimore area running ahead of the U.S. average at around 1.0% compared to 0.3% for the total U.S. This is reflective of higher labor rates as I mentioned, caused by not least the minimum wage increases and transportation cost increases. Secondly, as I've just mentioned, we see lower promotional levels at Stop & Shop and Giant Carlisle and Landover because of the change in the commercial organization which has also contributed to shelf-price inflation in the first half of the year. But in summary, this transitionary period for Stop & Shop and Giant Foods is now complete and I expect, just to reiterate, to see an improving trend in comparable sales in the U.S. for the third quarter.Now moving on to the Netherlands, total sales grew by 3.3% when adjusted for the remedy stores, and comparable sales were up 2.9% in the quarter or 3.8% adjusted for Easter. bol.com and ah.nl continued to grow strongly with bol's consumer sales growing just under 30%.Underlying operating margins were at 5.3%, up 20 basis points versus last year, and excluding bol.com, margins in the Netherlands were flat at 5.8%. While online remains overall dilutive to margins in The Netherlands, I must say I'm pleased this quarter with the margin improvement we see at bol.com, and as we've previously stated, we expect bol.com to be EBITDA-positive in 2018.In Belgium, we continued to see the Delhaize brand strengthening. Comparable sales were up 1.4%, or 2.3% adjusted for Easter. Price inflation was low in Belgium at 0.2% reflecting increased promotional activity which has resulted in continued market share gains in Belgium. Underlying operating margin was up 10 basis points to 2.7% despite additional investments we've been making in labor in our stores as we continued to improve the customer proposition.In Central and Southeastern Europe, we continued to see low comparable sales growth due to the negative comps that we've reported in the last few quarters in Greece. The good news is that we're now cycling these competitive reopenings and we are seeing an improving sales trend in Greece. Romania and Czech remain strong with 11% comps for example in Romania and strong single-digit comparable sales in the Czech Republic. Underlying operating margins at 3.6% were down 20 basis points compared to last year and that was mainly due to the lower margins in Greece and labor cost inflation in Romania and the Czech Republic.Moving on to free cash flow, the second quarter has been very positive and in fact to the half free cash flow stands at EUR 1.1 billion, well ahead of 2017, and well on the way to delivering EUR 1.9 billion for the full year. Working capital in the half was EUR 200 billion -- almost EUR 300 million, better than the first half 2017. And we now expect to exceed the working capital targets that we set for ourselves in terms of 2017 and '18 which was to deliver EUR 170 million -- EUR 175 million extra working capital over those 2 years. There is a little timing in the second quarter numbers for working capital, and we do expect to see a small reversal in Q3.Income tax at EUR 94 million in the first half was significantly down versus last year and we remained in line with our guidance of a EUR 200 million reduction in cash tax for 2018.And finally, capital expenditures for the first half were lower than we expected to be blunt at EUR 667 million which is lower than last year, and I -- but I do expect to see this against the timing and I expect to see a significant increase in capital expenditures in the second half of the year.Finally moving on to synergies, as you can see we generated EUR 99 million of net synergies -- EUR 99 million of net synergies in the quarter versus EUR 61 million last year, an increment of EUR 38 million of net synergies. And we remain on track to deliver EUR 420 million net synergies in 2018 of which EUR 152 million is incremental to 2017.Onetime costs related to the merger remain on track and within the expected total cost that we've given previously in our guidance.So thank you, and now I'll hand back to Frans.

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

Thank you very much, Jeff. I promise to come back to a few business highlights, so I'm with you now on Page #14. As a part of our strategy, we want to inspire our customers and promote a healthy lifestyle and healthier eating in particular. A great example of this is the introduction of My Nutritional Value at Albert Heijn, an online tool which was developed with the University Medical Center in Utrecht, The Netherlands. It shows loyalty cardholders the amount of sugar, salt, fibers, proteins, saturated fat, calories and carbs for each product they purchase. And it also helps them to find alternatives based on their individual preferences in nutritional values.Nature's Promise, our very successful natural own brand range from the U.S. which is already more than $1 billion brand, successfully being launched in the Czech Republic, and received a prestigious choice of customer awards in 2 categories, another great example on how own brands can travel across countries and continents.Across our brands, we are significantly reducing sugar, fat and salt in our own brand product ranges and provide in-store guidance to our customers. Our Guiding Stars nutrition navigation program in the U.S. helps them making healthier choices in the food they buy.Alfa Beta successfully completed its Free Fruits for Kids' pilots. The success of the pilot has given the green light for the full rollout to all the AB stores that are part of our ambition to educate over 30,000 children on healthy eating in Greece.Delhaize in Belgium ran a very successful marketing campaign, "Magical Vegetables," to encourage children to eat more vegetables by changing names and packaging to make them more attractive for children.In keeping with the Ahold Delhaize promise to be a better place to work, our Albert brand in Czech is rolling out a road show for associates to promote well-being and health in the Czech Republic. The program includes expert advice on nutrition and a healthy lifestyle as well as sports activities.We continue to develop and expand our digital programs throughout the business. Let me give you a few examples. In U.S. we have announced the launch of Peapod Digital Labs, which will drive innovation, expertise and skill, creating a shared e-commerce infrastructure for all our brands in the U.S., and will accelerate growth in our e-commerce business and digital programs. We expect Peapod Labs to be operational by the end of this year and at the same time overseeing the Peapod brand.All our U.S. brands are now partnering with IRI on data analytics, using Point of Sale, customer and supply chain data, and this will help us identify new growth opportunities, more efficient operations and most importantly leads to more happy customers.At Hannaford in the north where we recently introduced our digital loyalty program, today almost 1 million of customers have enrolled to My Hannaford Rewards program, another great example of our digital initiatives.I would like to mention Albert Heijn's newest store concept, not only innovating in its fresh experience, but also with well-embedded digital signage, shelf labels and much more. We are proud that the store is nominated by IGD for Store of the Year together with Alibaba's Hema in China, Target in the U.S. and Walmart omni-channel in Mexico, and I wish the colleagues in Hoofddorp all the success in this effort.We offered our time-constrained customers convenient ways to do their grocery shopping, both in our stores and online. We provide them with an increasing range of meal kits and freshly made meals that are easy to prepare, healthy to eat, with great quality ingredients, but also affordable for families as a daily meal. In various brands, we are also building and opening in-store kitchens where made-to-order food is prepared using products from the store and that customers can take out or enjoy in the store.Mega Image in the fast-growing Shop & Go format introduced Mega Apetit, offering fresh, convenient, chef-inspired meals and snacks for Romanians on the go, with options ranging from salads, soups and sandwiches to sushi, fruit, desserts and drinks.Technology helps us helping our customers. We are currently piloting using smart door locks at ah.nl that gives Albert Heijn access to the homes of its customers to deliver their online grocery order, even putting it in the fridge. We talk about the seamless checkout experience before that we have developed and tested at Stop & Shop and Albert Heijn, where customers pay their groceries without going to a checkout. We will start to roll this out in the second half of this year to a larger number of stores.Now before I wrap up, I would like to briefly touch upon bol.com, our very successful online platform in the Benelux. Bol.com continues its very strong sales growth while improving their margin. Third-party sales grew by almost 50% and is now around 40% of bol.com's total consumer sales, an attractive platform for other retailers to build their online presence.bol.com, as Jeff already mentioned, was EBITDA-positive in the first half of the year and we expect a similar performance for the full year of 2018. And following the opening of bol.com's new warehouse last year, we are planning to double the current warehousing capacity by 2021, starting construction early next year. This fully mechanized state-of-the-art facility requires a significant investment of about EUR 200 million.So before we start the Q&A session, let me briefly wrap up. Q2 showed a good financial performance with strong growth in net income and free cash flow. Adjusted for Easter and the remedy stores, group sales was up 2.4% at constant rates and we expect sales trends in the U.S. to improve in the third and the fourth quarter.Online sales was growing 23%, especially strong in the Netherlands. And margins improved by 10 basis points to 4% as synergies are coming in as planned and we continue to make investments in our customer proposition and price. We confirm our guidance for free cash flow of EUR 1.9 billion for the year, with expected capital expenditures of also EUR 1.9 billion, in line with the previous guidance.Now let me hand back to the operator to start the Q&A session.

[Operator]

[Operator Instructions] The first question comes from Xavier Le Mené, Bank of America Merrill Lynch.

[Xavier Le Mené]

Two question, if I may actually. The first one on the U.S. margin trend. If we exclude actually the synergies that you were able to deliver in the U.S. your margin has been done in Q2 by, if my calculation is correct, about 30 basis points. It was down by 10 bps in Q1, so how can you explain such a deterioration of the margin excluding the synergies? So that would be the first question, especially given the fact that as you've said you were not potentially investing as much as you were expecting. The second one is the free cash flow. Given the better working capital that you were able to deliver in Q2, is the EUR 1.9 billion guidance easy to reach? And why are you not potentially upgrading it?

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

Let me -- Xavier, let me handle those questions. First of all, I think in terms of the U.S. margin, we remain on track to hit our guidance for the full -- for the company for the full year and I think we often read too much into quarter-to-quarter trends. There's a lot going on and a business is complicated as Ahold Delhaize USA with some $10 billion-$11 billion of sales. And so I'm not reading too much into a trend from Q1 to Q2, I'd look at the overall performance over the half. We still see margin improvement and in terms of the overall synergy delivery, there are some headwinds in terms, as I mentioned, labor cost for example and health care cost in the U.S. But I remain comfortable with the guidance that we've given for the -- and the consensus that's out there for the full year. In terms of cash flow, obviously it was a strong performance in the first half, in the first quarter and the second quarter. Working capital is doing better than we had originally planned and certainly the fact that we've had a good first half makes it easier to achieve the full year guidance of EUR 1.9 billion, but we're not at this point increasing that guidance. We do expect a little bit of a reversal on working capital in the -- due to timing issues in the third quarter. And I do expect to see a step-up in our capital expenditure programs in the -- which for various reasons, 1 or 2 different reasons have been delayed into the second half of the year. So for that reason I'm sticking with the EUR 1.9 billion free cash flow guidance, but with EUR 1.1 billion already banked so to speak, then I do feel comfortable that we should be able to achieve that.

[Operator]

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

[Fabienne Caron, Head of Food Retail Sector]

Questions for me, the first one -- the first one for you Frans. Now that you are running Ahold Delhaize, what are you clearly -- what are you mainly focusing on for the business? The second question would be on Belgium. Can you explain why you had higher labor cost because I remember the transformation program where the plan was to get lower labor cost at Delhaize Belgium? And can you as well comment on the slight decline in the own stores for Belgium? Is it due to closure or is it due to like-for-like?

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

In the last couple of years, together with Dick, I think we managed a very good integration and merger process, so that was very successful period for the company. After 2 years, I think it's an opportunity for the company to take the next step, the next phase of growth. And we will continue to drive growth and innovation in the stores in online. I'm very excited about the projects we already launched today with the update of the Stop & Shop brand, our largest business in the U.S. with people digital labs and the platform for digital e-commerce for all our U.S. brands. I'm very happy that we get traction in Belgium and Jeff will come back to -- later to your Belgium question. And what is also clear is that efficiency will remain high on our agenda as it has been before. We have a solid foundation and after the 2 years of integration, it's now for us to take the company to the next level and we have the opportunity in November at the Capital Markets Day to talk more about these type of topics.

[Jeffrey Carr, CFO & Member of Management Board]

Yes, I think just, Fabienne, on labor cost in Belgium, it's true the program did achieve its goals of increasing flexibility and bringing down the rate, but what we're talking about now is targeted adding labor into stores to improve the customer experience. And so it's very much targeted program to improve the customer experience, to improve service levels in certain areas and that's what I was referring to in terms of labor in Belgium. And I think that's -- and in terms of the sales performance, we're pleased with the sales performance generally in Belgium. We've seen a good upturn in terms of comparable sales in quarter 1 and quarter 2, both across the franchise stores and our own stores. And I think we'll continue to -- certainly we'll see market share gains in Belgium and I'm comfortable that we're going to deliver a strong year in terms of the Belgium performance in 2018.

[Fabienne Caron, Head of Food Retail Sector]

Yes, but the decline in own store sales in Belgium of minus 1% in Q3, is it due to closures mainly then, the way you talk about it, not to like for like?

[Jeffrey Carr, CFO & Member of Management Board]

I'm not sure where you get the number for own stores. I don't think...

[Fabienne Caron, Head of Food Retail Sector]

In the appendix of the press release.

[Jeffrey Carr, CFO & Member of Management Board]

Okay. Well...

[Fabienne Caron, Head of Food Retail Sector]

You show franchisee sales and own store sales for Belgium and Holland.

[Jeffrey Carr, CFO & Member of Management Board]

Yes. Yes. Okay. Well, certainly again you have an Easter impact in terms of own stores and also in terms of almost 1% in Belgium and certainly in terms of the rebuilds that we're doing. We have a significant number of remodels which are taking place, which have led to some closures in the quarter relative to last year. So we're upping the volume of remodels that we do in this year and certainly that's a factor in that as well. But overall in terms of the comparable sales numbers, we're very comfortable that we're making good progress.

[Fabienne Caron, Head of Food Retail Sector]

Both in -- and you're talking -- when you're comfortable you're thinking as well about own stores, right? So you're happy with the...

[Jeffrey Carr, CFO & Member of Management Board]

Yes. I think good progress on the own stores as well on the comparable basis and as I said we are increasing the remodeling programs and as a consequence of that we have more store closures compared to last year.

[Operator]

The next question comes from Mr. Vincent Lee, Bernstein.

[Vincent Lee]

Vincent Lee from Bernstein here. Three questions from me please. The first one is on working capital. Is there more potential to improve working capital at the same level in future years? My second question is regarding the U.S. What was the comparable sales exit rates at the end of Q2 in the U.S.? And what gives you confidence that the Q3 comparable sales will improve? And my final question is how high can EBITDA margins get in bol.com?

[Jeffrey Carr, CFO & Member of Management Board]

Let me talk about working capital. I think working capital is one of those areas where if you keep focused on working capital, you see areas of improvement. Obviously we've made stronger improvement, we gave guidance in 2016 that over 2017 and '18 we see EUR 175 million benefit from working capital. We're obviously well ahead of that though I do -- as I stated in the presentation, I expect a little bit of that to come back due to timing of some payments in Q3. We're still well ahead of that EUR 175 million target that we gave in 2016. I think we continue to see -- we will continue to focus on working capital and I think as we continue to do that we'll continue to see opportunities. I think it is a law of diminishing returns, eventually you reach a level of working capital where you're at an optimum level. But I think we'll certainly fall from that in terms of looking at optimizing receivables, all areas of working capital, payables and inventory. We still see opportunities to continue to improve, but I'm not going to give specific targets at this point for 2019.

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

On the U.S. itself for the third and fourth quarter, we already mentioned that we have positive volumes also in this quarter for Hannaford and Food Lion. And as we already mentioned we stood up the former USA organizations into brand-centric -- brand companies. We are in the second quarter in a transition there. That is finalized now, that work. We have highly energized teams with a lot of new talent in the companies to grow those sales numbers. That's why we expect for the third and the fourth quarter better comparable sales numbers than we saw in the second quarter for those brands. And let's not forget we also announced today the update of the Stop & Shop brand which is a program where we will see the first 20 stores already in the program in this year -- in this calendar year, but also a boost for 2019 as well. The brand-centric organization brought a lot of mandate to the brands on category, on merchandising, on pricing and we see a lot of energy around this that people take that accountability and take the opportunity to bring their brands close to customers and that's also apart from the Easter effect we saw in the second quarter will therefore also see us in the comparable positive trend of sales in the third and the fourth quarter.

[Jeffrey Carr, CFO & Member of Management Board]

Yes, I'd just add, Vincent, that in period -- sorry, in June the run-rate was higher than the average for the month, I'm not going to give specific month-by-month numbers and we have 5 weeks of experience in already in quarter 3 under our belts. So we feel comfortable to give that guidance. I think on bol, coming back to EBITDA, obviously we're pleased that we see EBITDA positive at bol. Again I hesitate to get stuck into a specific target, but I do think it's important that you also look at return on capital employed on our e-commerce businesses and I'm comfortable within 2019-20 time frame, the return on capital employed at bol will be reaching the levels of our average business and our company targets even with the extra investments that we're making in bol. So it's a very -- we have a positive outlook in terms of both the growth and the margin development at bol.com.

[Operator]

The next question comes from Sreedhar Mahamkali, Macquarie.

[Sreedhar Mahamkali, Analyst]

Three questions then for me as well, please. Just to understand the Ahold USA comments specifically, if you can talk a little bit more about the commercial strategy, what you've done because I think second half of last year you have talked about consistently investing in price and I think Q1 this year you've talked about significantly reducing promotional activities. So clearly has been -- there's been some reshaping of the commercial model, what is working and what is not working so well that will be helpful to know? But also just in terms of the volume trajectory Ahold USA is probably down 1.5% or something in both Q1 and Q2, is it the same run-rate of last year? Was last year much different? That's the second question. And the third one just again in terms of the U.S. are you able to give us a sense of the cost pressures you've talked about just a little bit, what sorts of wage increases you're seeing this year so far? And more potentially looking forward into 2019, are we right in thinking several of the Stop & Shop businesses and joint businesses will come up for wage negotiations starting 2019, is that the right timetable? Those are the questions.

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

I start off Jeff with the cost question from Sreedhar. We mentioned already that we have an margin rate improvement also in the second quarter also in the U.S., but also offset at the meantime some cost increases, Jeff mentioned already health care and minimum wages, not a component, it's also low [ LLDs ] logistics piece which may need the cost of loads and the cost of fuel. It is across the whole U.S. the case. So we have been managing also to offset in those increases. At the moment we are very comfortable with our wage increase rates and the levels where we are. Let's not forget we are also party and unionized company, so those rates are competitive there and also for Food Lion and Hannaford with always the strategy to be in Giant Martin's to be in line with the market, in line with legislation, so we have no backlogs there. And we normally manage and fund these kind of cost increases by improving efficiencies. So we...

[Sreedhar Mahamkali, Analyst]

Trying to understand the run-rate if that's possible, so the wage increases, I think historically you talked about 2%, 2.5%?

[Jeffrey Carr, CFO & Member of Management Board]

Yes, the run rate is about 3%.

[Sreedhar Mahamkali, Analyst]

3%.

[Jeffrey Carr, CFO & Member of Management Board]

And that means also that our teams in a very good job also at the same time to increase efficiencies to offset those cost. This was on the cost side, so...

[Sreedhar Mahamkali, Analyst]

Sorry, to come -- just is it right to think Ahold side the negotiations will come up beginning of next year because you've last done them in 2016, is that correct?

[Jeffrey Carr, CFO & Member of Management Board]

I think, yes, Sreedhar, we have contracts coming up every year. And I think we're constantly in negotiations with the unions. There's multiple contracts. There are some big ones coming up next year as well. But I think every year we have contracts coming up and we haven't really seen any major issues with those as we've gone through the last few cycles. So I don't think 2019 is going to be particularly different from what we've seen over the last 2 or 3 years. But obviously we do see wage pressure in the northeast which will add to that discussion. And as Frans mentioned, that's partly driven by minimum wage increases, health care increases, there's a lot of pressures in terms of labor cost in the northeast, but we've managed that over the years to offset that with increased efficiency within the stores. And while maintaining the customer service levels as well, I think that's an important fact. I think, can I just comment on the trend -- on the AUSA because I think it's important to look at this quarter and the half-year of 2018 as a transitionary period. There was a huge amount of work in setting up the brands and basically giving them independence from the AUSA centralized merchandising and marketing teams. We're very excited about what that creates in terms of the brands becoming closer to their customers, the brand -- and we're going to see some of that excitement I think in November when we show you some of the ideas for Stop & Shop going forward actually in the market that you'll see that being executed. So I think the first half of this year we should see as a transitionary period where volumes will -- a bit lower than we would have liked, we're not trying to pretend this was a good half of the year for those AUSA brands. But we already have the experience as I mentioned of June and then looking at the July period 5 weeks since the close of this half, where we see an improvement regardless of the investments we -- in terms of the remodeling and at the stores in Stop & Shop we already see an improvement in the performance. And I think that's the key message I'd like to leave you with.

[Sreedhar Mahamkali, Analyst]

Are you saying, Jeff, that in fact you've now turned a corner? Is it now positive already?

[Jeffrey Carr, CFO & Member of Management Board]

I'd say we're seeing an improvement in the trend, I can't -- I'm not going to go further than that at this point.

[Sreedhar Mahamkali, Analyst]

And the trade model, is there any comments to make on price cuts and promotion strategy?

[Jeffrey Carr, CFO & Member of Management Board]

I don't think we've changed our strategy, it's more been about execution and when you have a brand like Stop & Shop and the competition at ShopRite where at ShopRite something like 60% of the sales is on promotion, I think the transition of those promotional plans at Stop & Shop we see around about 40% of our sales on promotion. You really have to get it spot on in terms of what you put on the front coupon, what price points you're at. And I just said that we haven't quite hit all cylinders firing in the first half of this year and that's been partly due to that transitionary period. I think we're through that period and we're seeing an improvement in the performance already. It's not been a strategy shift or a shift in our price positioning, we've maintained -- we continue to maintain our price points. Sorry Frans.

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

No, I agree to that -- Jeff reported, but at the same time, of course customers are asking for more convenience and fresh meal solutions and that's what we're exactly doing now. And we will be able to share a lot more on these type of topics in November. At the same time -- we mentioned this earlier that we stood up our own private label department now where we in-sourced former brokers and we do it all ourselves and we also expect that for the second half of this year and the years to come and stronger proposition for customers without private label offerings, that's not only incent the store, but also in produce and fresh. So in that way the offering will be much more geared towards customers are looking forward to and teams are working very hard on this and this brand-centric new organization is only helping us there to understand customers better, be local customers and to make our great local brands more successful.

[Sreedhar Mahamkali, Analyst]

The volume disclosure is certainly helpful for the debate.

[Operator]

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

[Andrew Ian Porteous, Analyst, European Retail]

Just a couple of questions from me. Sorry to belabor the point on the Ahold U.S. market, but when you're talking about transitionary period can we assume from that you've perhaps seen a relative deterioration in your position or is it more the fact that the markets are still pretty tough in those northeastern areas and better in the Food Lion areas? And then I just wanted to just come back on CapEx as well, you call a EUR 1.9 billion guidance for this year, you're talking about doubling bol.com capacity. You've sort of hinted at some store fresh programs at Stop & Shop. Should we think about CapEx increasing going forward or are you confident you can perhaps manage that high CapEx in some of the areas of the business with a transition away from other areas?

[Jeffrey Carr, CFO & Member of Management Board]

I'll start with the CapEx perhaps. I don't see our current CapEx levels changing significantly. I think there's quite a lot of room within our current levels of spend which is run around 3% of sales. So I don't see it changing significantly. It might be up a little bit, I mean we talked about investing an extra EUR 200 million this year. But I don't see a significant step-up needed in order to fulfill the requirements of maintaining the capacity at bol and increasing the -- or re-looking at the format in the remodeling of Stop & Shop and stepping that up. And I think it's -- Stop & Shop hasn't had a new format for quite some time, so it's really exciting that we have some good format ideas and we'll be rolling that out. I think in terms of the competition at AUSA, We don't really see any real change to the competitive environment. We've talked about the northeast not having volume growth in the total Nielsen market for some quarters now, so it's a low growth market in the northeast. And that hasn't changed, but I wouldn't say we've really seen any change whatsoever in the competitive market. There's a lot of discussion about whole foods, I don't say -- I would say that we haven't really seen any impact from anything related to whole foods. There's a lot of discussion about Lidl. Obviously there's no real movement from Lidl. At the moment they're still in a -- I guess a rethinking phase where their first phase hasn't perhaps gone well, so they're reconsidering their options and they haven't really been rolling out new stores. I think Aldi is doing a good job in its remodelings, but it's again a relatively small issue. So there's no real competitive change in the northeast market. I would say it's more about us getting our promotional activities, our commercial programs firing on all cylinders and I think once we do that we'll -- which we feel more comfortable in the third quarter, we'll see an improving trend and I think we've been clear on that guidance.

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

And also to build on this, what Jeff just mentioned, apart from the northeast, when we also take the southern markets, in all our markets according to Nielsen we -- or have a stable market share or we gain market shares despite the fact that there's quite some new openings from competition in those markets. So that must mean that we are competitive in the offering, that we do the right things in pricing investments. We do the right things to compete well and very well with the discounters, if it's Walmart, Aldi or Lidl including the dollar stores. So I think our teams do a pretty good job to position our business well and this -- of course this is also not a new practice, right, and it will also remain in the future. So -- but we are very -- it's a very dynamic and very competitive market where it's difficult to gain volume in markets which gain the volume overall, especially in the northeast.

[Operator]

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

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

Two questions, if I can. So the first is just on U.S. inflation, never want to be the one to ask about inflation, but I think at the moment obviously we have tariffs and so forth coming into play, so I'm just wondering what's happening on the ground if you've seen any significant devaluation in some of your input prices? The second one just comes back to that working capital move, obviously you've flagged a little bit of an exceptional move for Q2. Could you just quantify approximately what that is? And what should reserve in Q3 just so we sort of have that in mind ahead of the quarter?

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

Jeff, if you'd take the second one, so I take the first.

[Jeffrey Carr, CFO & Member of Management Board]

Yes, go ahead.

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

So if we look at the input prices, in our merger a trajectory we started off as you know to harmonize trade rates and compare prices and also with our private label initiative we are now very deep into comparison of raw material prices, packaging prices, energy price and all the components which make a product cost X dollar. So we have very good mechanism in place, including economists, so we can measure this very carefully. At this very moment we apart from the wage and a deep increase, we do not see raw material prices going up at this moment. And also not from potential trade tensions et cetera. What we'll see is that as volumes go down CPG companies are looking for more volume or are looking for more margin, but for this we are very well prepared and we're now in the middle of those negotiation rounds for the second half of this year because we negotiate twice a year in the U.S. and we are very much focused on the various components to make sure that we do the right thing, but we are well organized. At the moment we don't see big increases there, but it will remain very competitive especially for the CPG companies, as they don't see volume growth themselves.

[Jeffrey Carr, CFO & Member of Management Board]

Yes, on working capital, I just -- I think between Q2 and Q3 we're looking at something in the range of EUR 50 million to EUR 75 million in terms of the adjustment between Q2 and Q3. And that's just purely down to the usual period-end timing of payments and such forth.

[Operator]

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

[Nick Coulter, Director]

Three from me please, if I may. Firstly, so as related to the point on the U.S. [indiscernible], but I think it's probably the key talking point this morning with your shareholders, were there just fewer promotions or were they less effective? And did you plan for a lower level of activity across the transitionary period? And then secondly, if it's too early for Q3 or Q4 when might we expect overall U.S. like-to-like volumes turn positive? It seems to me that that might be a strategic impact, if so if we could get your thinking around how long that might take, if it's not in the second half? And then thirdly on the new fresh format, could you share 1 or 2 of the key changes? I must admit I was in your stores last week and the execution in those categories -- in the fresh categories seemed strong, but is there a design to dial up the emphasis on fresh in the new format or how will you proceed?

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

Yes. Let me take your questions 2 and 3 and Jeff will come back to the first one. On the volumes, I think we've been very clear that this second quarter with the Food Lion, Hannaford growing in volumes the challenge -- and the other brands are challenged in volumes, we understand why this is, but of course not happy with it, so -- and that we see also this in a transitional second quarter bringing us better volume in quarter 3 and 4. Let us be very clear, we are a top line-driven company and we do everything what we can to bring volumes up and at the same time manage our margins properly. And there's always a tradeoff between margins and volume growth, but we all know in our retail business that volume growth is extremely important. On the fresh side, we see in all our store formats in the U.S. and all our brands in the U.S. including Peapod a strong development in fresh where we see more competence and teams doing a excellent work on the fresh offering and not only on branded, but also on the private label, we see categories and lot of experiments going on in marketing meat, in fish, in produce, we see a lot of product innovations coming in there. And if we look at -- also at the announcement we made today of the Stop & Shop brand update with the first 20 stores still this year, you will see a lot of innovation there on fresh; on meals, on readymade meals, ready-to-cook, ready-to-eat meal kits; different type of packaging sizes; healthier food and that's all very much geared towards fresh formats across all the categories. We believe this is an important role we have to play, we have an excellent brand. We have a lot of trust in our brands for fresh food. We are very close to our customers with more than 2,000 stores and this has been always a part of our heritage, the fresh food proposition. And that's why we also strengthened this even more because of course also a frequency driver. And let's not forget if you can do fresh food well online and in store format, which we think we can, that will really -- will create a competitive edge towards a lot of other players. So I'm happy that you had a positive environment, a positive experience of fresh and that's exactly what we -- where we invest a lot of efforts in.

[Jeffrey Carr, CFO & Member of Management Board]

Nick, just coming back on the promotional activity in the U.S., I mean we've been talking for some years about looking at promotional effectiveness and certainly it was a mixture of the 2 things that you said. As we look at promotional effectiveness, we probably reduce the level of promotion a little too far. You know there's an awful lot of [ non-act TPRs ] that run which don't really create any activity in the store, any volume uplift, but I think it's fair to say we've learnt in the first half -- the new team has seen that they probably went a little too far. And I'd also say that there was some of the activities which we ran, which didn't perform. And again it's a learning process, I think the team went through a transition where the AUSA team was running the promotions in the first part of the half-year and that was transitioned over different categories at different levels to the local teams. And in that transition we probably as I said weren't firing on all cylinders, but based on the evidence of June and what we see in July we're confident to give the guidance that we feel we're back on track and seeing a better performance.

[Nick Coulter, Director]

If simplistically we look at the underlying like-for-like volumes in AUSA in the second half of last year and then compare that to the first half of this year, is the delta, is the inflection to do with the transition impact?

[Jeffrey Carr, CFO & Member of Management Board]

Yes.

[Nick Coulter, Director]

If so, we -- and that's the available upside that you should get back over the course of the second half or --

[Jeffrey Carr, CFO & Member of Management Board]

Yes.

[Nick Coulter, Director]

-- I'll just get a gauge of when we should see this inflection and what the quantum of that inflection is with the available information to hand?

[Jeffrey Carr, CFO & Member of Management Board]

No, I certainly think we should be getting back on track. And yes, we were seeing -- I mean it was a difficult year 2017 because we're obviously coming through a deflationary period at the beginning of the year. We were seeing a better performance and again we don't -- we're seeing a better performance in terms of the second half of the year and we feel we're getting back on track with those performance levels and improving trends in the second half of this year. I mean I'm -- we -- I can't get into giving you more specific guidance as to specifically what volumes by sub-brand within the U.S. But I think you'll see a improving trend in terms of volumes and in terms of comparable sales in total in the third quarter and certainly back on track with the type of numbers we were showing in the third and fourth quarter of 2017.

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

Let's also put this -- like Jeff already mentioned this transitional phase a little bit more into perspective. We went through quite a big change in '17 and we stood up that brand-centric organization with this retail business services as you might remember as per the 1st of January of this year. Food Lion and Hannaford had already a structure like that and the former Ahold USA brands are now stood up after 6 months of tough work and diligent work. I think it's a great performance by the teams that the underlying business were so stable despite all those new changes. For example in the Stop & Shop brand we hired hundreds of new people in merchandizing category and pricing rather experience outside in hands. But of course they had to learn a number of things and that is completely natural and that is transition also what Jeff mentioned. But having said that the brands now with that mandate to be close to the customers, to market Stop & Shop in a different way than Giant of Carlisle, Giant of Landover and Peapod, I think that's what we believe in, in those great local brands. And that transition is now coming to an end and that -- those teams are now going to produce sales in the third and the fourth quarter in 2019 and further on. So I'm very excited myself about the change. I'm very complimentary to the teams making the change because that was a big change, RBS, the brand stood up as quite a big operation. And that's why we are excited and also convinced that those teams with that energy will bring that new competitiveness and the first nice product of this change is that we have now the first brand Stop & Shop our biggest brand, market leader in the U.S. on the East Coast, our biggest brand Stop & Shop now announcing that update of their brand to improve their shopping experience. So that's the first -- one of the first effects of this new organization and we are very happy about that.

[Operator]

The next question comes Mr. Dan Ekstein, UBS.

[Daniel Ekstein, Director and Equity Analyst]

The first question is around the gross to net synergies. I think when you upgraded the target to EUR 750 million, you said the bulk of that was being driven by procurement. So just intuitively you would think that should be achieved relatively quickly rather than over a 2 to 3 year period. So how far advanced are you in achieving those additional EUR 250 million? Then secondly, I'll take your point about there being sort of a transitional period in Ahold USA, but you did say towards the end of last year that you'd launched EUR 150 million sort of price investment. Are you disappointed at the sort of price volume elasticity response that you've seen from customers there because there doesn't really seem to have been any? And then the third question would just be for Frans on your sort of philosophy around capital allocation and the share buyback. Obviously you're buying back more stock this year than you're guiding to in terms of free cash flow, which is not that common and clearly the value created for your shareholders from that is a different proposition at EUR 20 than it was at EUR 15 or EUR 16 per share. So how do you think about the allocation of excess cash flow going forward? And given that the business isn't firing on all cylinders in the U.S. as you say, does it not make more sense to be allocating this to your customers than your shareholders going forward?

[Jeffrey Carr, CFO & Member of Management Board]

Well, let me take perhaps the first question on gross to net. I think we're pretty well advanced in terms of the gross synergies if you think about -- and we're not reporting the gross number so much on a run-rate basis, we're reporting the net number. And by the end of this year pretty much all of the activities will have been completed to deliver the EUR 500 million gross and the EUR 750 million net. So the programs will be pretty much complete. Obviously what you get then in terms of 2019 is the annualization benefit of the synergies through to the second half of '19. But the activities will be pretty much completed in terms of both the gross and the net synergies by the end of this year. In terms --

[Daniel Ekstein, Director and Equity Analyst]

Can you quantify that in terms of what the additional sort of run-rate dropping for -- at your disposal next year will be?

[Jeffrey Carr, CFO & Member of Management Board]

Well, clearly we're looking at roughly EUR 420 million this year going to EUR 500 million and prorated that similarly to the gross synergies they're coming in at about the same run-rate. Now as we look to 2019 and I'm going to anticipate a follow-up question we're pressing very hard and I'd say for our customer program as well because whilst we classified a lot of things as synergy when we first started this journey in 2015-2016, some of the areas that we've since seen and got very excited about cost opportunities, which take longer in the pipeline, we'll also be working on to deliver incremental cost synergies in -- cost benefits, not synergies, which will cost say for our customer in 2019. We haven't put a target out there yet but it's likely we will talk about numbers in November in terms of what we can expect to see from say for our customer to supplement the gross synergies that we'd be reinvesting in 2019, but also the opportunities from -- say for our customer.

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

So I do not know if I grasped your question completely, but I'll give it a go and then you have to fill in if there are follow-up questions there. On capital allocation I think Jeff mentioned already the EUR 1.9 billion for this year. If we have opportunities to invest in our business then we have a balance sheet which allows us to do so, but we will have a very disciplined capital allocation based on our own internal ROCE numbers. The second thing is that -- and that's what we said also in the past when in existing geographies we find opportunities to -- for non-organic growth on an M&A front, then we will look at those opportunities very carefully when it can improve our relative market shares in markets where we operate within the framework of our omni-channel supermarket definition and our present model and structure in the U.S. with retail business services positions us perfectly to take advantage of potential consolidation opportunities we might see in the U.S. The other thing is that you will see with people digital apps quite a number of opportunities to invest also there in our digital and e-commerce competence for the U.S. and the same we see in Europe and I think the EUR 200 million bol warehouse investment is one of those that we will not hesitate to do the things necessary to grow our business. And as you know we are also online, still very much on the trajectory of the EUR 5 billion in 2020 in online sales. So disciplined capital allocation we are striving for a strong free cash flow revenue stream also in the future. And on the buyback program, I think we are very proportionally now halfway the program in 2018, so we are roughly halfway to EUR 2 billion we programmed for '18. And on future programs of this kind we have not taken decisions yet and we might come back also in November on the Capital Market Day on those dimensions.

[Jeffrey Carr, CFO & Member of Management Board]

Just to follow up on that, Dan, what I've said clearly in the past is our philosophy generally is the utilization of our free cash flow 2018 was a little different because we were above our free cash flow level for specific reasons, but we've very clearly said we will allocate free cash flow if we have growth opportunities, then that's great, but if we don't, we will turn the funds to shareholders and that's been our philosophy. So we will look for growth opportunities. If there's nothing immediate, then we'll look to return excess funds to shareholders. I think just finally on the price investments you mentioned, we've made periodic price investments in the U.S. and we funded those from various what we call simplicity or cost-saving programs over the last few years in order to maintain competitiveness in each of our U.S. markets. And it's true to say in the northeast the price elasticity is not a great return, but at the same time we have to maintain our competitiveness in those markets. And so the investments we made last year for sure in a market where there's not a lot of growth in the northeast, in New York, in Massachusetts, when you don't see a lot of growth and you are basically growing by stealing market share, then the elasticity goes down. I mean that's just a fact of the economics of the situation.

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

Yes. And at the same time our teams, as Jeff said, are not constrained in capital allocation when the profitable plans are there and we expect from all our brands that they fund their own increases due to cost increase and due to price investments or wage increases that they funded themselves and that's why we have also our efficiency of say for our customer programs in the high level of attention also for the coming years.

[Daniel Ekstein, Director and Equity Analyst]

But is -- just on that price investment if -- I appreciate it's a low growth market, is this the new reality of operating in the northeast that it requires EUR 150 million of price investment per annum to generate 50 bps of negative volumes?

[Jeffrey Carr, CFO & Member of Management Board]

I don't think you can draw that type of conclusion. It is a competitive market. It is a relatively low growth market compared to the Carolinas for example where we see the GDP and the general macroeconomics in a different situation, but we see opportunities -- significant opportunities and we'll talk about those in November, but to continue to gain market share we see a significant part of the market in the hands of weaker players, independents and so we see significant opportunity to gain market share. I wouldn't take the last 6 months performance where we've talked about having been -- going through a transition as therefore the future model, no, I wouldn't take that at all.

[Operator]

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

[James Robert Grzinic, Equity Analyst]

I just had 2 very quick questions. The first one, Jeff, for you, can you please clarify what the benefit of that commercial investment hiatus in Q2 was in the U.S. Q2 margin? And you're pretty clear on the overhang in terms of the sales performance, would be interested to understand what the benefit to the margin was? And the second one, Frans, can you perhaps clarify against that minus 0.5% volume cost of sales in [ F1 ] in the U.S., what is the spread of I guess your best performer Food Lion, your worst one Stop & Shop, just how big is the spread there of performance?

[Jeffrey Carr, CFO & Member of Management Board]

Just first, James, on the margin, no, I'm not going to get into the margin mix and explanation, I mean clearly some promotions are margin dilutive, some promotions can actually be margin accretive. It depends on vendor funding and such forth. So I don't think we necessarily can draw the conclusion that a lower promotional level delivers any particular number that I could quote in terms of margin benefit in the quarter. Suffice to say the only margin guidance I'm going to give is that we remain confident with consensus in terms of the full year and just leave it at that. Again some promotional activities in reality -- probably most promotional activities in reality generate a margin dilution, but we also attract significant vendor funding in some promotional activities is relatively neutral on margins, so there's not a number I can quote to give you that.

[James Robert Grzinic, Equity Analyst]

Jeff, sorry, can you perhaps clarify whether there was a margin benefit though? I appreciate you might not be able to quantify it, but you identified the sales headwinds from the lack of activity, was there a margin benefit?

[Jeffrey Carr, CFO & Member of Management Board]

Well, gross -- gross margin was ahead if you look at overall gross margin in the second quarter, gross margin was ahead of last year generally. So there may well have been a small margin gain in the U.S. relative to Q2 relative to prior year, but I don't think that's going to create a headwind in Q3. We remain on track to deliver our margin which is in the consensus for the group in terms of the full year. So there may well be a little bit of a headwind relative to cut in promotions seeing some benefit in Q2, but it wasn't significant.

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

And on volumes, there are of course different inflation levels in the northeast versus the southern markets where we operate. We had both for Hannaford and Food Lion positive volumes and challenged volumes that we set for the other brands in the U.S., but at the same time we had stable market shares or gained also market shares in all our markets where we operate. So it's of course our targets to get into the positive volume space for all the other brands I talked about and that's also the confidence we have for the second half of this year and that will be the total proposition and we mentioned already that this brand-centric organization which is already Food Lion and Hannaford effect for some time, that it will inspire the teams to do the best of potential job in driving volumes and that's what we target for.

[James Robert Grzinic, Equity Analyst]

Sorry, Frans, can I just press you a little bit more on that? I guess ultimately just how was Stop & Shop in terms of volume picture relative to the average minus 0.5% and minus 0.6% we saw in the U.S. in half 1?

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

A little bit worse.

[Operator]

Next question comes from Mr. Maxime Mallet, Deutsche Bank.

[Maxime Mallet, Research Analyst]

Actually most of them has been answered, so a few confirmations on my side. The first one was with regard inflation, we saw a slowdown in Q2 versus Q1 in the U.S. I was wondering whether you could give us a bit of color about what you're expecting for the next few quarters and confirm that the improvements you're seeing in the next few quarters would be offsetting any potential like slowdown you would be seeing going forward? The second thing was coming back to comments you made earlier about promotions and being a bit less promotional in H1 just to confirm that you expect that you're going to be maybe a bit more aggressive in H2 on that particular front? And the last one was with regard to the transportation cost that you mentioned where one of the negative impacts in Q2. Could you also update on this particular headwind that you've experienced in Q2 and how you see this evolving in the next few quarters as well?

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

On inflation, for the remainder of the year we roughly see 1% inflation number for the U.S. On the promotional activities I think we talked quite a bit about teams getting into the new organization, transition and understanding promotions better and we were a little bit shy on promotions before for that same reason. I think it's not about more or less promotions, I think it's more about [ preciser ] promotions which fits to your customer base and your brands and your timing, so we expect more precision on the promotions and more effective promotions for the second quarter. That's where also our confidence comes from -- regarding sales. Then on L&D, it's difficult -- a little bit difficult to forecast the fuel prices ourselves, but on the loads, the price of loads we see in high demand in U.S. partly fueled also by the catastrophes we saw in Florida and Texas and the aftermath in construction as well, so we still see that -- we still expect pressures on the L&D prices also for the second half of this year.

[Operator]

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

[Dusan Milosavljevic, Research Analyst]

Three questions from me please. The first question is I just have to ask you again about the Ahold USA performance. I completely understand the argument around transition, but this is not the 2018 problem, it's a recurring theme and we've seen this underperformance for Ahold happening for almost -- for couple of years now relative to delays and relative to the results that other U.S. peers are posting. So my question is very simply do you think that if Stop & Shop offers competitive in the current format in the context of negative volumes and like-for-like underperformance? And I understand that you're flagging some market factors there on the northeast, but I guess none of that is going to change going forward. So this is the first question. The second question is just on bol.com because I think just it seems that margins excluding bol.com were flattish in Netherlands, so it seems that the improving profitability at bol.com is the key driver for improving Dutch margins? Then my question is do you see any risk of Amazon entering the Dutch market and do you think that there is a risk if you're prioritizing profitability growth for e-commerce segment, which is low barriers to entry and low capital base business, do you think there is a risk of attracting disruptors in the market? And then the final point, the third question that I had is just on inflation. So your inflation is, if I understood correctly at 1.6%, which compares to 1% which you see in the northeast and flattish for the U.S. market. As you move of promotions following this handover in Stop & Shop, do you feel that -- should we expecting that inflation to come down in the second half because also the industry factor seem to indicate that that's where inflation is going?

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

I think on the inflation numbers, I think I just mentioned already that we see that inflation coming down for the second half, so we can confirm that. On bol.com and Amazon, of course at bol.com is improving margins and it will help us all in The Netherlands, but it will not be the only instrument we have if in big business in the Dutch market and if it's improvement in cost or also they are safe for our customer type of initiatives that will also be good initiatives and good dimensions to improve our margin in the Dutch market. bol.com, we're very happy with the development at close to 30% growth. Amazon is already in the Dutch market. They are already there. They have already the operating through their German operations. So we're already competing with them. And if you see the development of bol in the marketplace in the Benelux, not only their own shelf, but also their marketplace is developing very well as I said in my introduction. So that is a big opportunity. The high level of brand awareness, the trust in the brand bol. A lot retailers we talked about [ Best Mark ] as well who are joining our platforms. So they see bol as a very competitive, but also a very efficient operator when we talk about the last mile and very trustworthy brand. And as I said, again Amazon is already there. So we are confident there, that's why we made an investment and that's why we're also very happy that bol is already showing now EBITDA-positive numbers.

[Jeffrey Carr, CFO & Member of Management Board]

I think on the AUSA just to mention obviously you're comparing different markets and it's difficult to compare. There are some significant, if you look at the Nielsen growth rates by region, you do see some significant variances. But that's not -- and I would just finally say if you look at overall Ahold Delhaize USA we see market share growth across all of our markets. We see margin improvement and improvement in free cash flow. So it's a pretty good story. That's not to say we're in denial. We see the opportunity to improve performance of the brand like Stop & Shop. That's why we mention and that's why we talk about the Capital Markets Day and the improvements we have in mind. And I think you'll hopefully join us and see that there are exciting developments as well.

[Dusan Milosavljevic, Research Analyst]

I will definitely join, yes.

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

Yes, at the same time, like Jeff mentioned, the markets are very different. Sometimes we are compared with nationwide operators where we have very strong shares in the northeast and the southern markets with Food Lion are very different in a lot of aspects on competition, on price levels, on cost levels or wages and these kind of things. And Food Lion at the moment is operating very competitively in the Image items with Walmart being on the 101 index and the [ wall to wall ] Walmart we are now at 110 index to Walmart. This we do already -- this measurement we make very precisely in all the individual markets of Food Lion for the last years. And you don't make 24 quarters of comparable sales growth and volume if you're not very price competitive. And I can tell you would that Food Lion is an example, but for the other brands the same we are monitoring those prices very accurately week by week.

[Operator]

The next question comes from Mr. Stewart McGuire, Credit Suisse.

[Stewart Paul McGuire, Research Analyst]

Most of my questions have been answered as well, just I think I'm going to try to get through again though. In the U.S., can you give us any color on Peapod growth given the broad push from your competitors into online grocery? And have you seen any margin dilution coming from online that might explain some of the issues in the U.S.? First question. Second question on your nonfood warehouse in the Netherlands can you give us any color or any targets on how your fulfillment costs might change with any hints on potential margin at bol.com? And just to confirm what you just said, did you say that you indexed at 110 versus Walmart at Food Lion? I just missed that.

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

Yes, start with the easiest part, that's the last question. We indexed for many quarters already wall to wall Walmart 110, 111 with Food Lion. And on the Image items, top 300 fast-moving items we indexed 101 or 100. So those numbers we already communicated many times and we are very consistent there. So that number is correct. If you look at some color on Peapod, by the end of this year, we'll have close to $1 billion of online sales in the U.S., which as you know is all food-driven including fresh, chilled and frozen. And we do this already for a lot of years very successfully in our commitment on the delivery, quality, food safety and so on. But at the same time we also see of course that the market changing dramatically and is growing very fast and getting very competitive. And food of Peapod is mainly for the big part of the volume and next day delivery option where we have a lot of very happy customers both in the B2C and the B2B area, but at the same time we see that same day and instant delivery growing very fast with all kind of third-party operators and that's why we launched this Peapod digital apps which will be the platform operation by the end of the year to give all our brands this e-commerce facility and digital facility and especially also for the -- former AUSA brands also giving to the majority of the stores that same day and instant day delivery in 2019. So Peapod is a part of that digital apps, but in the end we use the Peapod knowledge, the technology, the IT and the front end also to fuel the other brands and to share that learning across the total company. And at the same time, looking at Peapod, as you know from the U.S., a lot of things change in the market not only in offering, but also on the things like the minimum order quantities, on the pricing, on the delivery fees and all these kind of topics. And that means also that we adjusted a number of things in the Peapod offering and also in price and promotion and in new offerings. So we have some lower margins at Peapod before because of that reason and we invested there also in price. Overall with the close to 8% online growth in the U.S., we are not happy with that number because we see a much bigger potential for our brands and also based on our experience and the trust in our brands we are not content and that's exactly why we gear up now Peapod digital apps to make sure that in next year 2019 we are back to our well-known double-digit numbers of growth and that we fight back in that segment. Very competitive, very technology-driven and it's exactly what we are gearing up for now that we are back in the game in 2019.

[Jeffrey Carr, CFO & Member of Management Board]

I think on the nonfood investment, I'm not going to get into specific targets, Stewart. But each time we make those investments, we have return on capital criteria that they make and they improve our efficiency, but we haven't given out specific targets.

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

That, ladies and gentlemen, concludes this conference call and audio webcast. Thanks very much for joining us today and have a nice day. Thank you.