Koninklijke Ahold Delhaize NV

AEX:AD

Earnings Call Transcript 2018-Q3

[Operator]

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 third quarter 2018 and also in Ahold Delhaize's public filings and other disclosures. Ahold Delhaize's disclosures are available on aholddelhaize.com.Forward-looking statements reflect the current views of Ahold Delhaize management and assumptions 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 section. 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.

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

Thank you, operator, and good morning, ladies and gentlemen. Welcome to our third quarter 2018 results conference call and audio webcast. I am here with Frans Muller, our CEO; and Jeff Carr, our CFO. 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 third quarter 2018 results conference call. I'm pleased with these results, as we delivered strong sales and earnings growth, which has allows us to increase our free cash flow guidance for the year. This underscores the strength of our great local brands and our leading positions on both sides of the Atlantic. The third quarter sales rose 3.6% at constant rates. U.S. comparable sales was up 3%, and excluding the Hurricane Florence impacts, up 2.5%. And we saw a positive volume growth in the U.S. this quarter.Net consumer online sales were up 27.6%, boosted by another very strong quarter for bol.com. This puts us firmly on track to realize at least EUR 5 billion in net consumer online sales by 2020 and thus exceeding our target. Our underlying operating margin increased 20 basis points to 4.1%, supported by synergies.Net income was up 26% to EUR 459 million, as a result of higher operating income and lower income taxes. Free cash flow continues to be very strong, and we expect free cash flow for the year to be at least EUR 2 billion, exceeding our previous guidance.We are looking forward to give you an update on our strategy at the Capital Markets Day on November 13, next week's Tuesday, in New York City. We are excited to share our plans on e-commerce and digital in both the U.S. and Europe, and on the repositioning program at Stop & Shop, along with further plans to drive growth in the years ahead as we continue the expansion of the leading position of our great local brands.Now let me hand over to Jeff who will take you through the numbers in greater detail.

[Jeffrey Carr, CFO & Member of Management Board]

Thank you, Frans, and good morning, ladies and gentlemen. As Frans mentioned, net sales at EUR 15.8 billion were up 3.6% at constant rates. And while we saw a strong performance in the U.S. and the Netherlands, particularly at Food Lion and bol, it was very -- it was a very good overall performance from all of our brands. Underlying operating margin at 4.1% was a 20 basis points improvement versus last year, with operating income -- underlying operating income at EUR 647 million, up 8.8% at constant rates. And as Frans mentioned, lower merger-related costs and lower taxes resulted in impressive growth in net income, net income from continuing operations being up 30.6% to EUR 475 million.In the U.S., we saw a strong top line performance with volume growth. And while Food Lion was, as I mentioned, particularly impressive as we continue to roll out the Easy, Fresh and Affordable format, we also saw positive trends across all our U.S. brands. Total net sales grew 3.2% to EUR 9.6 billion and comparable sales were at 3.0%. As we've mentioned in the quarter, the Carolinas were impacted by Hurricane Florence, and I'd like to add my thanks to the hard work of our associates who responded fantastically to ensure that as many as our stores as possible remained available during the crisis to serve our customers. The impact from the hurricane was estimated at a positive 0.5 percentage points on the comparable sales for the segment. So adjusted, comparable sales would have been 2.5%, representing a strong improvement in the trend from Q2.The margin impact of the hurricane was fairly neutral since the extra benefit from the sales was offset by $10 million onetime costs, which was included in underlying operating income. Underlying operating income therefore grew in the U.S. by 8.8% to EUR 395 million, and margins were up 20 basis points to 4.1%.It's also a strong quarter in the Netherlands with sales of EUR 3.5 billion, so comparable sales grew by 5.9%. Net consumer sales grew by 33% in the quarter. And if you exclude the impact of bol.com, comparable sales for the Netherlands, that's excluding bol, grew by 4.2%, still an impressive growth rate.Underlying operating margins were 5.1% in the quarter, up 20 basis points, again compared to last year. And again, excluding bol.com, underlying operating margin was 5.7%, also up 20 basis points.We continue to see steady progress in Belgium. And although comparable sales were only up 0.6%, this was significantly impacted by having fewer trading days in the quarter. If we adjust for this, the comparable sales would have been at around 2%. Underlying operating margin of 3.2% was up 20 basis points versus last year, mainly due to higher gross margin and the ongoing delivery of the synergies. In Central and South Eastern Europe, net sales were EUR 1.5 billion, up 3% at constant rates. That's largely due to the addition of 123 new stores year-on-year, most of which were smaller convenience formats. Comparable sales were up 0.6%, where we see a strong performance in Romania and the Czech Republic, but with a softer performance in Greece. So albeit, we are now seeing improving sales trends in Greece and we expect a better fourth quarter.Underlying operating margin at 3.7% was down 60 basis points, partly due to the sales deleverage due to what we see in Greece, but also to the higher labor inflation we see across the region.As Frans mentioned, free cash flow remains very strong, with EUR 538 million in the quarter, that's 26% ahead of last year. And year-to-date, our free cash flow now stands at EUR 1.7 billion, 64% higher than last year. We announced today that free cash flow for the full year would be at least EUR 2 billion in 2018. That's ahead of our previous guidance of EUR 1.9 billion. The improvement in free cash flow is being driven not only by the improved operating cash flow, but by continued strong working capital performance and the fact that we now expect capital expenditure to be slightly lower for the full year at EUR 1.8 billion.Now finally, as I wrap up, we remain on track to deliver EUR 420 million of net synergies by the end of 2018, with EUR 113 million in the third quarter, an increase of EUR 45 million versus last year. And onetime merger-related costs remain within the original targets of EUR 380 million and EUR 70 million, respectively.Now let me hand back to Frans. Thank you very much.

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

Thank you, Jeff. On Slide 13, as part of our strategy, we continued to invest in our store network, inspiring customers with new store formats. And let me give you just a few recent examples. In Belgium, Delhaize remodeled the first 5 stores based on the new format. A highlight of that new concept store in Nivelles is that Fresh Atelier, offering freshly prepared ready-to-eat meals using recipes for a healthy diet. In the Czech Republic, Albert has created a new concept for urban supermarkets, featuring fresh, healthy foods and a fast and easy shopping experience with many products from local suppliers.In U.S., Stop & Shop remodeled all its stores in the Hartford area, 20 of them, as the first phase of its repositioning program, delivering more fresh, fast, local and healthy options. And we will tell you more about this next week on Tuesday.Food Lion continued to roll out the successful Easy, Fresh and Affordable format to 712 of its 1,029 stores, including 168 stores in the Norfolk and great Roanoke market this year.As part of our omnichannel strategy, we also continued to develop and expand our e-commerce and digital plans and programs throughout the business. Let me also give you a few examples here. Albert Heijn to go has started to roll out tap and go check-out free stores that offer customers superfast shopping without waiting in line. And by using blockchain technology, Albert Heijn has taken the next step in offering transparency in the products -- production chain of its own-brand products for its customers.Food Lion introduced the Food Lion To-Go grocery pickup service in North Carolina and Virginia, allowing customers to order and pick up their groceries in as little as one hour.bol.com is now piloting extra-fast delivering, with home delivery within 2 hours of ordering and with electric bicycles in an environmentally friendly way.On Page 15, you see -- before we start the Q&A session, let me briefly wrap up. We had a successful quarter with sales growth across the board and strong growth of underlying operating income and net income. Based on our strong cash generation, we expect free cash flow for 2018 to be at least EUR 2 billion, exceeding our previous guidance of EUR 1.9 billion. And as I state -- as I said in the beginning, we are looking forward to providing an update on our strategy at the Capital Markets Day on November 13, next week Tuesday, in New York City.So let me hand back to the operator and to start the Q&A session.

[Operator]

[Operator Instructions] The first question comes from Mr. Nick Coulter, Citi.

[Nick Coulter, Director]

So three questions, if I may. Firstly, on the U.S. As you look between the sequential quarters, the second quarter and the third quarter, and remove the distortions of Easter and the hurricane impact and also a move in inflation, what has changed? Is it the promotional execution of Stop & Shop that has improved? Is that the biggest step back test? Or are there underlying shifts at the other balance? That will be the first question.

[Jeffrey Carr, CFO & Member of Management Board]

Nick, yes, certainly, it's an improving trend if you adjust for Easter and still adjust out the hurricane. I think inflation is pretty flat across the U.S. from quarter 2 to quarter 3 at around 1.6% in our markets. I think, certainly, we talked about -- and what we've mentioned in the script was that we saw improvements across all the brands, but certainly, across the former Ahold brands, where we talked about, especially Stop & Shop, standing up the brands in quarter 1 and quarter 2. We have seen an improved performance through better execution of the promotional activities, and that's one of the things that we flagged in August, and that has certainly come through in quarter 3. But we continue to see very strong performances even adjusting for the hurricane down at Food Lion. That continues with the rollout of Easy, Fresh and Affordable. We've continued to see a very strong improvement in terms of volumes and market share delivery. And again, at Hannaford in the north, we see very good performance. So I'd say across all of the brands, particularly at the AUSA brands, which is more operational improvement in terms of better execution and promotional activity as we stood up the brands, and -- but we do see an improvement in the overall trends also at Food Lion and Hannaford. So I don't think it's really inflation-driven since inflation is pretty flat, but we are seeing an underlying strong volume growth, and that's very pleasing in the third quarter.

[Nick Coulter, Director]

So it's across the board, but Stop & Shop is probably the biggest step change within the business.

[Jeffrey Carr, CFO & Member of Management Board]

I don't know if it's the biggest, it's certainly -- I think the delta between Q2 and Q3 is a bit stronger at Stop & Shop for sure. But we did see, as I said, an improvement across the board. And although we're not proud of the 12% in online necessarily, we got a lot more to do. And we'll talk about that at the Capital Markets Day. It was also positive to see online performing a little better, which again we'll talk about more at the Capital Markets Day. So it really was across the board we saw improvements.

[Nick Coulter, Director]

Okay. And on online, just on the new automated [ warehouse ] for Stop & Shop, and without stealing next week's thunder because I'm sure you'll cover it in greater detail. But for those new automated [ warehouse ] how many lines can they stock and will it be used to pick fresh and chill?

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

Yes, Nick, Frans here. I think we'll talk about this next week Tuesday at the CMD where we both highlight all kind of fulfillment options and technology for our European markets, and especially also, the strong experience and learnings at bol and at ah.nl. And at the same time, we also will give you a good preview of how we would like to operate our business in the U.S. And I think one key word is we see our retail business with the great local brands as local brands close to customers, and that's why you also will see the partner of choice we're going to make.

[Nick Coulter, Director]

Okay. And then lastly, on CapEx, if I may, with respect to the lower guidance. How should we think about that for this year? Obviously, there'll be impacts in the outer years, but for this year and the lower guidance, is that a timing impact?

[Jeffrey Carr, CFO & Member of Management Board]

Yes, it is just timing, Nick. I mean, U.S. make estimates at the beginning of the year, but there's a lot of regulatory hurdles you have to get through to open up the number of stores that you'd like. And we still have a lot of openings due in Q4, so we have a lot to spend -- really step up in spend in the fourth quarter. But based on some timing in various countries, we've slightly downgraded from EUR 1.9 billion to EUR 1.8 billion. We don't constrain the capital within the business, there's no benefit in doing that. We have strong free cash flow. I'd rather we spend the EUR 1.9 billion, we get good returns on all of those investments in new formats and such forth. But it's just down to pure timing in terms of the teams that are just a bit behind their spend rates.

[Operator]

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

[Robert Jan Vos, Analyst]

A couple of questions. I remember that last year at Q3, you announced your share buyback program that is currently running. The program is now for more than 90% done. So my first question will be, when will you take a decision on a potentially new buyback program? Then the second question. You already mentioned the food inflation in the U.S. Can you also share the food inflation in the Netherlands and Belgium, please? And maybe also on the CapEx, you explained it's a timing issue for this year. But for the midterm, do you still believe that the current CapEx as a percentage of sales of around 3% is a run rate and sufficient? And lastly, Netherlands, 4.2% excluding bol. I assume you increased your market share in the Netherlands in the quarter, can you say something on that, please?

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

Yes, Robert Jan, a few things. On the buyback, we will be very explicit on our financial structure and plans next week at the CMD. On the food inflation, in the Dutch market food inflation is around 2%; and for Belgium, roughly about 2.9%. And the CapEx levels of 3% are levels where we feel very comfortable with. But having that in mind, that is, overall, higher than most of our competitors do. So it's a strong figure. But having said that also, you know that we have a very strong financial structure and culture, so we'll be very disciplined in spending our CapEx. But if there are opportunities we shouldn't miss based on our ROCE hurdles, then we have the firepower to do so. But 3% is the number we believe in, that's a good number and that's above market.

[Robert Jan Vos, Analyst]

And maybe a comment on the market share in the Netherlands?

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

We saw that the market share in the second quarter was under pressure. We don't have the market share numbers for the fourth and third quarter yet.

[Operator]

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

[Andrew Ian Porteous, Analyst, European Retail]

Just a couple from me, if I could do. Just in terms of Stop & Shop, obviously that was the main sort of area of disappointment last quarter. You talked about the amount of change in that business from the local brand proposition. Do you think you're fully up to speed there yet or are you still seeing an improving trajectory in terms of execution? Can we look forward to better performances there going forward? And then just a quick one on the Hartford transformations. I appreciate you're going to give us a lot more detail next week, but should we be thinking about this in the context of Easy, Fresh and Affordable? Or are they much bigger? I mean, the EUR 3.5 million of CapEx per site, it seems like it's a much bigger transformation on a store-by-store basis on Easy, Fresh and Affordable. And then the last one, just if I can do. Are we -- should we expect Easy, Fresh and Affordable CapEx to taper as you get closer to the end of that program from next year? Or is there still a couple of years to go on that?

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

Yes. Thank you, Andrew. Jeff and myself will try to answer your questions together here. On Hartford, the first 20 stores are done in the Hartford, Connecticut area, and the first feedback of customers is very positive. And the investments are higher compared to the average for Easy, Fresh and Affordable, Food Lion, but don't forget the stores are also much bigger. So it's -- we should compare them in a different way. And indeed, at Capital Markets Day next week, we'll talk about more details and more insights on what our plan is for the total Stop & Shop business and brand. And in Stop & Shop, in general, we see very good opportunities to raise the strength and the sales of that brand, especially because we have excellent locations and we have highly energized teams there. And of course, repositioning and remodeling, and also working on the online site and equipping those stores. Also, we've done -- the stronger online proposition will be a big help. Easy, Fresh and Affordable, 700 stores out of roughly 1,000. We have, for the 2019 year, another batch planned. So we're coming to the end of that remodeling scheme. And that's why we also can switch CapEx from that program into, for example, the CapEx of our Stop & Shop program.

[Jeffrey Carr, CFO & Member of Management Board]

Andrew, it's Jeff. I'd just follow up on Stop & Shop by saying, look, we talk specifically about the standing up of the new commercial, merchandising, marketing teams in Q1 and Q2, and then the handover, the planning for the promotional activities and the marketing activities, and that's largely done. The teams now are very much focused on the transformation of Stop & Shop. We're all very excited about that. It's rightly being pointed out as one of our weaker -- relative weaker areas in terms of the growth profile over the last couple of years. And so we're very excited to be able to address that, and we'll give more in the Capital Markets Day. But I would say that, that handover of the specific activities and the bedding in of that was pretty much complete during the second quarter as we said then, and we've seen better results as a consequence of that in the third quarter.

[Operator]

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

[Fabienne Caron, Head of Food Retail Sector]

See that your own stores continue to outperform compared to...

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

Fabienne, we -- I think we missed the first beginning of your question. Could you start from the beginning? Yes.

[Fabienne Caron, Head of Food Retail Sector]

Okay. Sorry, sorry. So first, on Belgium, looking at the appendix, we see that the owned stores continued to underperform the franchisee. Could you comment on that? The second question is more broad on logistics costs and the fact that we see some driver shortage, I guess Belgium, Holland and as well the U.S., if you could quantify the impact of this increased cost for you. Then finally, on the U.S., there was a lot of discussion regarding the price position of the different banners over there. Can you make some comments? Are you comfortable with the price position of each partner? Or which partner do you think you may have more work to do?

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

Fabienne, I'll try to answer question 1 and 3, and Jeff might focus on the #2. On Belgium, 2 things on Belgium. You see a positive sales growth of 0.6%. But we also realize that we have one Sunday more in the quarter, and the Sunday more in the quarter means we're a company-operated store, that we are closed. So if you could correct that then that is an effect of 1.5% negative in our case, and that same negative will be coming towards us in a positive sense for the fourth quarter because we have then one Sunday less. So comparable sales for Belgium are roughly 2%, comparable sales up. That's one thing I would like to mention. The second thing is that we should not forget that our company-operated stores are always closed on Sundays, whereby the affiliate stores, operated by third-parties, can be opened on the Sundays. It has to do with legislation and CLA and unions agreements. And that's a big difference especially as the weekends in Belgium get bigger. And especially also, as most of the smaller formats grow faster and the smaller formats are all affiliated formats, so they also have not only the smaller growth format opportunity, but also the Sunday opportunity. It's a little bit complicated to understand this, but it's the investor phenomenon in our Belgian business. On the U.S., on the pricing, I think we always were very consistent there and both -- and for Food Lion, we said for the image items there are within the range of 1%, 2%, to a big box retailer in the U.S., and those image items are a good 2,500 items. And for the full store, wall to wall, we are 10% away from the big box retailer as Food Lion. And we also said to give also an indication for the -- one of the other Ahold Delhaize brands for Giant Martins, that looks very similar towards Walmart. So that's to give you some price indications. We also said already earlier that we're going to reposition Stop & Shop, and that will be in combination of a lot of new concepts, and digital, and produce and remodeling, but we also will do some meaningful price investments in Stop & Shop as well. Jeff, can you take the second one?

[Jeffrey Carr, CFO & Member of Management Board]

Well, on logistic costs, it's fair to say we have -- across the board in Europe and the U.S., we see somewhat shortages of drivers and some inflation. I think specifically in the U.S., we've seen close to 10% inflation in logistic costs, which just makes it more important that we continue to focus on our "save for our customer" programs to offset those types of cost increases. I don't have a number specifically for Belgium with me, but in the U.S., it's -- inflation of our logistic costs in total is running around -- running just under 10%.

[Fabienne Caron, Head of Food Retail Sector]

And it's based on logistics cost of 2% to 3% of sales in the U.S.?

[Jeffrey Carr, CFO & Member of Management Board]

Yes, I think it's somewhat under 2%, I think. Yes, just 2.2% of sales in the U.S. That's total L&D, it's logistics and distribution, so it's -- and improved warehousing costs as well. I look at that line in combination.

[Operator]

The next question comes from Mr. Ajay Soni, Bernstein.

[Ajay Soni]

Is there any information you could provide on the market share? So in the second quarter, you mentioned all the brands in the U.S. are either flat or up, and has this changed in quarter 3? And just a second one. Removing the hurricane impact for this quarter, is this comparable sales level likely to continue in the U.S.?

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

I think Jeff, he already mentioned the hurricane effect, the 50 basis points for the U.S. So a 3% comp sales for the total U.S. I'd say, taking the hurricane uplift and sales out for the Food Lion brand, it's a 2.5% comp sales for the U.S.

[Jeffrey Carr, CFO & Member of Management Board]

Yes. And I think the way we measure market share, we try to get the most inclusive number, including drug, dollar stores, club stores. But looking at it that way, it comes in a pretty much a quarter late. But what I'd say is that this type of improvement, we could expect to see an improvement reflected in market share. I don't see a big change in the overall market growth rates. So I've got -- and we'll talk a little bit more about market share next week, specifically in reference to the U.S. brands. But I'm confident we'll continue to see a positive trend in terms of market share as well in terms of the U.S. And for the fourth quarter, we've seen 5 weeks or so of the fourth quarter, I've no reason to be concerned that we don't see the positive trend continuing into the fourth quarter or certainly maintaining the sort of levels that we're looking at, at the moment.

[Operator]

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

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

Most of my questions have been covered off, but 2 quick ones, if I can. So firstly, on the tax rate, pretty low this quarter, presumably still sticking to that low 20s guidance. But wondering if you could be a bit more specific as we've got a little bit more around into the year. And then finally, just on the synergies number, obviously, no change for this year. But obviously, if you sort of think about other projects, and you mentioned logistics for instance, I mean, the 2 businesses are essentially not integrated from a logistics point of view in the U.S. Is there a possibility that we get an extra logistics program -- or extra synergy number, sorry?

[Jeffrey Carr, CFO & Member of Management Board]

Let me pick that up. On the tax rate, it was low in the quarter. And from time to time, we get onetime benefits of various adjustments to provisions and such forth. We did in this quarter. Excluding that, it would have -- the rate this quarter would have been 20 -- just over 20%. And I expect that will be around the 20% for the full year, taking into account some of the onetime -- small onetime benefits we've had this year, but around 20%. It might just be slightly under 20% for the full year. So clearly, that's a significant benefit. Let me also follow up on the logistics. I think you're right to highlight that the synergies included some of the areas that we were focused on and we addressed in the first 2 years of the merger. But there are clearly significant other areas of cost improvement and efficiency improvement that we'll continue to go after very strongly. We may call them "save for our customer" instead of synergies. And certainly, all outside of the calendar, which is the end of the first half of 2019, they'll be termed "save for our customer." But we still see significant opportunities, and we'll talk more about "save for our customer" targets next week as well. But clearly, we're still optimistic there's a lot of improvement in efficiency bringing these 2 great businesses together and also learning best practice from each other, and there's still more that can be done. And again, we'll talk about that next week.

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

I would fully echo what Jeff's saying. I think in the synergy periods, we got a lot of teams energized and trained about their potential, which were a different definition name, "save for our customers," that we had on the net synergies. But the teams are working very closely together, a lot of things are shared. So I think that sharing will go on and the potential we still see, that's why we also see quite a bit potential also for the future in saving money to look for more funding.

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

And trends, earlier you mentioned substantial or a fairly meaningful move in prices at Stop & Shop. Do you think there is enough oxygen in -- well within the save for our shopper program to fund that? Or might we think about maybe some margin pressure going forward?

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

I think it's a combination of we have pricing, but we also have loyalty systems and promotions and couponing left. And you will see in the Hartford area, if you take a visit there, we have a very strong fresh produce, a new proposition which will create a lot of traffic. We'll upgrade and update our stores also in center store, self-checkouts, and the whole experience or journey will improve a lot. And I think all those components together will give us extra share and extra growth for Stop & Shop, which has historically great locations and very good teams.

[Operator]

The next question comes from Mr. Sreedhar Mahamkali, Macquarie.

[Sreedhar Mahamkali, Analyst]

So 3 questions from me, please. Just picking up on the save-for-customer savings. Jeff, are you able to give us an idea of run rate, say, this year or last year? How much savings were generated from save the customer in terms of run rate -- annualized run rate? That's the first one. Secondly, just going back to the U.S. I think first half volume was minus 0.6% from your presentations at Q2. Are you able to update on that volume in Q3, please? And just finally, in terms of Stop & Shop, just 2 very quick questions. Who are you benchmarking your price positioning against in Stop & Shop? And secondly, it's a few years since we've had a breakout for Stop & Shop in terms of revenue. I'm just trying to recollect probably around EUR 12 billion, EUR 13 billion of revenues a while ago. Just curious to see how much of the U.S. business Stop & Shop now is, please.

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

Okay. On "save for our customer," we specifically took a decision not to distract from synergies and give a target for '16 and '17 and '18. And that was a decision based on the fact that we weren't -- it wasn't that we weren't executing the regular "save for our customer" programs which were not related to synergies. And we had quite a strict definition if they were activities which resulted to -- from bringing the 2 companies together, and we got the benefits that would be synergy, but ongoing cost initiatives continued. And we didn't give a target for those years because we felt we wanted to focus people's mind on the synergies. But I did talk about ranges of 0.5% to 1% of sales being the kind of target that we should look to deliver on an annualized basis, and we'll be much more specific next week with a specific target that we'll talk about at the Capital Markets Day. In terms of the volumes, we don't give volume numbers out, but we talked about 2.5% like-for-like sales and 1.6% inflation, so.

[Jeffrey Carr, CFO & Member of Management Board]

That's East Coast inflation, yes.

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

East Coast inflation, yes.

[Sreedhar Mahamkali, Analyst]

Okay. I think in the Q2, you gave some volume numbers, I think you included mix in it, so just curious to see if there was a like-for-like number for Q3, that's all.

[Jeffrey Carr, CFO & Member of Management Board]

Yes. No, we specifically broke that out because there was a lot of questions, but -- around it, and there's a lot of factors impacting the movements from Q1 to Q2. But no, I think in terms of the numbers, we've been quite clear, 2.5% adjusted for the hurricane, and inflation of 1.6%.

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

So positive volumes overall.

[Sreedhar Mahamkali, Analyst]

And the Stop & Shop?

[Jeffrey Carr, CFO & Member of Management Board]

The question was the size of Stop & Shop or...

[Sreedhar Mahamkali, Analyst]

Yes. And also, who are you benchmarking the pricing against, because you've referred to some price investments.

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

I think on Stop & Shop, in that market, the discounters account for less than 5% of market share. Walmart, for example, for the last 25 years has not been very successful coming into the New York, Connecticut, Massachusetts market. They're not opening new stores in that market. And therefore, their market share and the market share around the middle remains very, very low. So we tend to benchmark against the other key supermarket players and the price leaders in the Massachusetts market, you look at someone like Market Basket, but it varies from region to region. And then you look at, for example, ShopRite in New York. But again, if you go on to Long Island or somewhere into different regions, we have different pricing zones. What I'd say is Stop & Shop has always been mid-priced in the supermarket categories in those markets. So for example, we're lower priced than Shaw's in Massachusetts but slightly higher priced than Market Basket. And you could say the same in Connecticut versus we're lower priced than Acme but slightly higher priced than ShopRite. And that's the way we look at it. And it's done in a local market pricing zone by pricing zone. And there's -- I don't know how many pricing zones we have at Stop & Shop, but there's quite a few.

[Sreedhar Mahamkali, Analyst]

And the relative contribution of Stop & Shop to U.S. revenues?

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

I think it's probably around -- the U.S., 23% or something.

[Jeffrey Carr, CFO & Member of Management Board]

Just less than 20%, between 20% and 25% of the U.S. revenues.

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

Yes. The biggest brand we have in the U.S.

[Jeffrey Carr, CFO & Member of Management Board]

Biggest brand, it's -- Food Lion is the second biggest in terms of sales.

[Operator]

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

[Dusan Milosavljevic, Analyst]

Just 3 questions from me, really. One, the first one is about the insurance gains. These are now kind of 2% to 3% of your EBIT. So I was just wondering how we should think about modeling this for next year going forward. They have been an incremental tailwind against this year relative to the previous year. The second question is just in respect to the commentary in the -- the press release that you've given, you got published in the beginning of October, you've given 3 areas of investments that are going to be coming in this new refurb. So one of them is the CapEx investments of about EUR 3 million, and then you've also been talking about -- sorry, it was CapEx investments of about EUR 3 million per store, the other ones are investment in headcount and investment in prices. So I guess the message at the moment is that all of this can be offset through the existing cost-saving programs and as Food Lion CapEx is obviously down.

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

Yes. Dusan, to that question, you're happily invited to our Capital Markets Day next week where we'll be very clear and explicit about the Stop & Shop program, which components we look for funding for the total company and how are we going to potentially offset the present investments in Easy, Fresh and Affordable and to Stop & Shop to have a good CapEx number overall for the company.

[Jeffrey Carr, CFO & Member of Management Board]

Yes. And it's -- but it's not -- again, Dusan, it's not a surprise that we've said that around 3% of sales CapEx is higher than our peer group. It's -- we're investing more than our peer group, and we will not have to increase this significantly in order to do the Stop & Shop work. So we've said that in the past and we continue to say that. On insurance -- but obviously, we'll break out more next week. On insurance, you're right. The key driver of that is the discount rates. And as the discount rates go up, we do see a benefit coming through from the lower discounting of the insurance provision. This quarter, that amounted year-on-year to about EUR 6 million, so we got a small benefit this quarter, and I think we'll continue to see discount rates trend up. And we'll expect to see a similar -- I would expect to see another slight favorable number in the fourth quarter. We have a couple of factors which are linked to increasing interest rates. The other one is -- this insurance provision is set monthly, it's not -- but if for example on the U.S. -- on the Dutch pension plans, we set -- we found a significant benefit in 2000 -- we could have a significant benefit as we see interest rates in Europe increase. If you remember back in 2013, we saw significant increases in costs as discount rates came down. So there are a couple of areas of our P&L which are impacted by that.

[Dusan Milosavljevic, Analyst]

And can I just ask the final question. The -- just wanted to clarify in respect to a question from one of my peers. The plus 1.6% number that you just mentioned, that's East Coast inflation for the market or is that your shelf inflation in line with the 1.6 percentage before then in Q2?

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

That's food at home CPI inflation, which is close to what we reported as 1.6% last quarter, and we haven't significantly changed. So it's a good proxy for our own inflation.

[Operator]

The next question comes from Mr. Dan Ekstein, UBS.

[Daniel Ekstein, Director and Equity Analyst]

A couple of questions from me. First one is on wage inflation in the U.S. Target has committed to $15 per hour and Amazon recently committed to $15 as well. Could you tell me how that compares to your average hourly rate, and whether you would see sort of convergence towards those peers over the next couple of years? And then the second question is really on margins in the U.S. You've obviously delivered strong sales growth in the quarter. On top of that, you're benefiting from I guess quite significant savings. I think you said they're about EUR 100 million this year from the retail business services implementation. But if you x out the synergy gains, then underlying margins are still down year-over-year. So what's the kind of the missing parts of the equation there? Is it cost inflation? Is there something to do with the mix of sales? I wonder if you could just give a bit more color there.

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

Should I take the wage inflation, Jeff, and you the synergy pieces, is that okay? On the wage inflation, we see of course the minimum wages set on federal, on state and sometimes on municipality level. And we, of course, are completely compliant with the legislation. Apart from legislation, we have our own ambition to make sure that we pay according to market levels, and that's what we do already and have been doing for 150 years. State-by-state, it's very different. The $15 Amazon, we should also see this in perspective because it's not only wages but it's also benefits and other things which are, for our associates, very important. On the average wage, you asked me, you asked us here, on average wages, our own average wages are most of them higher than the $15, partly because we are, of course, also in a unionized environment on one hand. And on the other hand, we would like to make sure that we have good conditions for our associates. So we do not see extra pressure coming out of this at the moment. And that's what we also check on a regular basis through our engagement levels with our people. And happily so, it's not only wages and benefits in the company, it's also the working environment and the level of inclusion. So that is a little bit on wages and wage inflation. So convergence, I think it's not necessary because we are, on a daily base, with those competitors in the market, also from an employer reputation as well, and we think we can compete very nicely.

[Jeffrey Carr, CFO & Member of Management Board]

Okay, thanks. But to answer your second question, obviously wages is one of those areas which -- where we see inflation increasing higher than prices. And therefore, we have to do everything we can in terms of our "save for our customer" to offset that. But I think if you look at this quarter, we delivered an incremental EUR 56 million of underlying operating income, of which EUR 45 million were incremental synergies. So yes, we have seen some slight base margin erosion if you back out the synergies. But relative to our peer group, I think we've held our base margins pretty well. I think 2 years after the merger though, we don't spend so much time looking at a base and our margin with synergies and without synergies. We look at the overall delivery and look at how that's appropriate for the group based on the investments we need to make going forward. And really, if I look at 20 basis points margin improvement, I think that's a great performance in this quarter. It's pretty much -- for the third year, we've seen margin improvements for the group. And so I'm not overly hung up about the with synergies, without synergy number. I think we have to look at the total picture. For example, I saw some comparatives in one of the analysts' report about the synergy levels that we're generating and comparing it to other retail mergers. But we've actually shown, some of those synergies showing real margin improvement, which again, it's easy to talk about synergies, but not actually drop the synergies to the bottom line, and we've been doing that. So I'm very proud of the 20 basis points margin improvement. And certainly 2 -- over 2 years now, nearly 2.5 years after the merger, I think we have to start just looking at the absolute numbers and not thinking so much about with synergies and without synergies. It's too complex a situation. There's too many moving parts to be able to say where would we have been without the synergies. It's just not relevant anymore.

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

So that, ladies and gentlemen, concludes this conference call and audio webcast. Thank you for being with us today, and we hope to see you next week in New York. Thanks.

[Operator]

The conference is no longer being recorded.