Earnings Transcript for ADRNY - Q4 Fiscal Year 2024

Operator: Ladies and gentlemen, good morning, and welcome to the analyst conference call on the fourth quarter and full year 2024 results of Ahold Delhaize. Please note that this call is being webcast and recorded. During this call, Ahold Delhaize anticipates making projections and forward-looking statements. All statements other than statements of historical facts may be forward-looking statements. Forward-looking statements are subject to risks and uncertainties and other factors that are difficult to predict and that may cause our actual results to differ materially from future results expressed or implied by such forward-looking statements. Therefore, you should not place undue reliance on any of these forward-looking statements. 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 the call over to JP O'Meara, Senior Vice President, Head of Investor Relations. Please go ahead, JP.

JP O'Meara: Thank you very much, Sharon, and good morning, everyone. I'm delighted to welcome you all to our 2024 results conference call. On today's call are Frans Muller, our President and CEO; and Jolanda Poots-Bijl, 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. These will provide extra disclosures and details for your convenience. [Operator Instructions] To ensure ease of speaking, all growth rates mentioned in today's prepared remarks will be at constant exchange rates, unless otherwise stated. And with that, Frans, over to you.

Frans Muller: Thank you very much, JP, and good morning, everyone. Reflecting on the year, I'm proud of all that we have accomplished. If I were to choose 3 words to summarize our year, it would be commitment, consistency and clarity. Commitment is staying true to our values to deliver for our customers every day. And consistency is sticking to our plans, realizing another year of strong underlying performance, and clarity being clear on where we are heading as a company through our Growing Together strategy. Commitment starts with our people. 2024 has been a dynamic and disruptive year with a lot the deal -- a lot of things to deal with

Jolanda Poots-Bijl: Thank you, Frans, and good morning to everyone. The great thing about being a grocery retailer is that we are constantly connected to our customers. The personal and digital connections we have with them, understanding their needs in real time is a powerful asset when combined with the agility and entrepreneurial spirit of our great local brands. Through our steady and growing market shares, strong relative brand strength, we can see we are doing the right things as customers choose to shop with us every day. As Frans mentioned, we are very pleased with how we ended the year. Strong holiday sales, thanks to festive assortments and shopping experiences that offered customers everything they needed to celebrate the season. On Slide 18 and 19, we present the key underlying numbers for the quarter and the full year. To summarize, net sales grew 0.6% to EUR 23.3 billion during the quarter and 0.9% to EUR 89.4 billion during the full year. Sales benefited from positive comparable sales ex gas and store openings. The end of tobacco sales in the Netherlands, the closure of underperforming Stop & Shop locations and the divestment of Fresh Direct impacted net sales growth by 2.1 and 1.7 percentage points for Q4 and full year, respectively. Online sales increased by 5.8% in Q4 and 3.5% for the full year. The divestment of Fresh Direct had a negative impact of 5.1 percentage points for the quarter and 6.9 percentage points for the full year. Excluding Fresh Direct, we saw double-digit growth rates at many of our brands, including Albert Heijn and Food Lion. Underlying operating margin for the quarter was 4.1%, a decrease of 20 basis points versus last year, mainly due to lower nonrecurring items in the U.S. related to holiday accruals. Our full year underlying operating margin for 2024 was 4.0%. Diluted underlying earnings per share was EUR 0.69 for the quarter and EUR 2.54 for the full year, in line with our guidance. Our operating income for the quarter was EUR 607 million, representing an IFRS operating margin of 2.6%. IFRS results were EUR 351 million lower than the underlying results, largely related to an amendment and additional funding of the Dutch pension plan. With this change, we have reduced our overall pension risk exposure and have eliminated the annual variability in the noncash service charges. For the full year, our operating income was EUR 2.8 billion, representing an IFRS operating margin of 3.1%. IFRS results were EUR 824 million lower than the underlying results, largely due to costs associated with the following elements

Frans Muller: Thank you very much, Jolanda. Much of our success over the past years comes down to doing the basics of good retail well while, at the same time, innovating for the future. Customers are responding positively to our actions with increasing engagements with our apps and loyalty programs and more frequently becoming omnichannel shoppers and with a growing preference for our own brand products. So the art now is to continue to invest with this winning formula, sequencing our investments so that they build upon each other over time and thus yielding compounding growth. For 2025, we will be doing 4 key things

Operator: [Operator Instructions] And your first question comes from the line of Robert Jan Vos from ABN AMRO ODDO BHF.

Robert Jan Vos: First one, concerning your comments on Profi and Europe, is it fair to assume that including Profi, you expect a roughly flat underlying EBIT margin of about 3.8% for Europe in 2025? So that's my first question. And my second question, you started the price investments at Stop & Shop, and this will continue in 2025. Can you elaborate a little bit on the first effects that you've seen of those initial price investments?

Jolanda Poots-Bijl: Yes. Thank you for your question, Robert Jan. As you know, we don't give guidance on a regional level. And for the next year, we trend around 4%. And like I said at Strategy, ultimately, we believe both regions are 4% plus regions, and I have to leave it at that.

Frans Muller: And Robert Jan, on price investment U.S., we communicated this Growing Together strategy with a CAGR of 4% for the total period, the sales CAGR and an average 4% margin. And of course, you don't fall from cliff in January to start with the plan. So you prepare already also in the U.S. with price investment to already cater for growth. And therefore, maybe not a surprise, but it's good to know that we had positive volumes in the U.S. in the fourth quarter. And the first period of the year was a very positive period to us. Also there, we saw growth in volume for the total U.S. And we also saw effects -- positive effects with the Stop & Shop brand, where we invested in pricing, but also in proposition, in customer value in private brands and these kind of things. So we are very happy with the momentum how we came out of the fourth quarter for the total U.S. And we also can confirm that we see positive upticks for Stop & Shop in the start of the year with the price investments we already made and will make further also in the year. And let's not forget that we said for the Strategy period, we said a $1 billion price investments of dollars for the U.S. And we will also, in the 2025 year, do those price investments across the total year for our U.S. brands.

Jolanda Poots-Bijl: And maybe to add to that, Frans. If you look at Stop & Shop indeed, we started with Rhode Island, where we, at all the stores at Rhode Island have reduced prices of almost 3,500 products. So I think customers will really experience it, and we are indeed happy that we ended with positive volume. So those price investments at large, it’s not only Stop & Shop. We see that positive trend really playing out.

Operator: We will now take the next question and the question comes from the line of Izabel Dobreva from Morgan Stanley.

Izabel Dobreva: My first one is on Profi Rom. So you gave us some disclosure for this year, but could you comment on the actual long-term plan for this business? So for example, where do you see the steady state margin for this business post synergies? And what level of synergies do you have in mind? For example, is the business breakeven today? It would be good to understand what do you have in mind on a multiyear view for this business beyond 2025 given the amount spent. And then my other question is just on the U.S. margin. If we exclude the one-offs, it was down 20, 30 bps, I guess, in Q4. So is this a realistic run rate of the level of decline that we can expect for the first half?

Jolanda Poots-Bijl: On the profit question, and thank you for your questions, you have to repeat your last question for me, so I lost track there. But the Profi question that you asked over time, we do expect Profi with the synergies that we can realize together that Profi will trend in line with the European margins that we guide for, for the other brands as well. On a current operating profit level, they are profitable. But as you are probably aware, we intended to close the transaction last summer. It took a bit longer, so the synergies also take a bit longer. So in the next year, we are now preparing for those synergies, and they will drip in, but the real synergy payback will start in 2026.

Frans Muller : Could you repeat your second question, please?

Izabel Dobreva: Yes. So my second question was on the U.S. margin. If I look at the level of decline over Q4, excluding the one-offs, I guess, it implies down 20, 30 basis points, which was in line with what you guided on the call last quarter. So I was wondering, is that the level of decline we should expect over the first half of the year before those price investments become annualized in the run rate?

Jolanda Poots-Bijl: Thank you for your question, and thank you for repeating it for us. As you know, and we’re sorry for that, but we don’t give guidance on regional level for our margins. So for the company as a whole, we will trend around 4%. But if you take out the one-offs, U.S. margin is expected to be stable.

Operator: We now go to the next question, and your next question comes from the line of William Woods from Bernstein.

William Woods: Look, I think it's to kind of pick up on the U.S. margin again. I think there's a lot of nervousness about that. I suppose when you think about FY '25, does the U.S. margin need to go down before it goes back up? And I think I'm thinking about the commentary that you've made around the impact of price investments, the unfavorable mix of wage inflation impacting on margins. And I suppose the question is, why don't they repeat again throughout 2025? And then the second one is a bit of a bigger picture question. There's been changes at the FTC. There's been changes in the M&A environment in the U.S. Why don't you take advantage of that and merge with Kroger?

Jolanda Poots-Bijl: Thank you for your advice, by the way. Frans will go into the suggested merger. If we look at the nervousness around the U.S. margin, I can understand that. But keep in the back of your head, we presented a Growing Together strategy where we stated that we are going to invest in prices over the period of our Growing Together strategy. So it's not a one-off in 2025. It's sequencing those investments to get the best return we can get. And if you look at the whole year at the U.S. level, although we do not give guidance on a regional level, margin -- the margin also in the U.S. will be rather stable for the full year as a whole because we're balancing our investments and the upsides we are creating.

Frans Muller: And we talked about it earlier, I think, Jolanda, also in previous quarters because, sometimes, we talk about the margins in Europe. We see them recovering now. We talked about the margins in the U.S. We have a business where both regions are 4% margin companies. And that's, therefore, also not a surprise that you see in our Growing Together strategy that 4% margin coming back again. And we have been always a 4% margin in the U.S. We don't want to change that. And we are recovering to a 4% margin in Europe, knowing that we had some deviations with the Belgium business. On your kind suggestion and recommendation on this otherwise boring Wednesday maybe, you talked about Kroger. We always shared with you that we are -- have an open view on expanding our business also inorganically when opportunities arise, which are in line with our strategy. And that's why you have seen Delfood. That's why you have seen Profi in Europe, which is in line with strategy, giving us more strength in market as well. And yes, also, like in the past, we're open to opportunities inorganically if those fit our strategy as such. We have a strong balance sheet, as you know, so we have the firepower in itself. But we come back to you if we have further ideas on M&A in total.

William Woods: Can I just clarify on the price investments, Jolanda, through the period of the growth -- the strategy? I think you've previously said that they would accelerate into the first half of 2025. Do you still see them accelerating into 2025 from 2024?

Jolanda Poots-Bijl: Yes. There is an acceleration from 2024 into our Growing Together period, but the EUR 1 billion that we talked about is sequenced over the full Growing Together period.

Frans Muller : And in the 2025 year, it's also spread with brands through the year as well.

Jolanda Poots-Bijl: Exactly.

Operator: Your next question comes from the line of Frederick Wild from Jefferies.

Frederick Wild: Both of mine really about just understanding the moving parts within the guidance. So first, on the around 4% margin guide, is that consistent with both ends of the mid-single-digit to high single-digit EPS growth range? And if so, which of the -- where in the sales do you see the bands of those -- that guidance -- EPS guidance coming from? And secondly, a similar sort of question at free cash flow level. Is it right to think that if you deliver mid-single-digit EPS growth, we should be looking at EUR 2.2 billion of free cash flow? Or is that an absolute limit? And where, if you deliver high single digit, do you think that free cash flow can get to?

Jolanda Poots-Bijl: Thank you for your questions. Yes, the margin range is consistent to the mid- to high single-digit earnings per share guidance that we've given. It's a combination of growth, share buybacks and FX impact, which is favorable for the year at current rates. And at least EUR 2.2 billion, it is at least EUR 2.2 billion of free cash flow that we are guiding on. So that's the floor, one could say.

Frans Muller : So we also gave a EUR 9 billion free cash flow for the total strategy period, too.

Jolanda Poots-Bijl: Yes.

Frans Muller : And we are at the beginning of the year. So we said at least EUR 2.2 billion for 2025. It's...

Jolanda Poots-Bijl: Striving for more as always.

Frans Muller : It’s the 12th of February. And let’s not forget that we also gave you a EUR 2.7 billion CapEx number for this year to take the necessary steps, to modernize further our assets, to build stores and to invest further in technology and data. So those things, of course, also fit together.

Operator: Your next question comes from the line of François Digard from Kepler Cheuvreux.

François Digard: Could you come back on the U.S. volume recovery? Has it been through all your brands? And how does it compare to your perception of the underlying market? And my second question would be about private label in the U.S. Are you finding the right suppliers? Or are you shipping some dry and frozen products from Europe?

Frans Muller : So the second question was, do we find the right supplier base for our private brand strategies, is that your question?

François Digard: Exactly, in the U.S.

Frans Muller : Yes. So let me take it a little bit broader because we get quite questions on tariffs as well. We are in food retail. We all have – we have a very small number of our sales in general merchandise to start with. Food retail is very local. And although we import a few things from Asia and Europe, it’s a relatively small share, and it’s very much a level playing field for the competitors we compete with. But it’s a very local business food. So the tariffs will not – most likely not have a heavy impact on us. Second thing was the element of price investments and, therefore, also volume growth, yes, we see volume growth in all our brands in the U.S. And as indicated before, we intentionally did this because we would like to deliver on our first year of Growing Together, which is a growth strategy, as you know. And that’s why we started in the fourth quarter already with our preparations. And we’re also happy to see that also the start of the year, as I mentioned before, is a very good start on growth and on volume. And yes, that was our plan. That was our promise. We’re going to grow our business and that 4% CAGR for the total strategy period is for us also the target to deliver on.

Operator: Your next question comes from the line of Fernand de Boer from Degroof Petercam.

Fernand de Boer: It's Fernand de Boer from Degroof Petercam. A couple of questions from my side. I remain a little bit puzzled on the U.S. margins because you say we have a negative unfavorable impact from change in sales mix, but you closed down the Stop & Shop stores. You also had a large impact of the Fresh Direct divestment, which I thought had a positive impact on margins. So could you elaborate a little bit on that part? And then coming back on the amendment for the Netherlands, you said EUR 108 million impact on your cash flow. What could we expect there going forward? Because I thought the charges were quite bigger than that one. And maybe to come back on the last question on Europe. I thought you said in the call that you assumed the dilutive impact of Profi to be compensated by improvements in the rest of the business. So I still take that as a kind of 3.8% margin for 2024. Or do we need to compare it with progress in Q4 of '23 for '24?

Frans Muller : So on the margin composition in the U.S., I understand your question, Fernand. And indeed, we have not been maybe completely complete here. There are 2 elements, which are also not helping our margin. First of all, our online sales growth. We grow double digit, which is strategy, and we are very proud about that number. And that is, of course, dilutive to our overall margin. And the second thing is we also grow in pharmacy. And you have heard that before with other players in the U.S., and that is also dilutive, too. Jolanda, the other things?

Jolanda Poots-Bijl: Yes, of course, and thank you for the questions, Fernand. The pension settlement in our unusuals for the quarter, there’s EUR 280 million rounded for pension settlement, of which EUR 205 million is cash related and the remainder – remaining part is the balance sheet settlement. Of the EUR 205 million cash impact, we paid already EUR 105 million in 2024. The remainder of the EUR 100 million is spread over the period to come and factored in our guidance. Maybe the last question, yes, like I said, I feel a bit repetitive, but we don’t give that guidance. So it’s up to you to conclude on a group level, where we will deliver around 4%.

Operator: Your next question comes from the line of Sreedhar Mahamkali from UBS.

Sreedhar Mahamkali : A couple. Maybe I think, Frans, you've referred to Growing Together strategy a couple of times in the Q&A, the 4% sales CAGR and an average 4% margin over the next 4 years. In that context, is 2025 a year of investing, i.e., potentially below 4% margin? Is that why you're calling out around 4% to help you move towards the 4% sales CAGR beyond this year and then obviously get you back to at least 4% margin trajectory that you've enjoyed over the past few years? So that's the first one. Secondly, if I can just very briefly go back to helpful U.S. margin comments you made. Within the year, is there some phasing to be -- for us to be thinking about in terms of particularly first half? Perhaps, that's where some of us were trying to explore a bit more. So if you could just help a little bit of -- give us a little bit of an idea in terms of phasing first half versus second half. Maybe very lastly, I'm sorry to squeeze one more in. Just in terms of run rate this year, I think, Frans, you referred to a good start. Anything you can share in terms of current trading so far perhaps versus Q4 run rate?

Frans Muller : Sreedhar, it's good to hear you. But sometimes, we are -- you ask us for almost weekly guidances of our results. But I appreciate the interest and the curiosity. On the total plan, yes, a CAGR of 4% growth, yes, an average 4% margin. And we gave that guidance to have a little bit of flexibility over time because we would like to bring that growth. If you then break it down, what does that mean for 2025? Then I think it's too early to share these kind of things. We just started the year. We started the year better than our 4% growth at the beginning of the year. So we have a good start in 2025. So that's why the teams also in the U.S. and also in Europe are quite happy with that start. And let's not forget, I mentioned that before, you cannot think about your strategy on the 1st of January. We did that starting up and ramp up earlier. And also in Europe, if you take the tobacco sales out, we also grew in Europe in the fourth quarter, 4.7% already. So that growth is coming. I mentioned volume growth in both regions, and we work very hard to keep it like that. So let's see when we talk to each other in the first quarter how that developed in the beginning of this year.

Jolanda Poots-Bijl: And Sreedhar, we don’t expect huge swings. We do things step by step. And like Frans said, we had the opportunity because we had a good second half of last year to already trend towards the strategy. So we’re phasing in, and I don’t expect big movements.

Operator: We will now take our final question for today, and the final question comes from the line of Maxime Stranart from ING Bank.

Maxime Stranart: Being the last, I'm going to focus on Europe instead of the U.S. Could you elaborate a bit on the building blocks for the improvement in margin in Q4. Excluding bol, it was definitely a standout performer. But in terms of margin in the different countries, Europe, the Netherlands and CSE, could you provide a bit of light on this as well, please?

Jolanda Poots-Bijl: Thank you for the question and also for focusing on Europe because we are quite proud of how our European teams are indeed performing. The big swing in the European margin is coming from the Belgium Future Plan. We, of course, invested in the Belgium transition. The 128 stores are now affiliated, and they are outperforming the business cases we had and recovering market share faster than we had. We are now at a level of market share that is higher than before we started the plan. So you can really see that intervention, which was a heavy one, is paying out now and that margins are trending faster than we expected towards the targets that we've set. But also, of course, Albert Heijn had a tremendously well Q4. So over the line, very happy with European performance, and the Belgium Future Plan makes the difference.

Frans Muller : And Jolanda mentioned already a little bit of Profi. And of course, we are -- got our closing of the project a little bit later than planned, like Jolanda already mentioned. But it's very nice to see that the teams come very nicely together. There's a good integration process. Of course, we've got 6 months more time to prepare that, so we are super well prepared. Teams are now working on the synergies. And I'm quite confident that this will be a great thing for our business in Romania, the complementarity of the business, EUR 3 billion sales more. So I think Europe will show a good number. And to close off this last question then, -- and then I sound repetitive, Jolanda, but our business in the U.S. is a 4% business. Our business in Europe is a 4% business, and you will see that number in Europe coming. And you won't see us losing that number in the U.S. So let's see. And thank you very much for your curiosity today and for your attendance to the call. And speak to you in the quarter 1 that is not that far from now.

Jolanda Poots-Bijl: We look forward. Thank you.

Frans Muller : Take care.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.