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Ladies and gentlemen, good morning, and welcome to the Analyst Conference Call on the Second Quarter and Half Year 2019 Results of Ahold Delhaize. Please note that this call is being webcast and recorded. Please note that in today's call forward-looking statements may be made. All statements other than statements of historical facts may be forward-looking statements. Such statements may involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those included in the statements. Such risks and uncertainties are discussed in the interim report second quarter and half year 2019 and also in Ahold Delhaize public filings and other disclosures. Ahold Delhaize disclosures are available on aholddelhaize.com. Forward-looking statements reflect the current view of Ahold Delhaize management and assumption based on information currently available to Ahold Delhaize management. Forward-looking statements speak only as of the day they are made, and Ahold Delhaize does not assume any obligation to update such statements except as required by law. The introduction will be followed by a Q&A session. Any views expressed by those asking questions are not necessarily the views of Ahold Delhaize. At this time, I would like to hand over the call to Mr. Henk Jan ten Brinke, Senior Vice President, Investor Relations. Please go ahead.
Thank you, operator, and good morning, ladies and gentlemen. Welcome to our second quarter 2019 results analyst call. 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.
Thank you very much, Henk Jan. Ladies and gentlemen, Good morning, and welcome to our second quarter 2019 results conference call.As we already announced when we published our first quarter results, the results in the second quarter were significantly impacted by the strike and the subsequent recovery of sales at our biggest brand, Stop & Shop. I will give you a brief update on Stop & Shop later in the presentation. Our other businesses in the U.S. continued to perform well. And as you will see when Jeff takes you through the numbers in more detail, you will see they did really well. And we are pleased with the sales growth of our overall online business, up close to 30% at constant rates. I will come back to you -- to that as well. I will leave further comments on the numbers to Jeff, but I'm pleased that we have met our targets on synergies by realizing EUR 512 million net synergies on a run rate basis this quarter with the integration after the merger now fully completed. For the first time, we will pay an interim dividend of EUR 0.30 based on 40% of the first half 2019 underlying income per share, reflecting our confidence in our Leading Together strategy and the strength of our great local brands.Now let me hand over to Jeff.
Hi. Good morning, ladies and gentlemen. Thanks, Frans. As Frans mentioned, clearly, the Stop & Shop strike overshadows the quarter 2 results. But I'm pleased that since the strike, we've made good progress at Stop & Shop, and we expect no significant impact from the strike in the second half of the year.So net sales for the quarter were EUR 16.3 billion, up 5.0% versus the prior year, helped obviously by the relative strength of the U.S. dollar. And at constant exchange rate, sales were up 1.5%. Underlying operating profit in the quarter was EUR 594 million, down EUR 75 million versus last year with margins at 3.6%, 70 basis points down. Now in the quarters, we'll discuss shortly the direct strike-related costs were $100 million. Also in the quarter, in our Global Support Office, costs included the negative impact of EUR 24 million due to the discounting of our insurance provision as a consequence of lower interest rates in the U.S.So moving on to the performance by segment where we can analyze the impact of the strike more clearly. In the U.S., net sales were EUR 9.8 billion, up 0.2% at constant rates versus last year. And comparable sales also grew by 0.2%. The impact of the strike on net sales was $345 million, $224 million was a direct result of the 11-day stoppage and $121 million during the subsequent recovery period. If we adjust this for the strike, comparable sales would have grown by 3.4% underpinning the strong performance in our other U.S. brands. And if we also adjust for Easter, we had 110 -- which had 110 basis points impact, comparable sales would be up 2.3% in the quarter. In April, we said we'd adjust our guidance for the direct strike-related costs, and that those costs would be in the range of $90 million to $110 million. We also said we'd mitigate any operating profit impact during the recovery period such as the margin loss due to the sales shortfall in that recovery period. As I've mentioned, the actual operating profit impact is now estimated at EUR 100 million, made up for the loss of margin on the $224 million direct strike-related sales, increased shrink both in the store and in the distribution system, increased markdowns and incremental L&D costs. So in The Netherlands, we saw sales grow 4.2% to EUR 3.7 billion with comparable sales growing at 3.8%, and that includes a 70 basis point benefit from Easter. Net consumer sales of bol.com grew 37.5% in the quarter. And excluding the impact of bol in The Netherlands, we saw comparable sales increased by just under 2%. Underlying operating margins in The Netherlands were 5.2%, down 30 basis points versus last year, mainly due to investments in the new fresh format at Albert Heijn and increased digital and e-commerce investments. Overall, excluding bol.com, margins at 5.8% in The Netherlands increased on the prior quarter and remain high in absolute terms. In Belgium, net sales at EUR 1.3 billion were pretty much flat versus last year. However, taking into account the Easter shift, comparable sales were down 1%, reflecting tough trading conditions and lower growth in that market, in the Belgian market. Underlying operating and profit margins improved in the quarter to 2.9%, reflecting the improving underlying cost performance in Belgium. In CSE, sales grew by 5.1% to EUR 1.6 billion with comparable sales up 3.5%, or 3% adjusted for Easter. And the trend remains. We continue to see a strong sales development in Romania and the Czech Republic, while Greek comparatives remain negative, albeit with an improving underlying trend in Greece. Now moving on. It's been just over 3 years since the merger of Ahold Delhaize, and I'm pleased in this quarter to wrap up the integration with a final report on synergies and the onetime costs. As Frans mentioned, in the quarter, we delivered EUR 128 million of net synergies. That's an annualized run rate of EUR 512 million, achieving slightly ahead of our target of EUR 500 million. It's been a great effort over these years, and I'd like to thank all those people involved. However, the work doesn't stop here. There's much more to be done, and we'll continue to work on our Save For Our Customer program to ensure we have the firepower to invest in our brands and maintain resilient margins.As well as the synergies, we'll be wrapping up our integration and restructuring charges -- U.S. restructuring charges, which have come in at EUR 378 million and EUR 64 million, respectively, are both slightly under our target of EUR 380 million and EUR 70 million. Now moving on to free cash flow. Our target for the year under IFRS 16 is EUR 1.8 billion free cash flow generation. And despite a slower start to the year and the Stop & Shop strike impacting in the quarter, I remain confident we can achieve this for the full year. In the quarter, there was a working capital inflow of EUR 284 million and free cash flow came in at EUR 486 million, a little down on expectations due to the strike but the effect of that, we feel confident we can mitigate in the second half of the year.Capital expenditure in the quarter was EUR 569 million, ahead of last year by EUR 205 million, representing our continued commitment and confidence to invest in the long-term future of our brands.That brings me to the dividend. As Frans mentioned, in the first half of the year, underlying earnings per share was EUR 0.75, which is up 4.6% versus last year. We'll be paying 40% of underlying earnings per share, which equates to a EUR 0.30 dividend payment, the dividend payment date of August 29.So in summary, I can reiterate our guidance for the year. We expect underlying operating margins for the group to be slightly lower in 2019 than 2018 and underlying earnings per share to grow by low single digits supported by our strong Save For Our Customer program. Thank you, and now I'll hand back to Frans.
Thank you very much, Jeff. I'm now on Page 12, and let me give you a brief update on Stop & Shop. Jeff just explained the financial impact of the strike, so you also can see the recap on this Page 12. But also on Long Island, we see an encouraging start of the rollout of our Re-imagine Stop & Shop program in part due to the implementing the learnings from our Hartford stores, which we remodeled last year. We are pleased to see that these Hartford stores continued to improve their sales performance and outperforming, therefore, the comparable Stop & Shop stores.Our other highlights in the U.S., Food Lion reported its 27th consecutive quarter of positive comparable sales growth, clearly demonstrating an ongoing momentum from rolling out the successful Easy, Fresh and Affordable program. Another 115 Food Lion stores will be remodeled in the second half of 2019. And with that, Food Lion will have upgraded 80% of its 1,000 stores across its 10-state operating area by the end of 2019. We announced that we will be opening a Fresh Kitchen facility in Rhode Island this September that will initially serve the Hannaford and Stop & Shop programs. The facility will be used to develop distinctive new meal solutions and culinary innovations in our own brand Fresh food offering. This will help us shorten the supply chain and present our customers in differentiating range in the various Fresh departments.As I said, we are pleased with our overall online sales growth, be it that online sales at Stop & Shop was also impacted by the strike. Adjusted for that, online sales growth in the U.S. would've been 18% as we added 124 Click and Collect points during the quarter, most of them at Food Lion and Giant/Martin's. This brings the total of Click and Collect locations to 483, in line with our online growth ambition to have more than 600 Click and Collect points by the end of this year and to grow our online sales by more than 20% this year.Peapod continues to expand its already large selection of meal kits, simplifying grocery shopping and making cooking more convenient for our customers.On Slide 14, we move to Europe. In The Netherlands, Albert Heijn is converting stores to its new fresh and digital concept to continue strengthening its fresh produce offering and healthy meal solutions. Recently, it confirmed its 50th store and is on track to have 120 stores completed by the end of the year with more planned for next year. In Belgium, the less proximity formats like Proxy and Shop & Go continued to perform well with more openings planned for the second half of this year. At bol.com, third-party net consumer sales grew by more than 60% today, close to 50% of the total. And in the last 12 months, bol.com doubled its number of merchants to 6,000 adding 1.3 million new products in the same period and, therefore, being the most successful retail platform in the Benelux. We continue to see strong sales growth in Central and South Eastern Europe supported by a new 134 stores, mainly convenience stores and by successfully remodeling and reformatting our Czech stores. For the third year in a row, consumers in Serbia have chosen Maxi as their favorite supermarket.So let me wrap up. Our second quarter results were significantly impacted by the strike, but the profit loss during the recovery period thereafter was largely mitigated by the strong performance of our other U.S. brands, and we expect no significant impact from the strike in the second half of the year. With the integration now fully completed, we achieved annual net synergies of EUR 512 million on a run rate basis, slightly ahead of our EUR 500 million target. And also our final integration costs are slightly below target with EUR 378 million and U.S. restructuring cost of EUR 64 million.We reiterate our outlook for 2019 as announced in the first quarter, and we will pay an interim dividend of EUR 0.30 per share, reflecting our confidence in our Leading Together strategy and the strength of our great local brands.That, ladies and gentlemen, concludes -- no, I think we're now back to the Q&A, right?
Yes.
Yes.
[Operator Instructions] The first question comes from Mr. Judah Frommer, Crédit Suisse.
I want to -- if we can get kind of some more commentary on the Stop & Shop strike and actual competitive reaction during the strike. What did you see competitors doing in order to kind of pull traffic away from those stores? And subsequently, what has been your response? Has it been more price-driven? Has it been advertising-driven? Any color you can give on sales and specifically traffic recapture, would be helpful.
Thank you, Judah. As you can imagine, in the first week just after the strike ends, we put a lot of efforts in winning our customers back. But at the same time, as we earlier had said to the market, we would like to further invest in the price positioning of Stop & Shop in general, that was a remark made before the strike. So at the moment, we're investing in price to make sure that the last customers come back. We have attractive promotional programs. And also with the remodelings of our Hartford and the Long Island stores, we see that we recover from the strike whereby the last single customer is coming back. We're still working hard on this. So we have good programs on making aware the total proposition of our Stop & Shop. We have an excellent brand and very good brand equity and excellent locations, and we're very happy with the recovery so far.
Okay. And then you reiterated the 20% growth target for online sales in the U.S. Kind of what gives you that confidence despite the strike impact? And more specifically, how has the rollout of those additional Click and Collect locations been going? Has customer adoption been in line with expectations there?
Yes. As I mentioned earlier, we announced for this year to have in total 600 Click and Collect locations. By the second quarter, we already have 483. So we're very confident that we will meet that 600 number target, and that is a big driver for our omnichannel and e-commerce growth. So that's why we are confident that we will reach more than 20% for this year. And we announced for next year, a 30% growth of e-commerce sales. We all know that our business is very much food-driven. So it's food online sales, which makes us still a strong leading e-commerce retailer at the East Coast.
The next question comes from Mr. Scott Mushkin, Wolfe Research.
This is actually Sid Dandekar on for Scott Mushkin. Just wanted some clarification on the EUR 121 million of sales impact in the recovery period. Your comments seem to indicate that, that was all in 2Q. What's the kind of spillover into 3Q? And would you mind taking us through the cadence as you ended the quarter? And in July, what are you seeing in terms of traffic, average ticket size or the mix? Anything you could comment on there.
Siddharth, clearly, yes, the EUR 121 million is the recovery period following the strike during Q2. And obviously, we've seen a progression -- a steady progression and pretty much in line with our expectations in terms of customers coming back into the store. Transaction levels have been returning to what we'd say our prestrike levels. And as we came out -- so if you focus on the underlying rate, ex-strike, we're running in the U.S. at around 2.3%. As we come out of Q2 and into Q3, we're pretty much at those sort of levels. Now I would caution as we go into Q3, not just in the Stop & Shop brand but across the U.S., we have tougher comps in Q3. And we also in Q3, had the effect of Hurricane Florence. But for Stop & Shop specifically, I'd say transaction levels are getting back to normal. They're not quite there yet, but I think during Q3 they will get there. And we expect to be -- therefore, the total impact for our U.S. business will not be significant in the third quarter. And then I think, certainly, business as usual in the fourth quarter. The main impact has been on transactions. It hasn't been on the basket size, which is -- which hasn't really been impacted by the strike. It's really been getting the last one or two percentage of customers back into the store. And obviously, we have a lot of -- we have good personalized activities. We understand who those customers are. We can target those customers through digital activities and bring them back into the store. And a lot of the promo activity that Frans had mentioned is very highly personalized promotional activity.
Okay. Great. And just a follow-up to that in terms of the Giant Landover agreement coming up in a couple of months' time. Can you maybe talk about anything being done there differently to kind of preempt what we saw in New England with Stop & Shop? Just so you could update us on that.
Yes. Thank you for that question, Scott (sic) [ Sid ]. We have those negotiations planned for October. As you know, we're talking about 17,000 workers with a very good relationship with the local unions, and we are in a very good dialogue already for quite some time in the run-up to those negotiations. So we are focused, alert, but we have confidence that we will close those negotiations in a constructive way.
The next question will come from Mr. Maxime Mallet, Deutsche Bank.
My first one would be, could you maybe give us a bit more color with regards to mitigation -- mitigating, sorry, actions that you implemented to limit the impact of the recovery? Where I'm trying to go here is how much of those action were specifically related to this period versus benefiting all sorts of coming quarters? And to follow up on that, it seems like you have less additional contribution from the combined synergies, cost savings in H2 versus H1 and potentially some more price investment at Stop & Shop in the U.S. So how confident are you that your margin can be stable in H2 in the U.S.? And my last one, you mentioned cost savings being potentially evenly spread through the quarter of the year, the EUR 540 million that you target. Can you maybe comment on how much you've achieved already in H1?
Okay. There's quite a lot in there, so let me try and get to that. In terms of the mitigation, obviously we're talking about the recovery period and we said, despite losing EUR 121 million of sales at Stop & Shop, we'd be able to mitigate any shortfall and maintain our margins. The question is how do we mitigate that? Well, a significant amount of mitigation was actually the overperformance of the other brands. So we overperformed, specifically Food Lion remaining very strong, outperformance gaining share showing positive volume development. We did step up our cost initiatives and, of course, some of the planning in terms of some of the investments we're planning to make before our Re-imagine Stop & Shop program have been deferred out of the second quarter into the third quarter. So it's a combination of those effects. Specifically, in terms of our Save For Our Customer program, we did say that the EUR 540 million would be spread evenly over the year in terms of the savings efforts. I would say that we are well on track and in track to look into probably exceed the EUR 540 million. So we overdelivered a little bit in the first half of the year, and I think we can keep that going and deliver a bit more than that. And that's certainly part of the mitigation as well in the second half.In terms of margins, in terms of the U.S., what I would say is we've given very clear guidance for the group. We're not giving specific margin guidance for each of our segments. We've been very clear for the group that we expected flat margins ex the strike in terms of 2019 versus 2018. Due to the $100 million, we expect margins to be slightly down 2019 versus 2018. And I think we're pretty much on track with that as you look at just for the strike in the first half of the year, and we feel confident we can deliver against that guidance in the second half of the year.
The next question comes from Mr. Bruno Monteyne, Bernstein.
My first question is on the U.S. sales growth. You're sounding quite cautious, putting the tough comps in quarter 3 there. But am I right that if you're going to achieve your e-commerce target of 20% growth, you have to extend quite a bit. So the combined impact of accelerated e-commerce growth in the second half, the Stop & Shop revamp, which would have more impact by then and possibly also the King Kullen acquisition, shouldn't you give that enough to offset the tough comps in the second half? Or do you think that it will not be enough to settle? That's my first question, please.
I think, Bruno, on King Kullen, for example, obviously those won't be in the comps. And if we do -- are able to close that, it's all dependent on the FTC in the second half. Those will be -- will give you some specific guidance on the additional impact on King Kullen. The e-commerce sales growth in the U.S. is still a relatively small proportion of U.S. sales. It's -- and therefore, yes, getting to 20% means the second half will be above 20% since we are below 20% in the first half, but it's still a relatively small amount of sales relative to the U.S. performance. So I just want to be realistic. I mean we talked about Hurricane Florence. I think we had the comp sales of 3% in Q3 2018. So if you look at the 2-year stack, we'll still have a strong performance. But we need to be realistic especially with Hurricane Florence in -- that the current run rate will be a challenge, for sure, but we'll certainly be above the Q2 number of 0.2%. But getting to the current run rate will be a stretch with the performance of Food Lion and the hurricane performance in the third quarter.
My second question is around the Dutch margin, which confused me a little bit. I mean for the last few quarters, you had a positive impact from bol.com becoming more profitable, so instead of dilution shrinking. This time we don't see that. You have the 30 basis points impact from the new Fresh concept without any offsetting benefit from bol.com. Why is that? And also the 30 basis points of the Dutch -- the Fresh concept, is that like more of a start-up cost that should pass away? Or is it really -- it's a lower-margin model and there's ongoing we should see as equivalent to a price investment in The Netherlands?
Let me just -- no, the Fresh format doesn't have a 30 basis point margin impact. We mentioned it as one of the reasons that margin would be down slightly 30 basis points versus last year. And remember, last year was a very strong margin performance. And if you take out bol, we're at a 5.8% Netherlands margin, which is in absolute terms a strong margin, albeit down 30 basis points versus last year. We mentioned the Fresh format since we're investing in that. We see slightly higher shrink, for example. We also mentioned investments in e-commerce where we're running, for example, lower than our minimum order size in many areas as -- and we're experimenting with obviously reducing the e-commerce -- the overall cost of delivery for e-commerce with the -- with different methods. So net-net, I'm reasonably pleased with the margins in The Netherlands at 5.8% ex bol. I think that the bol -- the reason it's 30% with bol and without bol, I mean the bol margin varies by quarter-to-quarter. So there's no major news there. bol will be positive on an EBITDA margin in 2019 and is developing very well from a profitability, but also you see the 37.5% growth, so growing very strongly.
Okay. And then the last thing in the cash flow statement. If I look at the repayment of lease liabilities, I mean it's the equivalent of paying rent in the old pre-IFRS world, but it's materially up year-on-year, almost implying that you're paying a lot more rents. I think you suggested there was some seasonality on that in quarter 1, I'm not 100% sure. Is that going to be sort of be reduced in the second half year-on-year? What should we make of that very big step-up year-on-year?
Yes, it will be flatter for the full year. There are some timing issues in terms of the rent payments, in terms of crossing over at quarter end, and that's why we see a higher number in Q2 versus last year. So in terms of the pure cash outflows, there are some timing issues on a full year basis. I would -- you'd expect to see the numbers much more closely together. So there will be a benefit come back from that in the second half of the year.
The next question comes from Ms. Fabienne Caron, Kepler.
Two for me. First one on the U.S. Can you give us -- you've given some quantitative comment on Food Lion and Stop & Shop. Could you give us some qualitative comment on [ Fortis Bank ] and Hannaford, Giant [ Heirloom ] and Giant Landover, please? And the second question would be on the Dutch margin again. So the reason that you're giving for the margin be slightly down, it looks as if I don't see why this margin -- this reason should disappear for the remaining part of the year. So we're going for Dutch margin to be slightly weaker that we all expected. So is it fair to assume that it should be more offset by stronger U.S. performance?
Yes, Fabienne, on the U.S. brands, we are, of course, very happy within corrected for strike and Easter and 2.3% growth for the other brands in the U.S. And all the other brands, apart from Stop & Shop, did a very good job and grew positively. And if you add them up and you look at the total East Coast performance, then we clearly gained market share as Ahold Delhaize U.S.A. on the East Coast. So that is very good news. Jeff already mentioned Food Lion did an outstanding job there and continuing outstanding job there, but facing tough comps, the growth of last year and the Hurricane Florence to come in the third quarter. So those were the qualitative remarks there. On e-commerce, the 20%, also mainly Giant/Martin's and Food Lion made a lot of progress with the Click and Collect locations, but the other brands will follow suit for the rest of the year. So also there, the 600 Click and Collect sites are coming. This on top of -- this is in line with what we said before. So we also see that we are well on track.On the Dutch margins, we already mentioned a few of the reasons why we see this as a healthy investment or healthy way of converting more into a fresh and more digital and e-commerce operation for the Dutch market. And we don't see this as a trend going forward. Our margins vary a little bit. And like Jeff mentioned, the 5.8% margin ex-bol is a great margin to have. And I think this is in line with our strategy to be more close on e-commerce, on digital, on Fresh. And we also feel that -- we see this also happening that our market share performance are also getting better.
And I'll just reiterate, Fabienne, that we've given the guidance on a group margin basis, and I'll reemphasize that. And we're not going to get into segment by segment, but we obviously go through cycles of investment and such forth in different parts of our portfolio, and we can manage that and manage the group margins being flat year-on-year excluding the strike impact and slightly down if you include that strike impact. And I think that's a very strong performance relative to our competitors and relative to the absolute position for 2019. So I think you have to go with the group guidance, and we're not going to get into specific guidance in individual segments on margin.
The next question comes from Mr. Robert Jan Vos, ABN AMRO.
I have 2 questions as well. First one, can you maybe comment directionally on your market share in Netherlands? Last year, you reported a small decrease, and I wondered whether or not you have recovered some of that lost market share year-to-date? And my second question, just as a clarification. Again, on the 20% online growth target in the U.S., is that as is or do you make an adjustment here for the impact of the strikes in the U.S. in the second quarter?
Yes. Robert Jan, the 20% or even more than 20% as we reported is including all the effects. So no reservations made there. It's -- we'll let you know that, at the moment, it's 14% for this quarter, corrected for a strike, 18%. But the 20% is a hard-on-hard number irrespectively of the strike and the target for 30% for next year. So that's that one. The other question was the market share.
Market share, yes.
I think we see year-to-date that we are closing the gap, and we're further closing the gap also year-to-date this year. So we see a positive trend there on our market share.
The next question comes from Mr. Nick Coulter, Citi.
Two then for me, please. But firstly on the Stop & Shop remodels, could you update on how hard the remodels are trending versus the original plan? And then how you've iterated the Long Island remodels as a result of your learnings? That will be the first one.
Yes. On the Hartford stores, Nick, they are doing absolutely much better than the control group in the same comparable space. It's still slightly under plan, sales rise, but we are very happy with the trend. The trend is improving. And it's always like this when your first 20 stores and complete new format and you learn a lot in your fresh and your digital and your operating cost and your kitchen and your labor cost in your center store on assortments and rejuvenating this kind of things. So a central checkout, a lot of things happening at the same time. We are very happy with that development now. So we're improving day by day, but we're still slightly under our plan. But compared to the control group, we do much better. The stores in Long Island had a very positive start, and we took the learnings into account. And it's not the full batch yet in Long Island we have done, that's coming from the remainder of the year. What we -- they are very optimistic what we see, but it's a very difficult market at the same time.
But how do you tweak? It sounds like you've taken some labor out to the center of the store. What are kind of the top 2 or 3 things that you've done differently in Long Island?
I think it's a little too early to say. We have 10 moving parts. We monitor very carefully in Hartford. We learned a few things on labor in Fresh department. We went one step further in remodeling of the center store. There are a number of things there. We're also reducing there also the investments. We said already to the market that there is one to do, which was center store, which we're not ready in Hartford yet. We have done more center store assortment work in Long Island. And the other thing is that we also look very carefully at pricing and price perception and also elasticity, and we went closer to the various target groups on pricing propositions and promotions, and we have 4 selected pilots in Hartford on different pricing propositions and we tested further out in Long Island. And we also took some learnings there. Sometimes pricing is less elastic than you might assume, sometimes you have to invest less than you originally thought. So we are still in testing phase what we learned from the first tests in Hartford to do a better job in Long Island.
And then secondly -- sorry, a second one, if I may. On the takeoff trial at the [ Southwinds ] at Stop & Shop, is that now live? And then what are your first thoughts? And are you working with other potential providers?
Yes. No, that's MFC, micro fulfillment center, is live in Hartford, Connecticut store. That is live -- that is now full also producing, by the way. We're not there yet in the projected productivity levels, but we're getting closer. So what we said, we take this as a pilot up, we test this up to the end in that same productivity levels, in mechanization, in reliability and all this type of things for -- or a Click and Collect facility or an instrument to have our last mile closer to our customers. So that's developing further. We have not finalized that pilot yet, and we'll take the steps after that, the finalization of the pilot at Hartford.
Is that broadly encouraging at this stage? Or what do you think your -- or still to be proven?
It's getting broadly more encouraging, but it's not only mechanization, it's also software and this type of things. And to have a first completely new type of format in your network is always a little bit more challenging than you might have thought initially, but we're making good progress here. And based on that, we're going to decide what we're going to do with takeoff and the further rollout.
I -- let me just add to Nick, I'd just add to that, this is Jeff. The takeoff in itself doesn't impact our sales performance on e-commerce. So it's not a dependency in terms of hitting our 20% and 30% targets for this year and next year. It's really about labor productivity. And if we don't see the productivity really playing back, we're going to hold back on the further investments until we do get that. So it's important with fulfillment that we improve the profitability of e-commerce, and that's what really takeoff is about. It's about improving our labor productivity and replacing store pick. It's an automated picking. But I think it's important point, just to emphasize, that our overall sales performance on e-commerce can continue to grow with or without takeoff.
And it's mainly coming from our Click and Collect extended network, and we are absolutely on track and that is the main driver for our growth.
The next question comes from Mr. James Anstead, Barclays.
I've got 2 questions probably both for Jeff, if that's okay. But firstly, on free cash flow. You're going to have to deliver quite a lot more free cash flow in the second half of this year versus second half of last year if you're going to hit the targets, and that feels like a tall order given the second half last year was quite a strong period in itself. Clearly, you're remaining confidence on that. Is there anything in particular you'd call out that is going to get better second half on second half? And secondly, probably a boring technical question, but I noticed you bought back this cumulative preferred financing shares in the last month or so. Can you remind us why you've done that? And so more importantly, why you've done it now rather than previously when you've had them for a very long time?
Yes. Okay. On free cash flow first. Yes, I think there's a couple of points I would bring out is, first of all, for the half, our working capital was actually an outflow, which is a bit disappointing. I -- we would expect to see that turned around in quite a significant working capital inflow in the second half. We have talked about how we smooth and improve our working capital performance through the year. But in the second half of the year, in order to get to the EUR 1.8 billion, which I've -- as I said, I'm confident we can get to, we will see a working capital benefit in the second half of the year. Also we had significant timing issues with our income tax payments, the cash payments. We saw we're at EUR 317 million cash outflow versus EUR 94 million last year. There's not a huge amount of cash outflow from a tax perspective expected in the second half of the year. So again, that will flip around in terms of expectations. And as we mentioned a little earlier, we will see a smoothing out of the repayment of the lease liabilities. That's a slight adjustment. So I think the combination of those factors, if you run down the model, should be able to get you to the EUR 1.8 billion for the full year in terms of the free cash flow. And we've given guidance on free cash flow for many years, and we've generally hit or exceeded that guidance. And I remain confident in terms of how we can deliver our free cash flow in 2019. In terms of the finance pref shares, yes, we made a decision, we've looked at those for some years, we made a decision to redeem those and there was a small charge in the interest lines in terms of the redemption cost of those shares around EUR 24 million in the quarter. But we just felt that was a good move in terms of the simplification of the capital structure. And in terms of uses of cash, they were slightly -- they were quite expensive in terms of the -- if you look at them as debt, which effectively is how the credit agencies looked at them, not really as equity, but as debt. And then it was quite expensive debt. So we took that decision to redeem those, and this also helps in terms of just a simplification of the overall capital structure of the balance sheet.
The next question comes from Mr. Andrew Porteous, HSBC.
A couple for me, a couple of mine were already answered. But mainly on the store remodels you're doing in the U.S. and in The Netherlands. Firstly, on the U.S. remodels. Sort of building on what Nick was asking, what is it that customers have responded well to? And what have you sort of struggled to see the incremental demand for? And sort of what learnings have you -- are you taking away from that? And then on The Netherlands store models, can you just give us an idea of how that's progressing? Are they -- are you seeing the sales uplift that you wanted to see from them? And are you able to -- when you do remodel a store, are you seeing yourself being able to compete better with the likes of little where you lost a bit of share last year?
Yes. Thank you for those store remodeling questions. On the U.S., if I just cut a few corners and try to look at the highlights, then there is a very positive reaction towards all the Fresh departments on the extended produce, on the extended deli departments, the international cheese departments, the kitchen departments and the service departments there. So all over there, apart from the fact that we have very new lighting system, flooring system and all of these kind of we just modernized our stores tremendously and the offering on the Fresh side including the convenience areas, the meal kits, the meal solutions, the Fresh fish and the packaged meats, I think that does very well. We see immediately an uplift there. We also see that the customers like a lot the digital performance in the stores, so if it's the payment ways, if it's the extra self-checkouts, if it's the way how they can have a more efficient shopping experience by getting time in those stores. And as I said before, in the Long Island stores, we also took more of the center store assortments in our hands, which was not done yet that much in Hartford. And we see also there by -- here and there, changing assortments towards organic, for example, or even reducing assortment to have clearer choice for customers and therefore also for us more efficiencies. We see these kinds of things doing well. Overall, the store are completely rebranded, of course. So you almost see a complete new store. People like this a lot, what we have done there. So the total overall shopping experience is more contemporary. And we did a lot of few bits and pieces like we brought in a small café where people can have their lunch or there coffee before, after or during shopping. So I think also that the whole shopping experience got more friendly and got a lot of very positive feedback. On the Dutch side, the big investments there are in the Fresh and the produce categories. So if you would walk into those stores, then we worked a lot on digital in general, in signage, in smarter electronic shelf-labeling but also new generation of checkout -- self-checkout. We have a lot of plus mask creams, giving you more product information from the wines to the promotions and to the offer. So a lot of progress in the digital space. On the other thing, on the produce side and the meals solution side, if you enter the store, you'll start with the raw materials of carrots, let's say. Furthermore, you see the cut carrots. And furthermore, you see the convenience meals with the same carrots in. So depending on your wallet, depending on your time, depending on your cooking experience, depending on how you structure yourself with your family and so on, you can make very healthy choices in all kind of different ways of convenience, and that does a lot for our customers. The stores do better than the control groups. And of course, also the Fresh area also included the new bakeries. New deli departments do very well for Albert Heijn at the moment, so we are very pleased to see this type of things. And then we have few techniques also to -- for example, to present produce without plastic, with less packaging. We use a dry, nesting type of way to preserve produce in a better way without packaging materials. So we also do those tests. And we also offer to our customers the so-called naked fruit and vegetables without immediately running into shrink by new techniques. So also we test this type of things. Doing better than a control group in line with the planning, 120 stores by the end of this year, 50 done so far. We expect a similar batch also for next year and also our franchisees, and our company-operated stores are very happy with that new concept.
The next question comes from Ms. Carole Madjo, Exane.
Just a couple of questions for me, please. First of all on the U.S., can you maybe give us an update of how much online sales were coming from Click and Collect in the U.S.? And the second question is related to Belgium. You mentioned that you're seeing tough trading conditions in the country. Do you expect the market to become a bit more difficult as you move toward H2? And can you just give us an update on your market share trends in the country?
Let me start with Belgium and then Jeff is happy he takes care of the Click and Collect shares in the U.S.In Belgium, it's a tough trading area at the moment, and Jeff already mentioned before. But you have seen also a few of our competitors reporting the same.The second thing is that in the second quarter, the weather impact in Belgium wasn't quite happy compared to last year. Last year, we had a much more summer weather in Belgium in the second quarter than we saw this year. So those 2 things, tough trading comps and tough trading area plus the weather impact were the main reasons why we feel that those are understandable explanations for our present performance. What we will do for the second half in Belgium is that we will strengthen and fortify, in the meantime, our commercial plan. So we expect an improvement in Belgium for the second half of this year based on those plans. And of course, we are quite happy with the margin development, which is in the fifth consecutive quarter progressing in the direction slowly but surely beyond the 3% of what we had in mind. At the same time, we keep investing in Belgium. I mentioned the small convenient stores, but also in e-commerce, also in digital, also in our relationship with our affiliates. So we are positive, but it's in tough area. For us, it's important in Belgium that we work with 3 brands with Albert Heijn, which is doing very well in Belgium; with bol.com, which is also growing fast. So with the 3-brand strategy, we think that, overall, we will for sure gain market in the Dutch -- in the Belgium markets.Jeff, Click and Collect?
Yes. Obviously, we have a strong around about USD 1 billion food sales, and the majority of that is it -- the strength of our historic Peapod business, which continues to grow as a home delivery channel. Now in our own-home delivery channel through Peapod, it's very important to us. We continue to grow that. But you're right to say, Click and Collect is growing more quickly. It now represents roughly 20% of our U.S. business but is the area which we'll see the fastest growth for sure. We continue to focus on home delivery growth. But Click and Collect as we launch the new improved Click and Collect centers with more service, we will see Click and Collect grow more quickly. But at the moment, it's roughly about 80% home delivery, 20% Click and Collect.
The next question comes from Mr. Sreedhar Mahamkali, Macquarie.
A couple of quick questions then for me as well, please. Firstly is just going back to free cash flow explanation, Jeff. I'm just looking at working capital, you had a very significant improvement in trade payables last couple of years already, I think. Is that still a source of opportunity? And I also see -- you haven't quite reiterated the EUR 2 billion CapEx target. Is that changing? That's the first one on free cash flow. Secondly, I guess in terms of group margin guidance for the year, I guess, and what implied in the second half. We're all probably scratching our heads a little bit just given -- the Dutch drivers you talked about seem a little bit more structural, the U.S. tough comps you talked about particularly Q3 and potentially also Q4 and also your ambitions of price investment and accelerating online. They're all there. Looking for the explanation in terms of how we get to -- a lot to the margin. Is part of the explanation then in the sale for customers' plan? Is that -- what is the missing thing? Is that an acceleration there potentially?
Yes. Look, I think I've got to emphasize how important, say, for our customer is, to us, it's a real program with real savings, which are measured and audited. We mentioned EUR 540 million to begin the years of target for this year and EUR 1.8 billion over 3 years. As I mentioned, the current run rate suggests that we could exceed the EUR 540 million, and I think that's very important part of our confidence in the margin guidance. With respect to specific segments, we go through investment phases in different segments of our business. The tough comps I mentioned, by the way, were for sales in terms of the [ ID ] sales comps. We didn't say anything about margins. But I would just say that we see a consensus number out there, we're comfortable with that. We're very clear in our internal planning, and we feel confident in the margin guidance. In terms of free cash flow, maybe I should have emphasized, yes, we expect to spend the EUR 2 billion, and we see that in a current run rate in terms of CapEx. I think it's really important, as you look at our history, we've increased our free cash flow, but we have done that while increasing our CapEx, and that's really important in terms of our investment in the future of the business. We are not playing at developing our free cash flow by cutting CapEx, we've -- we're increasing CapEx this year. And we will spend the EUR 2 billion -- or there or thereabout, plus or minus a few million. And to do that, yes, we have to improve our working capital in the second half, trade payables is a part of that process. We're very conscious there are -- certainly, we pay on time as suppliers where we extend payables, we negotiate with our suppliers. We're very conscious that we pay farmers and we pay our Fresh suppliers early and on time. There is still more room to be done on inventory management. We haven't seen the progress I'd like to see over the last 18 months on inventory management. So there are still opportunities to improve our replenishment systems, our replenishment processes to get better at that and to reduce our inventory levels. And the combination of those will result in a working capital inflow in the second half of the year.
Just quick one, not to get too much in the technical details, but are you not capped in the U.S. in terms of your trade payables. So the delta is largely ex U.S. in terms of trade payables. Is that how it's...
The U.S. is always -- there's no -- why would there be a cap in the U.S.?
Isn't there like a regulatory requirement to have a certain level of base?
No. The land of the free. There's no -- there's nothing regulatory about payables in the U.S. There's common practices. I mean it's harder. There's certainly common practices in terms of expected payment terms, but like anywhere, there's always opportunity. And it's not necessarily just extending terms, it's payment cycles. There's all sorts of opportunities. So no, there's no cap in the U.S. in terms of payables. In fact, most of the improvements we have seen over the last 2 or 3 years have been in Europe, but there are opportunities to improve our payables in the U.S. further. And again, that's -- if you look at our general terms, I think -- I'm making this number up, but we're in the low 40 days in terms of total payables. If you look at some of our suppliers, the -- I won't name them, but you look at them running at 90, 100 days...
But there are raw materials and estimate.
Yes, with their raw materials. So we still play very much. But the supermarkets tend to get a bad impression on payment terms, but we still very much pay on -- well, we're a good payer, we pay on time, but we pay to an average of around 40 days. So there's still an opportunity to work on that, 1 or 2 days makes a big difference on a business of our size. As I said, I still see opportunities in inventory. And it's a small number but receivables continues to be a focused point in those countries where we have a significant receivable such as Belgium, for example.
Sreed, you mentioned that you scratch your head, that's how I understood it on the margins in the U.S., the [ sealable ] margins after strike. If you just look at your second quarter and you'll back out the Stop & Shop one-off effect, you back out the EUR 24 million interest rates and then you look at your operational margin, then you're there on last year. So I think we will be very confident with our guidance. But I think this is also now already comfort level, we start believing that.
The next question comes from Mr. Xavier Le Mené, Bank of America Merrill Lynch.
Two questions, if I may. First, can you comment about the U.S. market and how you see the competition in recent months and what you're expecting potentially in H2? That will be quite interesting. The second one, you're paying an interim dividend for the first time. So what is the reason to pay an interim dividend this year? And should we expect an interim dividend every year going forward?
Let me start with the dividend, Xavier. Yes, I -- yes, you should expect it going forward. We don't change these things as a one-off. The reason for doing it is just to be as an extra benefit to our shareholders to smooth the cash flow and to create a smoother flow of income into the -- from the dividend. It's as simple as that. And yes, you should expect it ongoing from now on.
Yes. And on the market situation in the U.S. and I'll just focus on the East Coast and on the second half, it was your question, the outlook. I just can't share with you what we see at the moment because we also do not have a crystal ball on competition for the second half. I think it's fair to say that in our markets, discount is growing, but mainly due to extra space, extra locations. There are the German discounts, of course. So that's one thing. The second thing is that the strong regional players are also building share by adding new locations if they come from Florida or if they come more from the west. We grow share at the East Coast, and this goes most likely at the expense of the traditional other grocers, and that is also in line what we said at the CMD in November, we see a further consolidation in this market. And just have in mind that the investments we made, the EUR 2 billion CapEx in total with 60% share going to the U.S., a lot of that money is going into remodeling, into technology, into digital, and that is not easy to keep up for a lot of smaller traditional grocers. So that market will further consolidate where we feel that we have an opportunity to deepen our footprints and with our strong local brands extend our network gain share. And I think we expect that, that will be ongoing for the coming quarters, and that is a little bit -- roughly the summary of how I look at this.
The next question comes from Mr. Hans D'Haese, ING.
Most of them are already answered, only remaining questions are on the Belgian market. Your most important competitor on the Dutch market, Jumbo, is entering the Belgian space this year, still early days. But what do you expect for next year? How does the market -- will the market evolve? Do you expect a tougher environment? That's it basically.
Yes. On the Belgian market, I said already before and so did Jeff, that the trading environment in Belgium is a tough one. Looking at the number of square meters in the market and the economy in itself is not growing nor is the population, and we required some new square matrix in that market and I think we're not the only one who is recognizing this. The second thing is that Jumbo announced to open, I think, 3 to 4 stores this year. So we'll see what's happening there. I think we have an extremely good brand with our Albert Heijn brand in Flanders, and also we understand that Jumbo also will come to Flanders. And so I would call that Albert Heijn, I think we'll see how it will develop. And the second thing is that we do not know about the outlooks of Jumbo for next year. We focus on ourselves. We have 3 strong brands with Delhaize, Albert Heijn and bol.com. And those brands are a good recipe for servicing a broad number of customers in the Belgium market both in the French and the Dutch-speaking part, and we will grow as a group, our market share in that space.
That, ladies and gentlemen, concludes this Conference Call and webcast. Thank you for joining us today, and have a nice day.