6 Nov - Delhaize Group has reported its financial results for the third quarter of 2008.
Financial Highlights Third Quarter 2008 (at identical exchange rates)
· Solid revenue growth of +4.8%
· Significant comparable store sales growth both in the U.S. (+2.5%) and in Belgium (+3.7%)
· Double-digit revenue growth in Greece (+13.1%) and in Romania and Indonesia (+40.6%)
· Operating profit growth of +8.3%
· Group share in net profit increase of +4.2%
Other Highlights
· Confirmation of our 2008 guidance
· Free cash flow of EUR 113.1 million during the third quarter
· Net debt to equity ratio decreases to 58.9%
CEO Comments
Pierre-Olivier Beckers, President and Chief Executive Officer of Delhaize Group, commented: “During the third quarter, our revenues grew at a solid pace at all of our operations in spite of the ongoing difficult consumer environment. We are effectively managing within the current environment while pursuing our long-term strategic choices. The continued success of our private label products and our commitment to competitive pricing through cost savings initiatives have contributed to our improving sales momentum. Our solid sales performance, careful expense management and strong balance sheet, along with sufficient liquidity to finance our projected cash needs, allow us to manage our Company with confidence in these challenging times and confirm our guidance.”
Third Quarter 2008 Income Statement
In the third quarter of 2008, Delhaize Group had revenue growth of 4.8% at identical exchange rates, a significant increase compared to the second quarter. At actual exchange rates, revenues declined by 1.7% to EUR 4.7 billion due to a 8.7% weaker U.S. dollar versus the euro. Organic revenue growth amounted to a strong 4.6% for the quarter. The revenue growth in the third quarter of 2008 at identical exchange rates was driven by:
· a 3.8% increase of U.S. revenues in local currency, supported by comparable store sales growth of 2.5% and new store openings;
· a significant 4.3% increase of Belgian revenues, supported by comparable store sales growth of 3.7%, an acceleration compared to the previous quarters;
· another quarter of solid performance at our Greek operations, generating a 13.1% increase in revenues (10.2% excluding the Plus Hellas acquisition); and
· strong revenue growth of 40.6% in Romania and Indonesia (Rest of the World) in local currency.
Delhaize Group ended the third quarter of 2008 with a sales network of 2,630 stores, representing a net addition of 28 stores for the quarter (including 14 newly acquired La Fourmi stores in Romania).
Gross margin increased to 25.2% of revenues (25.0% in the third quarter of 2007). This is an increase of 28 basis points at identical exchange rates as a result of more private label sales (particularly at Food Lion), better inventory results (particularly at Delhaize Belgium), and the cycling of long-term strategic price investments started last year at Sweetbay.
Other operating income amounted to EUR 26.0 million, an increase of 10.6% at actual rates and of 14.6% at identical exchange rates compared to 2007. This is mainly due to a EUR 4.6 million gain on the sale of real estate by Alfa-Beta.
Selling, general and administrative expenses remained stable at 21.0% of revenues. Cost saving initiatives and the conversion of Cash Fresh stores to affiliate status offset higher energy costs throughout the Group, more staff costs at Food Lion and Delhaize Belgium and the integration costs of Plus Hellas in Greece.
Other operating expenses amounted to EUR 4.8 million in the third quarter of 2008 compared to EUR 0.2 million in the same period last year, mainly as a result of EUR 1.2 million hurricane losses at Food Lion, higher store closing expenses at Food Lion and store closing expenses related to Plus Hellas in Greece.
Operating margin increased to 4.6% of revenues (4.5% in the same period last year). At identical exchange rates, this represents an increase of 15 basis points mainly as a result of our increased gross margin.
Operating profit was almost stable at EUR 215.8 million, a 0.1% increase at actual exchange rates. This is an increase of 8.3% at identical exchange rates which, as communicated at the beginning of the year, represents a significant increase compared to the first half of this year, as our sales-building and cost savings initiatives began producing results. During the third quarter, the integration of Plus Hellas in Greece and La Fourmi in Romania negatively impacted operating profit by EUR 3.0 million. Operating profit would have increased by 9.7% at identical rates for the quarter excluding the results of these entities.
Net financial expenses amounted to EUR 51.1 million, a decrease of 1.3% at actual rates compared to last year due to the decrease of the U.S. dollar versus the euro, partially offset by a EUR 2.0 million negative change in the fair value of hedging instruments related to the 2007 refinancing, compared to a EUR 3.6 million positive change in the third quarter of 2007.
The effective tax rate was 37.2% compared to 35.0% in the third quarter of 2007. This increase was mainly due to the payment of an inter-company dividend in 2008 and to less tax benefits in the U.S. from the exercise of stock options.
Net profit from continuing operations increased by 3.9% at identical exchange rates (-2.9% at actual exchange rates to EUR 103.4 million) compared to the third quarter of last year. Basic net profit from continuing operations amounted to EUR 1.01 per share (EUR 1.04 in 2007). The result from discontinued operations, net of tax, amounted to EUR -0.2 million compared to EUR 0.2 million in the third quarter of 2007.
Group share in net profit amounted to EUR 100.0 million, a decrease of 3.1% at actual exchange rates (an increase of 4.2% at identical exchange rates). Per share, basic net profit was EUR 1.01 (EUR 1.04 in the same period last year) and diluted net profit was EUR 0.98 (EUR 1.01 in 2007).
Third Quarter 2008 Cash Flow Statement and Balance Sheet
In the third quarter, net cash provided by operating activities increased from EUR 214.1 million in 2007 to EUR 302.4 million in 2008 as a result of less cash used in working capital, positive cash flow from a tax refund in the U.S. and the timing of hedging related cash flows.
Capital expenditures decreased by 12.6% to EUR 190.9 million primarily as a result of lower remodeling activity at Food Lion and Hannaford due to timing, fewer store openings and the completion of the Sweetbay conversion process last year, partly offset by spending at Alfa-Beta for the conversion of the acquired Plus Hellas stores.
Delhaize Group generated free cash flow of EUR 113.1 million, an increase of EUR 116.0 million compared to last year as a result of higher operating cash flow combined with lower capital expenditures. Delhaize Group held EUR 334.4 million cash and cash equivalents at the end of September 2008.
Delhaize Group’s net debt amounted to EUR 2.3 billion at the end of September 2008 (58.9% of equity), an increase of EUR 87.5 million compared to the end of December 2007 (EUR 2.2 billion or 61.0% of equity), mainly as a result of the strengthening of the U.S. dollar by 2.9% between the two balance sheet dates.
Year-to-date 2008 Income Statement
Year-to-date 2008, revenues of Delhaize Group increased by 4.1% at identical rates and decreased by 4.6% at actual rates to EUR 13.6 billion due to a 11.7% weaker U.S. dollar versus the euro. Organic revenue growth was 4.3%. Revenue growth for the first nine months of the year at identical exchange rates was the result of:
· a 3.7% increase of U.S. revenues in local currency driven by comparable store sales growth of 2.3% and new store openings;
· a 1.5% increase of revenues in Belgium supported by 2.0% comparable store sales growth, partly offset by the sale of Di and conversions of Cash Fresh stores to affiliates;
· a significant 14.2% increase in Greek revenues due to strong comparable store sales growth, store openings and the acquisition of Plus Hellas; and
· a 35.0% increase of revenues in Romania and Indonesia (Rest of the World) in local currency.
Gross margin was 25.1% of revenues (compared to 25.3% in the first nine months of 2007) mainly due to the lower contribution of our U.S. operations as a result of the weakening of the U.S. dollar versus the euro. At identical exchange rates, gross margin remained stable mainly due to favorable product mix changes especially at Food Lion where private label revenues increased, offset by the divestiture of the higher gross margin Di business and the conversion of Cash Fresh stores to affiliated stores in Belgium and price investments at Sweetbay.
Other operating income decreased by 1.5% at identical rates and by 6.8% at actual rates to EUR 67.4 million primarily due to the sale of Di in the second quarter of last year and fewer gains related to the sale of Cash Fresh stores to independent owners in Belgium, partly offset by a real estate gain in Greece in the third quarter of this year.
Selling, general and administrative expenses increased slightly to 21.0% of revenues (20.9% last year) as a result of the negative operating leverage of soft sales, particularly in the second quarter of this year, higher energy costs throughout the Group, higher advertising costs at Food Lion and the integration of Plus Hellas in Greece, partly offset by lower expenses at Sweetbay and cost saving initiatives.
The operating margin of Delhaize Group decreased to 4.5% of revenues compared to 4.9% in the first nine months of 2007. Operating profit decreased by 2.0% at identical exchange rates and decreased by 11.4% at actual rates to EUR 615.4 million.
Net financial expenses decreased to EUR 146.4 million, a 47.6% decrease compared to last year as a result of the debt refinancing transaction in 2007 and the weakening of the U.S. dollar versus the euro.
The effective tax rate decreased from 32.6% to 31.3% because of the positive resolution of federal tax matters in the U.S. in the second quarter of 2008 and the favorable impact of the debt refinancing, while last year’s tax rate benefited from the tax benefit related to the exercise of stock options and the tax deductible debt tender charge.
Net profit from continuing operations amounted to EUR 322.1 million, a 15.2% increase compared to last year at actual exchange rates (26.3% at identical exchange rates), or EUR 3.18 per basic share (an increase of 14.0% over the EUR 2.79 of 2007).
In the first nine months of 2008, the result from discontinued operations, net of tax, amounted to EUR 2.5 million compared to EUR 25.2 million last year which included a positive accumulated foreign currency translation adjustment of EUR 23.7 million related to the closing of the sale of Delvita.
As a result, Group share in net profit in the first nine months of 2008 amounted to EUR 318.1 million, an increase of 7.5% at actual rates (17.3% at identical exchange rates) compared to last year. Per share, basic net profit was EUR 3.20 (EUR 3.05 in the first nine months of 2007) and diluted net profit was EUR 3.12 (EUR 2.92 in the first nine months of 2007).
Segment Reporting
· In the third quarter of this year, revenues from our operations in the United States grew by 3.8% to USD 4.8 billion (EUR 3.2 billion) compared to 2.3% growth in the second quarter of 2008. Comparable store sales growth was 2.5% despite comparing with a strong 4.6% comparable store sales growth in the third quarter of 2007. Although consumers remained prudent in their spending, which resulted in pressure on sales volumes, revenue growth improved compared to the second quarter of this year supported by retail inflation and 22 new stores compared to the third quarter of 2007. Private label revenues have further increased in our three U.S. operating companies, with private label penetration rising above 19% at Food Lion during the quarter, up from less than 17% at the beginning of 2007. At Sweetbay the average number of transactions continued to increase as a result of improved customer satisfaction and price perception supported by significant price investments that started in the summer of 2007.
At the end of September 2008, Delhaize Group operated 1,577 supermarkets in the U.S. In the third quarter of this year Food Lion opened two new stores and relocated one store. Food Lion continued the renewal work in the Charlottesville and Richmond, Virginia markets, which were re-launched at the beginning of the fourth quarter. Sweetbay opened three new stores, closed one store and relocated one other store.
In the third quarter of 2008, operating profit increased by 3.5% at identical exchange rates, as a result of an increase in gross margin partly offset by a slight increase in operating expenses. Gross margin grew in the third quarter mainly due to an increase in private label sales in both fresh and dry grocery categories at our three U.S. companies, and particularly at Food Lion. The slight increase in operating expenses was the result of higher energy costs for the three businesses and higher advertising and staff costs at Food Lion partly offset by cost improvements, particularly at Hannaford and Sweetbay.
In 2008, Delhaize Group plans to open between 37 and 42 new supermarkets in the U.S. In addition, the Group expects to close approximately 13 stores of which seven will be relocated, resulting in a net increase of 24 to 29 stores. Approximately 150 U.S. stores will be remodeled in 2008. Food Lion will remodel 141 stores as part of its market and store renewal programs.
· In the third quarter of 2008, revenues of Delhaize Belgium increased by 4.3% to EUR 1.1 billion, an acceleration compared to the first two quarters of this year. Excluding the conversions of Cash Fresh stores to affiliate status and the end of the wholesale contract with Di in June 2008, revenue growth would have been 5.4%.
In the third quarter of 2008, comparable store sales growth was 3.7%, the best comparable store sales growth for Delhaize Belgium in eight quarters. Delhaize Belgium continued to experience an increase in transactions. Careful consumer spending resulted in a more than 26% increase of our “365” private label sales compared to the third quarter of last year.
During the third quarter, the sales network of Delhaize Belgium grew by 7 stores to 759 at the end of September 2008, including 135 company-operated supermarkets in Belgium, 37 stores in the Grand Duchy of Luxembourg and four stores in Germany. Market share decreased slightly compared to the third quarter of last year, but the share trend improved compared with the first two quarters of this year.
Operating profit jumped by 66.1% to EUR 34.3 million. The operating margin of Delhaize Belgium increased by 116 basis points to 3.2% (including the negative effect of the change in cost allocation policy previously announced), showing a solid recovery compared with the third quarter of last year. The operating margin improvement was the result of better sales momentum, an increase in gross margin (mainly as a result of better inventory results) and operating expense decreases (due to cost management efforts and the continued implementation of the Excel 2008-2010 plan). Delhaize Belgium remains on track to achieve for the full year a stable operating margin compared to last year.
Delhaize Belgium expects to end 2008 with a store network of between 784 and 789 stores, as a result of the net addition of 46 to 51 stores (including two company-operated supermarkets).
· In the third quarter of 2008, revenues of our operations in Greece grew by a strong 13.1% to EUR 314.4 million driven by solid comparable store sales growth, the acquisition of Plus Hellas and new store openings. Excluding Plus Hellas, revenues would have grown by 10.2%. The Alfa-Beta network includes 41 additional stores compared to the third quarter of 2007.
Alfa-Beta’s operating margin amounted to 4.3% of revenues, a decrease compared to 4.5% last year due to the EUR 2.6 million negative contribution of Plus Hellas. Excluding Plus Hellas, the operating margin of Alfa-Beta would have been 5.3%, an increase compared to 4.5% last year, mostly due to a gain on the sale of real estate of EUR 4.6 million.
In 2008, the sales network of Alfa-Beta is expected to pass the milestone of 200 stores due to 17 store openings and the acquisition of Plus Hellas completed on April 1, 2008.
· Revenues in the Rest of the World segment (Romania and Indonesia) increased by 27.4% (40.6% at identical exchange rates) in the third quarter of 2008 to EUR 53.8 million, as a result of high comparable store sales growth, the acquisition of La Fourmi in Romania, and new store openings. Operating profit decreased by 8.9% at identical rates in the Rest of the World segment to EUR 0.3 million as a result of the integration of La Fourmi which had a negative impact of EUR 0.4 million. Excluding La Fourmi, the operating profit of the Rest of the World segment would have increased by 69.4%.
On September 1, 2008, Delhaize Group closed the acquisition of the La Fourmi chain of 14 supermarkets in Romania for an amount of EUR 18.6 million, subject to contractual adjustments. This fill-in acquisition strengthens Mega Image’s number one supermarket position in the city of Bucharest.
In 2008, Delhaize Group expects to increase its sales network by 25 stores in the Rest of the World segment to a total of 103 stores, including the 14 La Fourmi supermarkets.
2008 Financial Outlook
Delhaize Group confirms its full year 2008 guidance as updated on July 18, 2008 and confirmed on August 4, 2008 at the occasion of the publication of the second quarter 2008 results.