Net Profit from Continuing Operations Increases by 12% to EUR 426 million in 2006

 

In 2006, net sales and other revenues of Delhaize Group increased by 4.8% to EUR 19.2 billion. Organic sales growth amounted to 5.0%, a major improvement compared to 2.1% in 2005. Net sales and other revenues growth accelerated to 5.5% at identical exchange rates, the strongest performance in five years, due to:

·         the 4.4% increase of U.S. sales driven by the strong sales momentum at Food Lion and Hannaford. Comparable store sales grew by 2.7% for the U.S. operations;

·         the 7.0% increase of Belgian sales due to comparable store sales growth of 2.8%, new store openings and the positive impact of the acquisition of Cash Fresh in May 2005; and

·         the 13.5% increase of Greek sales.

 

Delhaize Group ended 2006 with a sales network of 2,705 stores, a net increase of 69 stores compared to the previous year.

 

Gross margin remained stable at 25.2% of net sales and other revenues (25.3% in 2005). Better inventory results and continued effective retail pricing at Food Lion and an improved sales mix in several of our operations offset investments in price competitiveness in all companies of the Group.

 

Selling, general and administrative expenses was 20.7% of net sales and other revenues (20.5% in 2005). Costs related to the conversion of Kash n’ Karry stores to Sweetbay in Florida, increased utility and fuel expenses throughout the Group and higher medical costs in the U.S. were offset by good cost control and EUR 15.5 million lower than planned spending due to an adjustment recognizing forfeited accounts in the retirement and profit sharing plans at Food Lion and Sweetbay.

 

Other operating expenses amounted to EUR 19.2 million in 2006, compared to EUR 39.2 million in 2005, due to lower store closing expenses and impairment losses at Food Lion.

 

Operating profit increased by 5.2% to EUR 946.3 million at actual exchange rates and 5.9% at identical exchange rates due to the stronger sales growth. The operating margin of Delhaize Group was stable at 4.9% of net sales and other revenues.  

 

Net financial expenses decreased by 7.0% to EUR 275.7 million due to the positive impact of major debt repayments made in the first half of 2006, partially offset by a decrease of the income from investments related to the use of cash balances for the debt repayments.

 

The effective tax rate decreased from 37.1% to 36.5% primarily due to company tax benefits related to the exercise of employee stock options in the U.S. The higher operating profit, the lower tax rate, and lower net financial expenses resulted in an increase of the net profit from continuing operations by 12.1% to EUR 425.6 million, or EUR 4.39 per basic share (EUR 3.99 in 2005). At identical exchange rates, net profit from continuing operations would have increased by 12.9% (+12.1% Group share, at the top of our guidance of an 8% to 12% increase).

 

In 2006, the result from discontinued operations, net of tax, amounted to EUR -65.3 million, following the impairment loss related to the planned sale of our Czech operations and its reclassification to discontinued operations. Group share in net profit amounted to EUR 351.9 million. Per basic share, net profit was EUR 3.71 (EUR 3.89 in 2005) and per diluted share EUR 3.55 (EUR 3.71 in 2005).

 

The Board of Directors of Delhaize Group will propose at the Ordinary General Meeting of May 24, 2007, the payment of a gross dividend of EUR 1.32 per share. This is an increase of 10.0% versus prior year. After deduction of 25% Belgian withholding tax, the proposed net dividend is EUR 0.99.

 

 

 

In the fourth quarter of 2006, net sales and other revenues of Delhaize Group decreased by 1.0% to EUR 4.8 billion, due to a 7.8% weaker U.S. dollar versus the euro. Organic sales growth amounted to 4.6%, and net sales and other revenues increased at identical exchange rates by 4.6%, supported by comparable store sales growth of 2.2% in the U.S. and 3.4% in Belgium and continued excellent sales in Greece.

 

Gross margin remained stable at 25.1% (25.2% in 2005) despite continued price investments due to a better sales mix. Selling, general and administrative expenses increased by 26 basis points to 20.1% of sales due to the store conversion work at Sweetbay, higher planned staffing costs at Food Lion to support sales in the holiday season, and higher medical expenses in the U.S. Retirement and profit sharing plan expenses at Food Lion and Sweetbay were EUR 4.5 million lower than planned due to adjustments recognizing forfeitures of retirement and profit sharing plan balances.

 

In the fourth quarter of 2006, Delhaize Group’s other operating expenses amounted to EUR 4.7 million, primarily related to impairment charges on U.S. stores and losses on the disposal of fixed assets in the U.S.

Operating margin was stable at 5.4% in the fourth quarter of 2006. Operating profit amounted to EUR 262.4 million, a decrease of 0.8% due to the weakening of the U.S. dollar. At identical exchange rates, operating profit would have increased by 4.8%.

 

Net financial expenses decreased by 13.5% to EUR 67.3 million, as a result of debt repayments in the first half of 2006 and of the 7.8% U.S. dollar decline. The effective tax rate increased from 33.2% to 37.4% in the fourth quarter of 2006. In the fourth quarter of 2005, the tax rate was favorably impacted by U.S. state audit resolutions.

 

Net profit from continuing operations decreased by 2.2% to EUR 122.1 million, or EUR 1.24 per basic share (EUR 1.29 in 2005). At identical exchange rates, net profit from continuing operations would have increased by 2.9%.

 

In the fourth quarter of 2006, the result from discontinued operations, net of tax, amounted to EUR -3.6 million, primarily related to our Czech operations which are in the process of being divested.

 

Group share in net profit amounted to EUR 114.7 million, compared to EUR 117.3 million in the fourth quarter of 2005. Per basic share, net profit was EUR 1.20 (EUR 1.25 in the fourth quarter of 2005) and per diluted share EUR 1.14 (EUR 1.19 in the fourth quarter of 2005). At identical exchange rates, net profit would have increased by 3.4%.

 

 

 

In 2006, net cash provided by operating activities amounted to EUR 910.3 million. Capital expenditures increased by 10.0% to EUR 699.9 million (EUR 636.1 million in 2005) or 3.6% of net sales and other revenues primarily due to the continued Sweetbay rollout, the multi-brand market renewal program at Food Lion and an active store opening program, particularly at Hannaford and Alfa-Beta. Delhaize Group generated free cash flow of EUR 215.1 million. After major debt repayments earlier in the year, the Group held EUR 314.3 million cash and cash equivalents at the end of 2006.

 

The net debt to equity ratio continued to improve, decreasing to 74.0% at the end of 2006 compared to 81.8% at the end of 2005. Delhaize Group’s net debt amounted to EUR 2.6 billion at the end of 2006, a decrease of EUR 308.4 million compared to EUR 2.9 billion at the end of 2005 due to the weakening of the U.S. dollar between the two balance sheet dates and the continued generation of free cash flow.

 

In 2006, thecontribution of the operations in the United States to the sales of Delhaize Group amounted to USD 17.3 billion (EUR 13.8 billion), an increase of 4.4% over 2005, mainly due to the continued strong sales momentum at Food Lion and Hannaford, supported by comparable store sales growth of 2.7% (non-adjusted for the negative calendar impact of 20 basis points due to an earlier cut-off of the fiscal year).

 

Sales in the U.S. in 2006 were supported by good sales at Food Lion following disciplined execution in the stores, effective price, promotion and marketing initiatives, and the success of the market renewal program. Following a softer first quarter, Hannaford performed well for the balance of the year, supported by its competitive pricing and many store openings. Sales at Sweetbay were negatively impacted by the intensive remodeling activity and the sales weakness at the unconverted Kash n’ Karry stores.

 

Delhaize Group finished the year 2006 with 1,549 supermarkets in the U.S. In 2006, Delhaize Group opened or acquired 40 new stores in the U.S. The Company closed eight stores that were relocated and 20 other stores. This resulted in a net increase of 12 stores. In addition in 2006, Delhaize Group remodeled 147 supermarkets in the U.S., including 68 stores in the Washington, DC market, 29 of which were converted to Bloom and 14 to Bottom Dollar. Forty-three Kash n’ Karry stores were converted to Sweetbay Supermarket. At the end of 2006, 69 Sweetbay stores were open.

 

In 2006, key initiatives at our U.S. operating companies included:

-          at Food Lion the continued development of multiple products and services enhancing our in-store experience, ongoing focus on price competitiveness, in-depth customer segmentation work, the first multi-brand market renewal in Washington, DC, the integration of the Harveys back-office into the Food Lion organization and the first phase of a project to improve significantly the replenishment cycle of the stores;

-          at Hannaford the expansion of its private label categories, major price investments particularly in the Massachusetts market, the launch of Guiding Stars, the in-store nutrition navigation system, a historic high of 14 store openings, and action undertaken to structurally reduce expenses particularly at its head office; and

-          at Sweetbay the conversion of its Kash n' Karry stores in the Tampa-St. Petersburg market to the Sweetbay concept and the price investment started in the fourth quarter of 2006.

 

In 2006, gross margin improved by 7 basis points due to better inventory results, continued margin management and price optimization and to an improvement in the sales mix partially offset by targeted price investments. Selling, general and administrative expenses as a percentage of net sales and other revenues increased by 14 basis points, due to additional expenses related to the Sweetbay conversions, the renewal of the Food Lion market of Washington, DC, increases in health care costs and higher utility and fuel expenses. The operating expenses in 2006 were reduced by USD 19.5 million in relation to an adjustment to recognize forfeited accounts in retirement and profit sharing plans.

 

In 2006, the operating margin of the U.S. business increased by 12 basis points to 5.6% of net sales and other revenues. The operating profit of the U.S. business of Delhaize Group grew by 6.6% to USD 961.0 million.

 

In the fourth quarter of 2006, the contribution of U.S. business to the sales of Delhaize Group amounted to USD 4.4 billion (EUR 3.4 billion), an increase of 3.8% over 2005. The operating margin of the U.S. business of Delhaize Group was 6.1% (6.2% in 2005). Good cost control, a better sales mix and lower planned spending on the retirement and profit sharing plans offset investments in price competitiveness, the Sweetbay conversion expenses, budgeted higher staffing costs at Food Lion to support the holiday selling season, and increased medical expenses. Operating profit grew by 1.7%.

 

In 2007, Delhaize Group plans to open approximately 47 new supermarkets in the U.S. In addition, the Group plans to close approximately ten stores to be relocated and 14 other stores, resulting in a net increase of 23 stores to a total number of 1,572 stores at the end of 2007. Approximately 207 U.S. stores will be remodeled in 2007. Food Lion will remodel 142 stores as part of its market and store renewal programs. All remaining 31 Kash n’ Karry stores will be re-launched under the Sweetbay Supermarket brand before the end of September 2007, finishing the massive conversion project started in 2004.

In 2006, net sales and other revenues of Delhaize Belgium increased by 7.0% to EUR 4.3 billion, supported by strong comparable store sales growth of 2.8%. The Belgian market share of Delhaize increased 59 basis points to 26.1% (source: AC Nielsen).

 

The sales network of Delhaize Belgium was extended by 35 stores to 843 at the end of 2006, including 129 company-operated supermarkets in Belgium, 30 stores in the Grand Duchy of Luxembourg and three stores in Germany. In addition, five supermarkets were remodeled in Belgium in 2006.

 

In 2006, the operating margin of Delhaize Belgium decreased to 4.3% of net sales and other revenues (4.6% in 2005) due to negative inventory results, investments in price competitiveness, expenses related to the integration of Cash Fresh and higher depreciation. Operating profit increased by 0.5% to EUR 183.8 million.

 

During the fourth quarter of 2006, sales of Delhaize Belgium increased by 4.6% to EUR 1.1 billion. Comparable store sales grew 3.4% (instead of 2.7% as mentioned in our preliminary sales report on January 18, 2007, on the basis of preliminary figures for the wholesale business).

 

In the fourth quarter, the operating margin of Delhaize Belgium increased to 4.7%, reversing the negative trend of the previous quarters. This is due to stronger sales and a more efficient promotional program. As a consequence and combined with good sales growth, operating profit increased by 21.8% to EUR 53.2 million.

 

Delhaize Belgium expects to end 2007 with a store network of 753 stores, as a result of the addition of 42 stores (including three company-operated supermarkets) and the planned divestment of 132 Di stores. Delhaize Belgium plans to remodel nine stores in 2007 and convert 26 Cash Fresh stores to Delhaize banners, including four to company-operated supermarkets.

 

In 2006, sales in Greece grew by 13.5% to EUR 1.0 billion due to high comparable store sales growth and many new store openings. The operating margin of Alfa-Beta increased to 3.2% of sales (2.7% in 2005) due to stronger sales, lower inventory losses and good cost control, while the operating profit increased by 36.0% to EUR 32.8 million.

 

In the fourth quarter of 2006, Greek sales grew by 14.6% and the operating margin was 5.0%, resulting in an operating profit of EUR 14.5 million.

 

In the fourth quarter of 2006, Delhaize Group bought 81,000 additional shares of Alfa-Beta Vassilopoulos increasing its total shareholding in its Greek subsidiary by 0.7 percentage point from 60.6% to 61.3%.

 

Net sales and other revenues of the Emerging Markets (Romania and Indonesia) of Delhaize Group increased by 16.1% to EUR 136.9 million due to the continued good sales performance in both countries. The Emerging Markets of Delhaize Group recorded operating profit of EUR 0.3 million in 2006.

 

In the fourth quarter of 2006, the Emerging Markets of Delhaize Group grew sales by 15.0% and posted a small operating loss (EUR -0.5 million) due to expenses related to provision adjustments in Romania.

 

The results of the Czech activities of Delhaize Group, formerly in the Emerging Markets segment, have been reclassified to discontinued operations (for both 2005 and 2006). A sale to Rewe Group has been announced, and the closing of the transaction is expected in the second quarter of 2007.

 

 

 

A binding agreement has been reached to sell Di, our Belgian beauty and body care business, to Parma Gestion, a subsidiary of Distripar (NPM/CNP Group - Euronext Brussels: NAT). Through its subsidiary Distripar, NPM/CNP is operating other specialty retailers such as Planet Parfum (beauty care) and Club (books and stationary). Subject to the approval by the European competition authorities of the Di transaction, the holding company Ackermans & van Haaren (Euronext Brussels: ACKB) has agreed with Distripar to form a 50%-50% joint venture on Di, Planet Parfum and Club.

 

Arthur Goethals, Executive Vice President and Chief Executive Officer Western and Central Europe said, “We are convinced that the combination of Di with the specialty retailers of Distripar will create a stronger player in the competitive Belgian beauty and body care market. The sale of Di will allow Delhaize Belgium to focus its financial and management efforts on its businesses in food and pet products in which it has important market positions. I want to thank all Di associates and franchisees for their contribution to the growth and success of Di and wish them all the best for future success in their new corporate environment.”

 

Delhaize Group opened its first Di store in 1975. In over 30 years of operation the concept evolved and the assortment expanded to encompass the current beauty and body care line. Today, the Di network consists of 90 company-operated and 42 franchised stores, which contributed EUR 95.5 million to Delhaize Group’s 2006 net sales and other revenues.

The agreement foresees the sale of the operations of Di for consideration, subject to contractual adjustments, of EUR 33.4 million in cash, which will produce a small gain. The impact of the divestiture on the ongoing profitability of Delhaize Belgium will be minor. The closing of the transaction is subject to the customary conditions, including approval by the European competition authorities.

 

Planet Parfum is a chain of 70 beauty care stores in Belgium and the Grand Duchy of Luxemburg. Club operates 26 books and stationary stores in Belgium. In 2006, Planet Parfum and Club realized EUR 135 million sales.

 

 

 

Delhaize Group is planning the implementation of cross-guarantees between Delhaize Group SA and Delhaize America, Inc, its largest subsidiary. The cross-guarantees of the companies’ financial debt obligations will support the continued integration of Delhaize Group and increase its financial flexibility. The implementation of cross-guarantees must not negatively impact the credit ratings and outlook of Delhaize America, Inc. and is conditional on obtaining a credit rating for Delhaize Group SA from Moody’s and S&P at least as strong as the current credit ratings and outlook of Delhaize America, Inc. At this time, Delhaize America, Inc. has the only credit rating within Delhaize Group.

 

 

 

For 2007, Delhaize Group expects the following financial results at identical exchange rates (1 EUR = 1.2556 USD):

• Comparable store sales growth of the U.S. operations of Delhaize Group in 2007 is expected to be in the range of 2.5% to 3.5%.
• It is expected that net sales and other revenue growth of Delhaize Group will be in the range of 4% to 5.5%.
• Operating profit is expected to grow by 6% to 8% in 2007.
• Net profit from continuing operations (including minority interests) growth expectations are between 8% and 12%.

In addition, in 2007:

• Delhaize Group plans to end 2007 with a store network of 2,575 stores, as a result of the addition of 99 stores and the planned divestments of 97 Delvita and 132 Di stores in 2007.
• Delhaize Group expects capital expenditures (excluding finance leases) of approximately EUR 825 million at identical exchange rates, including approximately USD 755 million for the U.S. operations of the Group.