Koninklijke Ahold Delhaize NV

AEX:AD

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, and welcome to the analyst conference call on the fourth quarter and full year 2020 results of Ahold Delhaize. Please note that this call is being webcast and recorded.Please note that in today's call, forward-looking statements may be made. All statements other than statements of historical facts may be forward-looking statements. Such statements may involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those included in statement. Such risks and uncertainties are discussed in the summary report fourth quarter and full year 2020 and also in Ahold Delhaize's public findings and other disclosures. Ahold Delhaize disclosures are available on aholddelhaize.com.Forward-looking statements reflect the current views of Ahold Delhaize's management and assumptions based on information currently available to Ahold Delhaize's management. Forward-looking statements speak only as of the date they're 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 Alvin Concepcion, Senior Vice President, Investor Relations. Please go ahead.

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

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

[Frans W. H. Muller]

Thank you very much, Alvin, and good morning, everyone. In 2020, the effects of COVID-19 and the social unrest deeply impacted the communities we serve and created unprecedented challenges for our brands.I'm pleased with how the hundreds of thousands of associates across all our brands, distribution centers and support offices demonstrated courage and care in protecting the safety of our stores and distribution centers, while providing, at the same time, great customer service and community support. I would like to, once again, thank each and every one of them for their tremendous efforts.In support of these efforts, we made significant investments in additional safety measures, enhanced associate pay and benefits and substantial charitable donations, which resulted in approximately EUR 680 million in COVID-19-related costs in 2020.We also committed to contribute over EUR 1.4 billion to improve the security of pension benefits for associates and reduce, at the same time, the financial risk for Giant Food and Stop & Shop.When we started to see consumers shift their purchases more online at the onset of COVID-19, we acted quickly to shift capital expenditure spending in 2020 to accelerate investments in digital and omnichannel capabilities. As a result of these combined efforts, we ended 2020 in a strategically stronger position than before the COVID-19 pandemic began.Now I'll focus a little bit on the financial results. And of course, Natalie will go into more detail on the financial performance in Q4 as well as our outlook for 2021. For now, you can see in our press release and on Slide 4, some of the highlights.We are pleased with the underlying Q4 performance in both the U.S. and Europe. Comp sales grew, excluding gas, was strong in both the U.S. and Europe. And our leading local omnichannel platform generated nearly 130% net consumer online sales growth in the U.S. and nearly 75% growth in Europe in the quarter at constant exchange rates.The strong Q4 performance allowed us to exceed our full year outlook. Underlying EPS growth was 33% in the full year 2020 versus our guidance of a high 20% growth. We were able to produce EUR 2.2 billion in free cash flow in 2020, which compares to our guidance of above EUR 1.7 billion. We were proud of this high level of cash flow given the significant payments we made to withdraw, settle and improve the security of pension plans in the U.S. and the Netherlands as well as our accelerated investments in digital and omnichannel capabilities.We strive to benefit all of our shareholders and aim to strike the appropriate balance between investing in the health and safety of associates and customers, supporting our local communities, prioritizing environmental, social and governance initiatives. Therefore, we are also proposing EUR 0.90 dividend for 2020, which represents 18% growth from the prior year.Moving to Slide 5. You heard me mention that we were entering 2021 in a strategically stronger position versus the pre COVID-19. And I will elaborate a little bit more on that now.In 2020, we were able to significantly improve our strategic position. We are exceeding the multiyear Capital Markets Day 2018 financial results and targets. We grew overall market share in both the U.S. and Europe, which has further strengthened our #1 and 2 market share positions. We exceeded our 3-year group net consumer online goal of EUR 7 billion a year early by achieving EUR 7.6 billion in 2020. And online now represents about 10% of our sales, and we are positioned for additional growth, given our significant capacity increases in 2020 and 2021. And we significantly derisked our U.S. multi-employer pension plan liabilities, while withdrawing from and securing plans that comprise about 90% of the year-end 2019 net deficit.Exiting 2020 in this position makes us feel even more confident about our prospects in 2021 and beyond. While no doubt that COVID-19 helped our results last year, we also know that the future for Ahold Delhaize is very promising. Many consumers have found a new love for eating at home and found new ways to engage with our brands, both online and in-store, which are behaviors which we think will have a lot of stickiness.As a result, we are now setting more ambitious targets in several areas of our business, which you can see on the right side of Slide #5. With increased capacity and continued momentum, we expect group net consumer online sales to continue to grow slowly -- to grow strongly in 2021, particularly in the U.S., both organically and aided by the recent acquisition of Fresh Direct.We are raising our cumulative cost savings target for 2019 to 2021. These cost-saving efforts will enable our brands to invest in providing more value and convenience to customers and help us mitigate cost pressures in the business. This will lead to a solid group underlying operating margin in 2021, which is expected to be at least 4% and will drive EPS growth versus 2019.It will be another strong year for free cash flow. And we are now on track to reach EUR 5.6 billion in cumulative free cash flow from 2019 to 2021, which exceed the Capital Markets Day 2018 target of EUR 5.4 billion.Natalie will provide more color on this outlook in a few moments. But underpinning this financial guidance is our ability to further capitalize on our strong relationship with our customers and communities, who will continue to reward us for our efforts to innovate, provide convenience and offer a healthy and fresh assortment at a good value. This guidance also reflects the consistent financial discipline and operational excellence, which have come to expect from Ahold Delhaize. This is particularly important as we led a year what COVID-19 has created a lot of distortion in the financial result as well as new challenges in 2021.Slides 6 and 7 summarize how we exceeded our key targets in 2020 as well as our new targets in 2021 beyond the financial targets I just discussed. We hold ourselves accountable when we set targets and believe in being transparent about them.In the spirit of transparency, Slides 8 and 9 show our progress versus initial 2018 Capital Markets Day promises. And I won't go through them all, but clearly, we have exceeded or are on track of exceeding all of our financial goals through 2021. We are happy with our track record here, which I recall was also a very good pre COVID-19. I'm confident in our ability to achieve our more ambitious targets in the year to come.The last quarter, on Slide 10, we spent a bit of time discussing some of our early initiatives to solidify our position as an industry-leading local omnichannel retailer and increase our share of the customer wallet in 2021 and beyond, even more confident about our efforts to make that happen.On Slide 10, you can see that we increased share in 2020 in our key markets in the U.S. and the Benelux, and maintained share in the Central and Southeastern European markets. This widened in a positive sense, our already leading 1 and 2 position market share and our aim is to retain this leading position in 2021 and beyond. So I think it's worth giving you an idea how we plan to do that.On Slide 11, we described some of the reasons we think additional wallet share opportunities remain. Well, no doubt, COVID-19 creates challenging sales comparisons in 2021, we are confident that our 2-year stacked comp sales growth rates will be better than they were pre-COVID-19.One of the reasons we believe this is because of our ability to capitalize on changes in customer behavior. We have shown in 2020, our ability to adjust our operations and shift investments in a short amount of time. And we will continue to remain nimble.Even as COVID-19 subsides, we think customers will work more from home than they did before COVID-19 and therefore, eat more at home than before. We think the preference for healthy and fresh products will step up even further. And we think online demand will continue to grow strongly. These behaviors portend well for our future as a company because they are the areas we have been highly focused on and already and play well into our strengths. In fact, with our investments in increased capacity and continued innovations, we expect over 30% growth in net consumer online sales for the group in 2021. And we expect the U.S. to outperform that rate with over 60% growth.In Europe, bol.com has exceeded their net consumer online sales target a year early, reaching EUR 4.3 billion in 2020 versus our target of EUR 3.5 billion in 2021. We expect growth to continue and are upping our forecast for bol.com to EUR 5 billion in net consumer sales by 2021.There are a few other reasons we think incremental sales opportunities exist. Our recent acquisitions of Fresh Direct and stores from Southeastern Grocers as well as yesterday's announcements regarding Deen Supermarkets in The Netherlands will drive incremental sales. We think there's organic growth opportunities here as well.The store remodels we are doing across the U.S. and Europe should also continue to drive sales uplifts. And many of these are focused on some of our largest brands in Stop & Shop and Albert Heijn, which you have heard us talk about before. There are also new opportunities for increased sales in general merchandise and own-brand products in the U.S. as well as improved meal solutions offerings in both the U.S. and Europe.On Slide 12, you can see some highlights of ways we are bringing to life our goal of being a leading local omnichannel retailer, building upon key initiatives, which we announced last quarter, our activities centered around several areas.First of all, significantly stepping up our online capacity, supply chain and technological capabilities. In 2021, we have plans for increased online capacity in both the U.S. and Europe on top of a significant increase in 2020. We will also continue to make progress in our U.S. supply chain transformation efforts, which are absolutely on schedule.Two, advancing our omnichannel offerings to consumers. We will roll out AAH Albert Heijn Compact, which is the no-fee, home delivery service targeting smaller households to more markets in 2021.GIANT Company launched Choice Pass in January, which offers unlimited free grocery delivery and pickup with an annual membership fee of $98 as a sort of subscription system.And last quarter, under three, we mentioned that improving online productivity across all our brands is one of our highest priorities for 2021 and beyond. It remains a key focus for us, and we have some new things to share with you on this front. We plan to accelerate U.S. online grocery fulfillment productivity growth through an end-to-end improvement of processes, systems, operating practices and innovation beginning in 2021 and continuing through the end of 2022, which will lower the cost to serve.To improve efficiency even further, we will open an additional micro-fulfillment center with Autostore and Swisslog inside of a new omnichannel fulfillment center in Philadelphia in the fourth quarter of 2021.In both the U.S. and Europe, we will utilize technology to improve route optimization in order to reduce last-mile costs. We're also working on ways to optimize the numbers of orders per trip and leveraging new fulfillment centers to reduce distance traveled.And at bol.com, we are pleased with the team's ability to drive positive operating profits and double-digit return on capital in 2020, and we expect this to continue in 2021.You also remember that we want to continue to address the call to action in ESG. Slide 13 show our recent actions. It's great to see that our substantial efforts in the past have been recognized as well. We were top ranked -- the top ranked food retailer in the U.S. and Europe, and #2 globally in the 2020 S&P Global Corporate Sustainability Index. And therefore, recognized as a member of the Dow Jones Sustainability World Index, DJSI, in Europe.Going forward, we continue to push our online efforts -- our efforts on the ESG and announced that in January, our Albert Heijn halved their CO2 emissions per store and switched to 100% wind energy. The U.S. partnered with HowGood on an easy-to-use environmental and social impacting -- impact rating system. The U.S. brands pledged support to the CEO action for diversity and inclusion program, which is the largest CEO-driven business commitment to advance D&I within the workplace. And our U.S. brands were recognized as best places to work for LGBTQ and equality, receiving a perfect score on the Human Rights Campaign Foundation's 2021 Corporate Equality Index.We also announced a EUR 1 billion sustainability-linked revolving credit facility. All elements to underline the importance of ESG and our efforts to make it even more important for ourselves, our associates and our customers.On Slides 14 and 15, we highlight some of the key achievements in Q4 for the U.S. and Europe. In the interest of time, I won't cover all of these. But in the U.S., we saw high levels of online growth to continue. Also, the Stop & Shop remodeled stores continue to perform in line, and we will accelerate the number of remodels in 2021.In Europe, we were also pleased with the high level of net consumer online sales growth, particularly at bol.com, which started the year with 26,000 sellers on the platform the year of 2020 and ended the year with over 41,000 of sellers on the platform. And it continues to grow in 2021.I will now hand over to Natalie.

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

Good morning, and thank you, Frans. Our underlying performance in the fourth quarter was again strong and continues to be impacted by high levels of demand due to COVID-19. As a result, net sales grew 18% at constant exchange rates to EUR 19.6 billion and group comp sales ex gas were 11%.Net consumer online sales grew 84.2% at constant rates. This was driven by strong demand from both existing and new customers as well as by accelerating investments in our online business to rapidly expand our capacity in both the U.S. and Europe.Underlying operating income increased by 10.8% at constant rates to EUR 811 million, with underlying operating margin down 30 basis points to 4.1% at constant rates. This was primarily due to significant cost related to COVID-19, which amounted to EUR 210 million in Q4. That's a significant step-up versus Q3's EUR 140 million, due to a resurgence in COVID-19 as well as lower margins in the U.S., which I'll elaborate on more in a moment. These factors were partly offset by a margin benefit of 0.2 percentage points from the calendar effect of a 14-week quarter compared to a 13-week quarter in 2019.Underlying income from continuing operations for the quarter was EUR 561 million, up 3.4% at constant rates. On a reported IFRS basis, however, there was a loss from continuing operations of EUR 9 million, reflecting the EUR 841 million pretax provision for the previously announced withdrawals and settlements from U.S. multi-employer pension plans.We also repurchased EUR 296 million of stock in the quarter, which brings our full year share buyback to EUR 1 billion in 2020. Diluted underlying EPS in the quarter was EUR 0.53, an increase of 7.3% at constant rates.Now slides 18, 19 and 20 show our results on an IFRS reported basis as well as for the full year 2020. Moving on to our fourth quarter performance by segment. Let's look at Chart 21. Here, you see that net sales in the U.S. grew by 18.7% at constant rates to EUR 11.4 billion. Comp sales ex gas increased 11.2%. Brand performance was strong across the board with the highest growth rate again coming from Food Lion.Another important call out on the U.S. top line was our online sales, which increased by 128.5% in the quarter, this led to 105% online sales growth for the year, exceeding our already upgraded 90% growth target. Click and Collect was a significant driver of this growth. And we ended the quarter with 1,116 locations, up from 692 at the beginning of the year.The underlying operating margin in the U.S. was 3.9%, down 40 basis points from the prior year. Q4 comp sales moderated relative to the growth rate we delivered in Q3. And at the same time, costs related to COVID-19 in Q4 also increased relative to what we've seen in Q3. This drove a different margin profile relative to what we've seen in the other quarters of the year. In addition, onetime items and previously announced transition expenses related to the U.S. supply chain transformation initiative, unfavorably impacted margins by 0.5 percentage point.In Europe, net sales in the fourth quarter grew by 17.1% to EUR 8.2 billion, and comp sales increased 10.6%. This improvement was led by our brands in the Benelux markets. Growth was mixed in the Central and Southeastern Europe due to higher level of consumer lockdown restrictions, reduced tourism and lower demand in urban centers where many of our stores are located.Net consumer online sales in Europe grew 73.4%. At bol.com, our online retail platform in the Benelux, which is included within the Europe segment results, net consumer sales grew by 69.6%. The big driver of the development was bol's third-party sales, which grew 110% in the quarter.Europe's Q3 underlying operating margin was 5.1%, up 10 basis points from the prior year at constant rates. Operating leverage from the higher sales growth was offset in part by higher cost related to COVID-19 as well as EUR 11 million of pension expense in The Netherlands during the quarter, which had been flagged in previous earnings calls.Moving on to Slide 22, where you see the underlying segment performance for the full year and 2020. Now I'll look at what you've seen in terms of all of the announcements we've made on pensions in recent months. Up on Chart 23, you see a summary of our activities on this important front. We've committed over EUR 1.4 billion in the U.S. to improve the security of pension benefits for associates and significantly reduced financial risks for the group going forward. This relates to withdrawing from and settling our largest U.S. multi-employer pension plans. We took the full charge for these liabilities in our P&L in the second half of 2020, of which EUR 841 million was taken in the fourth quarter and was excluded from underlying operating income.In terms of cash impacts, we paid EUR 487 million in 2020, of which EUR 470 million was paid out in the fourth quarter. Together, these plans represented about 90% of the year-end 2019 deficit for all of our U.S. multi-employer pension plans, as disclosed in our 2019 annual report. We'll disclose an update on this on the 2020 report, which will be released on March 3. But suffice it to say, you'll see a significantly improved profile here.In the fourth quarter, we also paid out an additional EUR 122 million in cash to our Netherlands pension plan based on an existing agreement to improve the funding position. In total, the cash payouts in the U.S. and Netherlands related to all of these activities totaled EUR 609 million for the full year in 2020 of which EUR 592 was in the fourth quarter.That's a nice segue to free cash flow in the fourth quarter, which is the top of Chart 24. Here, you see that free cash flow was EUR 262 million, which compares to about EUR 1 billion last year. This was largely impacted by the EUR 592 million in pension plan withdrawals and incremental pension funding payments I just discussed. There was also an increase in CapEx of EUR 238 million as we accelerated and increased omnichannel investments in the quarter. And taxes increased by EUR 69 million due to higher income as well as the timing of tax payments in The Netherlands.At the bottom of Chart 24, you'll see that our free cash flow for the full year was really something that was a very strong result. Free cash flow was EUR 2.2 billion, which compares to about EUR 1.8 billion last year, and this would have been even higher had we not paid that EUR 609 million for pension plan withdrawals and incremental pension funding payments.We also spent EUR 476 million more in 2019 on CapEx than we had in 2019 for a total of EUR 2.6 billion for the year. As we accelerated and increased our omnichannel investments and acquired several C&S wholesale distribution centers and made other investments into our U.S. supply chain transformation, totaling over USD 300 million.Now on to Chart 25. Here, we're proposing a cash dividend of EUR 0.90 for the financial year 2020, an increase of 18.4% compared to 2019, which is the highest increase since the merger. This represents a payout ratio of 40% based on the expected dividend payment on underlying income from continuing operations on a comparable 52-week period, which is right in line with our dividend policy. This means our compounded annual growth rate is 12% since 2016 with its proposal.Moving on to our outlook for 2021 on Slide 26. As you know, COVID-19 continues to drive a significant amount of uncertainty for our business. And this is an important factor in all of our guidance for 2021. While operating -- while higher demand drove unprecedented sales growth and operating leverage in 2020, this development and, to a lesser extent, the absence of the 53rd retail week, will challenge comparison significantly this year.Let's start with operating margin, where I'm pleased to announce that we are expecting at least 4% in 2021. We believe this return to historical levels is realistic compared to the unsustainably high margins we experienced in 2020 due to the very strong sales related to COVID-19.It also reflects our ongoing commitment to drive cost savings. And we'll need to do that in 2021 to offset cost pressures, including the continued costs associated with COVID-19. I'll share a few items to consider when you think about this year's outlook. First, we expect comp sales trajectory to be better on a 2-year basis in 2021 compared to pre-COVID-19. While it doesn't affect our comp store sales, our recent acquisitions of Fresh Direct as well as the stores of Southeastern Grocers and Deen Supermarkets will provide us with incremental sales, which will be modestly dilutive to earnings as we integrate them.It may, however, still be challenging to overcome the abnormally high-growth comparisons from 2020 overall. Therefore, compared to 2020, we expect sales to deleverage as we lap the strong results given by -- driven by COVID-19. We expect costs related to COVID-19 to continue, albeit at a much lower level than what we experienced in 2020.And you've heard this from us before, but as a reminder, U.S. supply chain transformation costs are still expected to have about a $50 million impact in 2021. On our key -- one of our key priorities is to improve online productivity as our guidance suggests, and we are finding new ways to balance the impact from increased online sales penetration that we expect to come into our numbers in 2021.And lastly, one of the big ways we're balancing all the pressures I've mentioned is through significant cost savings of over EUR 750 million in 2021, which is higher than our previous expectation of about EUR 600 million.So underlying EPS is expected to grow mid- to high single digits relative to 2019. Free cash flow is expected to be approximately EUR 1.6 billion, inclusive of our CapEx of around EUR 2.2 billion. This puts us on track to reach EUR 5.6 billion in cumulative free cash flow from 2019 to 2021, averaging EUR 1.9 billion annually, exceeding the Capital Day -- Capital Markets Day 2018 target of EUR 5.4 billion that was EUR 1.8 billion annually.As a reminder, our free cash flow guidance has always excluded M&A, and we have made that pretty clear consistently. If we were to exclude investments needed to improve the operations and capabilities of the aforementioned M&A deals as well as the ongoing CapEx related to our 3-year supply chain transformation, free cash flow for this year would actually be on track to the EUR 1.8 billion number.When we look at Slide 27, this outlines the increased outlook for the Save for Our Customers plan and this is something that you see us over-delivering, and it really gives us confidence that we will continue to over-deliver against that initial plan for 2021.So I'll now hand back to Frans.

[Frans W. H. Muller]

Thank you very much, Natalie. So let me wrap up. While our 2020 results were impacted by increased demands from COVID-19, we made significant moves to enter 2021 in a strategically stronger position when compared to pre-COVID-19. For that, we thank the associates across our organization for their contributions during these unprecedented times.We had a strong 2020 performance, which exceeded our guidance. We also are exceeding our key multiyear financial targets established at the 2018 Capital Markets Day. Our significant efforts in ESG were recognized as the #1 ranked food and staples company in the U.S. and Europe by the S&P Global CSA, which led to being select as a member of the Dow Jones Sustainability World Index as well as the Dow Jones Sustainability World Index in Europe in 2020. We are now able to propose a cash dividend of EUR 0.90 for 2020, an increase of 18%.Our recent acquisitions should add incremental sales and market opportunities in 2021 and beyond. And this leads to our confidence in providing the 2021 outlook, which reflects a balanced approach to margins and another year of strong free cash flow.We will now be happy to take your questions. And operator, could you help us here and could you please proceed?

[Operator]

[Operator Instructions] Our first question is from Mr. Spencer Hanus of Wolfe Research.

[Spencer Christian Hanus, Research Analyst]

My first one was just on your guidance. Can you talk about how sales are trending quarter-to-date? And then any additional color you can provide on how much higher your 2-year stack comps will be in 2021? And then in terms of EPS growth, what do you see as the biggest factors that could lead to outperformance there?

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

I think you've picked a good topic when you look at sales. We obviously don't provide you with quarterly guidance on that one here. But we have started out the year positively. And I do think we expect there to be some nice COVID stickiness as we go through the rest of the year. When we look at how that translates on an EPS basis, you've seen there that we've given the guidance for the year that we're expecting that mid- to high single-digit improvement versus the 2019 number. And really, the -- I'd say the piece there that is the biggest mover is what we do see in terms of sales, if that were to be a higher number if we continue to see a higher COVID sales throughout the year, that could be an upside.

[Spencer Christian Hanus, Research Analyst]

That's helpful. And then we're starting to see reports of increased cost inflation. What is your expectation for inflation next year? And then did you see own-brands gained share versus national brands in 4Q in the U.S.?

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

On the cost inflation, that's one we don't give our numbers on that. But in terms of the fourth quarter, what we saw in own-brand was definitely something where we did see those levels go up. It's something where you know this year, we've actually planned to bring an extra about 2,000 SKUs into our private label collection because it is something where we want to make sure that we're addressing that slight shift to, I'd say, more promotional behavior.

[Frans W. H. Muller]

And to your private label, overall, we gained share in the U.S. in private label in the fourth quarter. And for this year, we would like to add, like Natalie already mentioned, the 1,500 SKUs to the assortment.

[Operator]

Next question is from Mr. James Anstead, Barclays.

[James Robert Anstead, Director]

Two questions, please, on your guidance for 2021. Firstly, on the EBIT margin guidance of at least 4%. And I know, clearly, you -- understand that you wouldn't give us guidance by quarter, but I just wonder whether we should be aware of any possibility that individual quarters, perhaps, particularly the first quarter might be below that 4% minimum for the year as a whole? That's one question.And then the second one was around the free cash flow guidance of around EUR 1.6 billion. I just wondered, 2 kind of big elements, I guess, within the free cash flow number are working capital and the amounts you're injecting into the pension. And I think you told us there's about EUR 250 million or so you're going to inject over the next 3 years as a whole. I was just wondering if you can -- I mean, is it sensible to assume we just divide that number by 3 and to see some even over the next 3 years? Or might it be a bit more focused on '21?And on the working capital element of it, clearly, you had a very nice inflow in 2020. I mean is it -- I mean, it seems to be sensible to assume an outflow in the year ahead, but is that inevitable? Can you give us any color on what that working capital number might be for the year ahead?

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

Okay, James. So there are a couple of things in there. I think it was primarily around working capital and pensions. If we look at the working capital for kind of our expectations as how those developed this year, you're right, we had a very favorable 2020 and particularly Q4. So we will see an unwind of that as we go through the year. I think that's something where our expectations are that will play -- that is one of the big drivers, I think, in terms of where we believe our cash flow will end for the year.In terms of pensions, that one, I wouldn't -- I think you've oversimplified that a little bit. Not all of that has to come in the next 3 years, and we don't have any specific agreements on timing. So I wouldn't just take that as a division by 3. I think that's something where it's not going to be a big visible impact when we look at 2021.So when I look at our free cash flow for this year, I would say we feel very strong about what all the underlying elements are in that number. You continue to see us right on track with kind of the development we've looked at ever since the Capital Markets Day, less that working capital unwind, that's an important number.

[James Robert Anstead, Director]

That's very helpful. And then if you're able to give any -- well, maybe there's nothing to say on it, but the -- whether any individual quarters might be below that 4% minimum you've guided to for the year ahead?

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

Yes. Sorry, I missed that one. Obviously, we don't give the operating margin by quarter. So good try. But what I would say is we're very pleased with our performance in the first quarter so far.

[Operator]

Next question is from Ms. Fabienne Caron of Kepler.

[Fabienne Caron, Head of Food Retail Sector]

Two questions from my side. The first one, can you help us a bit with what kind of COVID costs do you believe will be sticky in 2021? And the second question would be on the online. So you announced that you are doing a new micro-fulfillment center with Swisslog/Autostore. Can you share with us the comparison of what -- how should it compare to the one you have currently with Takeoff?

[Frans W. H. Muller]

Yes. So Fabienne, the thing on the stickiness of COVID, at the moment, we all see in all the markets, Europe and the U.S. markets that we are still in COVID times, unfortunately, both with lockdowns and a lot of limitations everywhere. And what you said earlier also last year that a lot of fixed cost for equipment and these kind of things are already covered in 2020. So those will not reoccur. But we might have a reoccurrence of things like sick leave, an extra labor. But if that takes place, that will be overcompensated by the COVID sales in the end. So we will have amounts of money based on extra labor and sick leave, depending on how long COVID will take, but this will be overcompensated by the contribution from the excess sales most likely.The other thing is EFCs, the fulfillment centers for e-commerce. We have our takeoff pilot in Connecticut, and we are working towards this to make it according to the specifications. And we are pretty confident there. But at the second time, we also just -- we also opened -- going to open a Swisslog/Autostore unit in Philadelphia in the fourth quarter. That's based on 100,000 square feet space in that store in Philadelphia, and 6,000 orders per week capacity. Takeoff is a multi-shuttle goods-to-man type of system. Swisslog/Autostore is more goods-to-man grid system. So those 2 pilots we will run and we compare and we'll see and we learn, and that's one of the elements where we are going to gain productivity in our total e-commerce frame.We also mentioned a few other things on productivity, like better processes, also the manual pick systems of Prism are getting more and more learning curve and delivering more productivity. So also, that part will contribute to earlier profitability of e-commerce. And last thing is the last mile where we use with -- where we work with technology partners, both in Europe and in the U.S. to make that route planning for the last mile more efficient. So a number of elements where technology and digital is going to help us to make e-commerce more profitable. And those were the initiatives we are working on. And you can imagine with the growth in e-commerce, this is for us top priority.

[Operator]

Next question is from Mr. Andrew Gwynn, Exane BNP Paribas.

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

Well, 2 quick questions would be asked. So the other question I had was just on the guidance. I'm just wondering if you can give a bit more color on the 2 divisions, really how we should think about the margins for both? I guess the share reaction today does suggest people are a little bit spooked by the U.S. margin during Q4.And then maybe actually connected to that the other question would be, could you just elaborate a little bit more? I guess, normally, we'd expect to see quite significant positive operational gearing from 11% comp store sales growth. I appreciate that's obviously COVID costs and also transformation costs, but any more color you can give us there to help us, without forecasting for 2021, would be much appreciated?

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

Sure. Andrew, maybe I'll just speak a little bit about the U.S. operating margin because I think that's really where a lot of these questions have come from. And I think the real easy way to think about it is if we look at the fourth quarter, on the one hand, our COVID costs were quite a bit higher than we expected. We talked about it being 50% higher than where the Q3 cost had been and also significantly above what we had expected. And that was really driven by what was happening on the one hand on incentives, but in particular, in the Q4 on higher sick leave and safety cost. And we saw that at the beginning of the year, we think that's actually crested in terms of how that's developed. And the other one was we had some onetime impacts. It was about 50 basis points. The biggest piece of that being the supply chain transformation, but the others were one-offs.So if you look at that, you can think of the U.S. underlying operating margin really being around the 4%. And I think that's something that when you look at that in the environment of some deleveraging going on with COVID, it's actually a pretty good place to be. And also, I think, gives you confidence in terms of the number that we've looked at for our global number in 2021. I think when you talk about the European side, there's a place where I think margin in the fourth quarter was actually quite promising and gives good outlook. The only small pull on that was the Dutch pension expense, which we flagged all year.

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

But are you able to be a bit more specific about the margin evolution for 2020 -- I mean essentially what makes up the 4% guide for the group? Should we expect further pressure in the U.S.? Europe holding strong or...

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

I think when you look at both of those, what you should see is return to more historical levels in terms of what we've been able to deliver in both of those markets. And that's very much both for Europe but also for the U.S.

[Operator]

Next question is from Mr. Nick Coulter, Citi.

[Nick Coulter, Director]

Two for me then, please. Just to come back on Andrew's question on the operating leverage flow through in the U.S. in Q4 on a 13-week basis. Natalie, you kind of alluded to some smaller impacts, I don't know, maybe in terms of P&L investment, promotional shift back margin. I don't know, but it would be quite useful just to kind of get that kind of extra granularity. Because I think it certainly, from where I'm sitting, the flow-through looks notably weaker in this quarter, notwithstanding the level of comps and COVID costs. And I guess one of the missing pieces would be the weighting of COVID cost between the U.S. and Europe, which would be helpful additional color. And I'll ask my second one in a second, if I may.

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

Okay. I think I'm not going to be able to give you too much more color on that one, Nick. What I can say is, you're clearly right that the COVID costs and the COVID sales, by the way, are heavily weighted to the U.S., and that was also the case in the fourth quarter. And the comments that I made around, especially the absenteeism was also a stronger comment about the U.S. than in Europe. When we talk about those other kind of discrete costs that we discussed, that isn't something where we're going to give a lot of color on each of those. What I can say is that it's less something about promotions, which you were suggesting there, more operational, I'll say, items in terms of I talked about the supply chain, but other -- just I also call them core basics that we wanted to get in place. And that's definitely something we do not expect to continue either in Q1 or in 2021.

[Nick Coulter, Director]

If you back out the supply chain, which we knew about, the other one-off impacts, what do they take for? Is that 20 or 30 basis points just to give us a hand?

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

40.

[Nick Coulter, Director]

40. Okay. So 40 excluding supply chain. So I mean that's obviously quite a meaningful impact.

[Frans W. H. Muller]

It sort of means, Nick, also that with those discretes and the supply chain together, we are above 4 in the U.S., also comparable for the fourth quarter.

[Nick Coulter, Director]

Okay. I mean, obviously, you're not able to share specifics there, but...

[Frans W. H. Muller]

Those are really one-off items. And you know that we also transparent about this ourselves. We -- those are one-off items, they don't reoccur. So that fourth quarter U.S. margin is a 4 plus margin when you look at the operational effect.

[Nick Coulter, Director]

Okay. That's clear. And then secondly, on online, would it be possible to share some sales base numbers for Fresh Direct for 2019 and 2020? And then on the Autostore, it looks from the pictures, like its manual pit, but the cube -- or the Autostore cube is being used as a total bin buffer, but any details on how you're using the automation there would be gratefully received? And I guess also some initial thoughts on the Fresh Direct collaboration with Fabric as well, would be interesting to hear.

[Frans W. H. Muller]

Yes. So apparently, you're very interested in the EFC operations, the total bin that explanation, I haven't heard yet. But we have now, indeed, also with Fabric, with Fresh Direct, 3, call it, micro-fulfillment center pilots in working, which is great because we all learn about technology. And that grid system in Philadelphia will be used for the total ambient assortment and next wait for the ultra fresh, we have a menu pick to complete the orders, the same -- roughly the same type of distribution of assortments we have also for Takeoff in Connecticut.And it's, I think, for us, important to be as close as possible to our customer base, to be as agile as possible with our MFCs, to have over-seeable investments and that those pilots are, let's say, very limited risks, and we think with quite some opportunity upsides. And we run them in existing real estate buildings also in Philadelphia. So that's what we -- those were our beliefs. Those are still our belief that this is the right thing to do. And we gain a lot of insights and also the Takeoff machine is getting very close to the pro forma. So that is all good news, but it's only the picking process.And the second thing, of course, is that you see that our Click and Collect prism software for the manual pick in the stores is doing very well. And also there, we gained learning curve and productivity. So that's another important element, and it's all proprietary software, it's ours. And then what I mentioned later on that earlier on that with some technology partners, we made good progress with the same partner in Europe and the U.S. on the last mile, and we have a lot of last mile experience in Europe, when we talk about delivery and home delivery. So various technology partners for various parts of the total supply chain for online. We grow very fast. We added 40% capacity last year in the Dutch market. We will double capacity online in the U.S. in 2021. Click and Collect, growing very fast. 1,400 Click and Collect centers by the end of the year. And we're very happy with that rollout. But also very happy with the acceptance of our customers there. And I think we are learning with technology, but we're on a very good trajectory here.

[Operator]

Our next question is from Mr. Andrew Porteous, HSBC.

[Andrew Ian Porteous, Analyst, European Retail]

A lot of mine have already been asked, but I got a couple left. Focused a lot on sort of the e-commerce side of things this morning. But so I just wanted to talk about your stores a little bit more and then particularly the sort of Stop & Shop store refresh program. Could you give us an idea on what your -- what the progress has been in the stores that you have refreshed over the past year? But also, really what the outlook is there? I mean, how quickly can we ramp that program back up? And how you're thinking about that?And then a second sort of small one, just around the dividend. Obviously, a big increase this year reflecting COVID. You've kept the payout. How should we think about that for next year? I mean, would you -- if your earnings are going to progress, should we just expect a smaller payout ratio next year? Or do you think that you can continue to progress the dividend there?

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

I'll start with the dividend and then hand over the store question to Frans. What you saw in our guidance is that it is the biggest increase ever, but we're actually only paying out at the 40% number there in terms of the payout ratio. So we've also already guided that for next year, we will expect another increase in terms of that dividend. So that also, by definition, implies probably a higher payout ratio next year.

[Frans W. H. Muller]

And on Stop & Shop, we planned for this year another 60 stores. We are -- we said and shared with you earlier that we see Stop & Shop 60 to 80 stores per year remodeling. So that is a 4, 5 years program for the 400 stores we have. What we also do is that we see that the rollout of the remodelings are very much in line with our pro forma that is for the markets we opened earlier, but also the stores we open now. So we're very happy with that response there. So we're in line with the pro forma for Stop & Shop. We rolled out 60 stores this year. And we'll continue to do so. And we feel that all the other brands in the U.S. are very well invested, and we also see that Stop & Shop is benefiting from those remodelings when we see also the sales plans getting better and better quarter-by-quarter.

[Operator]

Next question from Ms. Victoria Petrova, Crédit Suisse.

[Victoria Petrova, Research Analyst]

First one is again on U.S. operating margin. In general, have you seen any difference in consumer behavior in the U.S. versus previous quarter, in the fourth quarter '20 and versus what you're seeing in Europe? Obviously, we have slightly different dynamics there. That would be my first question. Anything non-related to your operating one-offs, more related to consumer.And my second question is again on micro fulfillment, you're currently working with Autostore, Fabric and Takeoff, 2 of which overall, obviously, overlap with Walmart. Have you chosen micro-fulfillment solution as the way to go? What are the key differences between 3 trials? And are you consider our 3 pilots? And are you considering choosing 1 or you will create sort of an infrastructure of these micro-fulfillment centers with several vendors simultaneously?And also when you compare your first MFC with Takeoff versus your last agreement, what are you seeing on the cost side? Is it decreasing given that there is more competition, more vendors? Or is it increasing given there is more, I don't know, technological upgrades? And ultimately, what percent of cost savings could you extract from automation of picking?

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

I'll talk to your question on margin in the U.S. And I think the only thing that we've seen on the consumer side is -- and I'll call this, it is a U.S. phenomenon, a little more pushback, a little more increase on the promotion side. We're still not at historical levels. But that's really why we believe we've seen the improvement in our private label, not just the share gains. That's obviously us delivering better on that offering. But it is something that we did see pick up a little in the fourth quarter, and our expectations are, obviously, as we go into 2021. Again, still nothing moving in at a high speed, but there is more promotion than we saw in Q3 or Q2.

[Frans W. H. Muller]

So a few more things on the -- potentially on the detailing of the various micro-fulfillment solutions we have. Just to start with the very beginning, and there we are very consistent with what we said earlier. First of all, you saw our phenomenal growth in the U.S. with 128% online growth in the fourth quarter. And you can imagine that also Click and Collect sales is growing faster for us than home delivery. And that we have now a number of different fulfillment methodologies. So we have home delivery. We have Click and Collect next day, same day and instant. And we see Click and Collect growing faster than home delivery, which is in the end, also for us for our total margin profile, a good thing to have. So that's one thing on the fulfillment, the growth of the online and how we use also our store assets to make fulfillment work.The second thing is the MFC type of technology. Yes, we still are very consistent and we believe that a multiple MFC network along the East Coast is for us the best solution. I mentioned before, also 2 years ago, when we had the opportunity to look at the stores in Connecticut and so on that important for us that we are close to our customers, that we're close to customers when we pick with an MFC, but we, in the end, have also a delivery solution next to it, that we see that we can use existing real estate, so we can also sweat those assets better, that we can react very fast with those MFCs because you can build them very fast. The buildings are already there. So you can very fast operate and rollout when you make your final decisions with whom to work. And that also the costs are much lower than that we would build huge centers, which need a big catchment area.The U.S. market, especially also on the East Coast, apart from a number of bigger cities, is much less populated, of course, than a lot of European markets. So the density in those markets, we think, is much more fit for an MFC solution. So we are very consistent on that strategy.Then going to give you a few details in the Takeoff machine, we have roughly 15,000 SKUs. In the Autostore machine, we look rather at a bigger assortment of 25,000 SKUs. It's all the same type of goods-to-man technology, although grids and multi-shuttle, those are technologies we check. We learned from this. And we have not made up our mind if we can work with 1 or 2 or 3 vendors there. That's exactly what we try to work out and to learn from Autostore, from Takeoff and from Fabric. The labor productivity with Takeoff and Autostore is reasonably comparable. So it's not only an economic thing there, but they have very much higher pick rates than we do manually, of course, but reasonably comparable on labor productivity. The capacity is for Takeoff roughly 4,000 or 5,000 orders a week and for Autostore 5,000 to 6,000 orders a week. We have investments which are relatively low because we invest roughly in EUR 3 million in the machine, which is for both companies, decently comparable but, of course, we have the buildings already. So we don't have that asset cost anymore. And we have to learn over time how those offers are -- how does productivity is developing, and we do not get more details on pricing negotiations with those vendors.

[Operator]

Next question is from Mr. Xavier Le Mené, Bank of America.

[Xavier Le Mené]

So 2, if I may. The first one, can you help us potentially just to quantify the impact of the acquisitions you made in 2020. So Fresh Direct plus the 2 you brought, so can we get a bit of insight there, that would be quite helpful?The second thing, sorry to come back on that, but still on the operating margin of, at least, 4%. You have been mentioning you're exiting 2020 in a stronger position. So at least we should see some benefits from 2020 heading into 2021. So what should we expect -- also we talked a lot about the negative, but what are the positive, which you will also see in 2021?

[Frans W. H. Muller]

If Natalie takes the second one, and then I will take the first one later on.

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

Sorry. Could you repeat what you wanted on the operating margins, Xavier?

[Xavier Le Mené]

Yes. We talked a lot about the negative and why, of course, 2021 margin should be lower than 2020, obviously, but are there also any positive that we should consider because, as you said, you're exiting 2020 in a stronger position, as you said, than you were in 2019. So I want also to see what are the positives that we should see in 2021?

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

Well, I think the biggest positive is that you look at our Save for Our Customer program. We're -- we really have, over the last 2 years, I think, built a strength within the organization that tells us we're going to continue to be able to deliver at that high level. So when we look at 2021, in particular, we're very focused on activities around store efficiency and logistics. The logistics one, you can imagine, is already starting to pay out because of the vertical integration of our supply chain in the U.S. But on the store -- the store efficiencies, that's one where we're rolling out our electronic shelf labeling. It's going to be in at least 50% of our stores in Europe, which allows us to do dynamic pricing, dynamic discounts. We're more effective with our labor. You also know that we've been active in looking at how do we look at cashierless options, other things for automation. So I'm very positive in terms of on the cash -- on the cost side. Because we've been very focused as we look at 2021 thing. There are a lot of unknowns. But what we do know is how we can control our costs so that as we have benefits that come through because of COVID stickiness or other opportunities, we're able to capture them. And I'd say that's the other big potential upside to margin is, of course, if we would have higher sales at a longer -- for a longer period, there would also be some sales leverage you would see come through in the margin as well.

[Frans W. H. Muller]

Good. On Fresh Direct and also realizing at the same time that I was not so complete in the same type of question from Nick earlier on Fresh Direct. Fresh Direct is a company, which is a very nice fit to our total network. And it has a very strong position, as you know, in New York City, Manhattan, but also in the tristate. And it's a #2 player there as a pure player and excelling in fresh and ready-made meals not only in 2020, a very good year, but also had a strong start of 2021. It fits for us very nicely because it's in part of -- that part of New York, where we are not strongly present. And therefore, we can deepen our footprint there in New York to New York City and the tristate.We don't disclose sales numbers for Fresh Direct. What you can see in the documents that our part of this -- of the purchase price was $327 million for 80% of share. We are excited about Fresh Direct because it's a big market area. That whole New York's tristate area is a market volume of EUR 9 billion. So there's quite some things to win there. They have a very solid and loyal customer base and have an impressive quality and order completeness and on-time delivery. And it is, of course, all built by a very passionate and good professional team there.So we now, since the 5th of January when the deal was closed, we're now looking into the company, of course, and we're working together with the team there. We are bringing in the good things from Ahold Delhaize to make sure that we learn from each other and that we also can bank on the synergies in COGS, in not for resale, in IT and in digital. And that's why we're very positive there about the acquisition but we see also a mutual learning opportunity here to learn also from a #2 in the market, successful pure player company.On the other things on SEG because you asked Fresh Direct, but we have also -- we are also in the way of integrating 62 SEG stores. And we're also looking at the Deen Company, where we have now -- although so under approval, we're looking forward now to integrate a 39 Deen stores in the Albert Heijn network in the second half of this year.And I think in the next quarter, we have more to say about Fresh Direct. We're now 6 weeks in the company. And we have more things to see how we then combine the knowledge and the leverage and how we can grow the company further.

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

And maybe what I'll add from my side on that because I think you didn't ask the question, but I think it's interesting is if you look at the sales impact of those acquisitions, we are expecting in '21 that, that will probably basically even out for that 53rd week that we're losing. So it's pretty significant for us.

[Operator]

Final questions are from Mr. Robert Jan Vos, ABN AMRO.

[Robert Jan Vos, Research Analyst]

I have 2 questions from The Netherlands, please. First one, can you tell a little bit more about the Deen acquisition? For example, what sales we've generated in the 39 stores you acquired? And is that Q4 sales you expect to be able to realize with those stores when converted to Albert Heijn stores?And maybe also a comment on the price paid and additional conversion investments required. And my second question is on market share in The Netherlands. I think Albert Heijn's market share was relatively stable at 35% in 2020. What can you share about the development in your online market share, the combination to delivery and Click and Collect for Albert Heijn in 2020 compared with the previous year?

[Frans W. H. Muller]

Thank you. On Deen, first of all, we are awaiting approvals. Secondly, the family decided not to continue the business. And we're happy that we are able to convert 39 Deen stores into Albert Heijn stores. We expect that the approval might take 6 months before we can start working on that. Deen has a 2% market share. That's in Nielsen. Market share is a public number. And 39 stores is roughly half of the 80 stores of the total Deen network. So I think you can do your math and it would mean for Albert Heijn and another 1% market share gain.Also in the full year, we gained market share with Albert Heijn to 35%. What is more important for us is that this is a nice addition to our network in the northern part of Holland. And I think also with the locations, but also with the people of Deen and also with a number of local suppliers in the northern part of Holland. I think that's also a nice addition to our total company. So we're very happy because you can imagine, with 35%, there's not a lot on share on the regulation you can do. And we're very happy that we got a good alignment with the family on this. And as I said, 6 months we took into account for the approvals.

[Robert Jan Vos, Research Analyst]

Great. And on the online share, what can you say there on that directionally? Because I think that most of your competitors that started way later are catching up a little bit. So can you say anything on that?

[Frans W. H. Muller]

Yes. What we see on -- and we're talking about the Dutch market here, right?

[Robert Jan Vos, Research Analyst]

Yes.

[Frans W. H. Muller]

Yes. Yes. Now we see a lot of numbers passing by. We are now well beyond EUR 1 billion in Holland on food. So we grow very fast. We added a lot of capacity. And I think there's a very good chance that we further will gain share in the Dutch market. And we have more than 50% share at the moment. We expect to gain based on the added capacity we put into the Dutch market in foods. And the bol story, I think you're well aware that we are also gaining share there.

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

With that, this concludes the conference call and webcast. Thank you for joining. Please take care. Stay safe, and have a great day. Bye.