Full press release in pdf format
Second Quarter 2007 Results
- Revenues growth by 4.7% at identical exchange rates
- Operating margin increase to 5.2%
- Operating profit up by 15.5% at identical and 9.6% at actual exchange rates
First Half 2007 Results
- 5.3% revenue growth at identical exchange rates
- 11.9% higher operating profit at identical exchange rates
Other Major Events in Second Quarter 2007
- Successful refinancing of USD 1.1 billion debt of Delhaize America
- Investment grade credit rating for Delhaize Group by Moody’s
- Closing of divestitures of Delvita and Di
Guidance
Strong first half year supports expectation to achieve higher end of revenues and operating profit guidance ranges
CEO Comments
“Delhaize Group again performed well in the second quarter of 2007,” said Pierre-Olivier Beckers, President and Chief Executive Officer of Delhaize Group. “Excluding the one-time charge related to the Delhaize America debt tender, net profit from continuing operations would have increased by 35.6% at identical exchange rates. We continued to roll out successful sales-building initiatives, driving our top line growth as well as improvements in our sales mix and gross margins. This gives us confidence that we will deliver full year results at the higher end of our guidance range.”
“In the second quarter, we made an important improvement in the financial structure of our Company by introducing cross-guarantees of debt with our U.S. business, receiving an investment grade credit rating from Moody’s and refinancing USD 1.1 billion debt on favorable terms”, added Mr. Beckers. “These initiatives will further improve the ongoing results and the financial flexibility of Delhaize Group.”
Financial Highlights
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Q2 2007 (1)
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H1 2007 (1)
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Actual Results
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At Actual
Rates
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At Identical
Rates
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IFRS, in millions of EUR, except EPS (in EUR)
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Actual Results
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At Actual
Rates
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At Identical
Rates
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4,812.9
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-0.4%
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+4.7%
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Revenues
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9,525.3
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-0.4%
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+5.3%
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248.9
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+9.6%
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+15.5%
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Operating profit
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478.6
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+5.3%
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+11.9%
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5.2%
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+47bps
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+49bps
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Operating margin
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5.0%
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+27bps
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+30bps
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86.3
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-45.6%
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-44.7%
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Profit before taxes and discontinued operations
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251.0
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-19.7%
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-15.6%
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62.9
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-35.2%
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-34.1%
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Net profit from continuing operations
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173.0
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-11.2%
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-7.0%
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81.4
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-14.0%
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-13.5%
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Group share in net profit
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192.8
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+0.4%
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+4.3%
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0.84
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-15.8%
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-15.3%
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Basic earnings per share (Group share in net profit)
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2.00
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-1.3%
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+2.5%
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(1) The average exchange rate of the U.S. dollar against the euro decreased by 6.7% in Q2 2007 and decreased by 7.5% in the first half of 2007 compared to last year.
Second quarter 2007 Income Statement
In the second quarter of 2007, revenues of Delhaize Group decreased by 0.4% to EUR 4.8 billion because the U.S. dollar weakened by 6.7%. Revenue growth at identical exchange rates was 4.7% as a result of:
- 4.2% increase of U.S. revenues driven by the strong performance of Food Lion and Hannaford. Comparable store sales grew by 2.8% for the U.S. operations;
- 3.8% increase of Belgian revenues driven by new store openings and good performance in existing stores; comparable store sales grew by 2.7%; and
- 13.2% increase of Greek revenues due to the continued outstanding performance in the existing stores and new store openings.
Delhaize Group ended the second quarter of 2007 with a sales network of 2,495 stores, compared to 2,476 at the end of last year (adjusted for the divestitures of 132 Di and 97 Delvita stores in the first half of 2007).
Gross margin increased to 25.5% of revenues (compared to 25.2% in the second quarter of 2006) due to sales mix improvements (particularly in private label), price optimization and better inventory management in Belgium and at Hannaford. In the second quarter of 2006, price reductions by Hannaford negatively impacted the gross margin. Higher cost inflation, particularly in the U.S., has generally been passed through in retail prices.
Other operating income increased significantly to EUR 28.5 million (EUR 18.7 million in 2006) due to the sale of certain Cash Fresh stores to independent owners to operate as Delhaize affiliates as well as certain assets of the Di business.
Selling, general and administrative expenses remained stable at 20.7% of revenues, principally because of the operational leverage associated with good sales dynamics and the continued focus on cost optimization.
Operating profit increased by 9.6% to EUR 248.9 million at actual exchange rates and by 15.5% at identical exchange rates. The operating margin of Delhaize Group increased to 5.2% of revenues as compared to 4.7% in the second quarter of 2006.
Net financial expenses amounted to EUR 162.6 million mainly due to a EUR 103.8 million charge related to the purchase of USD 1.1 billion Delhaize America debt above its book value and related expenses.
The effective tax rate decreased from 38.9% to 27.2% primarily as a result of the deductible debt tender charge. Last year’s second quarter included withholding taxes paid on the dividend from Delhaize America to Delhaize Group, and a similar dividend has not been paid this year.
Because of the debt tender charge and the weaker U.S. dollar, net profit from continuing operations declined to EUR 62.9 million, or EUR 0.61 per basic share (EUR 1.00 in 2006). Excluding the one-time charge related to the debt tender, net profit from continuing operations at identical exchange rates would have increased by 35.6% in the second quarter of 2007.
In the second quarter of 2007, the result from discontinued operations, net of tax, amounted to EUR 21.9 million, due to a positive accumulated foreign currency translation adjustment of EUR 23.7 million recorded at the closing of the sale of Delvita in the Czech Republic on May 31, 2007.
As a result, Group share in net profit amounted to EUR 81.4 million. Per basic share, net profit was EUR 0.84 (EUR 1.00 in the second quarter of 2006) and per diluted share EUR 0.81 (EUR 0.96 in the second quarter of 2006).
Second Quarter 2007 Cash Flow Statement and Balance Sheet
In the second quarter of 2007, net cash provided by operating activities amounted to EUR 245.9 million. Capital expenditures decreased to EUR 147.6 million (including USD 149.9 million for the U.S. operations of Delhaize Group) primarily due to timing differences in store openings and remodeling activity with the previous year. Delhaize Group generated free cash flow of EUR 196.1 million. The Group held EUR 395.3 million cash and cash equivalents at the end of the second quarter.
The net debt to equity ratio decreased to 63.6% at the end of June 2007 compared to 74.0% at the end of 2006. Delhaize Group’s net debt amounted to EUR 2.3 billion at the end of June 2007, a decrease of EUR 289.8 million compared to EUR 2.6 billion at the end of 2006 mainly due to the generation of free cash flow, the conversion of convertible bonds and the weaker U.S. dollar.
In April 2007, Delhaize America repaid USD 145.0 million in bonds with a 7.55% coupon using cash on hand and existing credit facilities.
In the second quarter of 2007, EUR 129.3 million of the EUR 300 million Delhaize Group convertible bond due 2009 were converted into Delhaize Group shares, leaving an outstanding amount of EUR 170.7 million at the end of June 2007. To satisfy the conversion of the convertible bonds, 2.27 million Delhaize Group shares were issued. In addition, 666,512 shares were issued during the second quarter of 2007 to satisfy the exercise of employee stock options.
Successful Restructuring of Financial Debt
In the second quarter of 2007, Delhaize Group successfully completed a restructuring of its debt, which substantially improves the Company’s financing structure and debt profile. The changes will also reduce Delhaize Group’s financial and tax expenses.
The restructuring started in May 2007, when Delhaize Group implemented cross-guarantees of debt with its U.S. subsidiary Delhaize America. The same month, Delhaize Group received an investment grade rating of Baa3 (with stable outlook) from Moody’s, while S&P gave a BB+ rating with a positive outlook. Delhaize Group is now the rated entity instead of Delhaize America.
With a Group level rating and cross-guarantees of debt in place, we were able to execute a successful tender offer on Delhaize America debt. In June 2007, Delhaize America purchased USD 1.1 billion of its outstanding public debt, including USD 1.045 billion of its 8.125% notes due 2011 and USD 55 million of its 9.0% debentures due 2031. The tender resulted in a one-time pre-tax charge of EUR 103.8 million in the second quarter of 2007 which was recorded as a financial expense.
Delhaize Group financed the debt repurchase by issuing EUR 500 million of 5.625% senior notes due 2014 and USD 450 million 6.50% senior notes due 2017. In addition, Delhaize Group entered into a USD 113 million floating rate bank term loan agreement, maturing in 2012. The euro debt has been effectively swapped into dollars to maintain its match to associated dollar cash flows.
This operation enabled the Group to proactively address a major debt repayment threshold of USD 1.1 billion due in 2011. In addition, from 2008 onwards, Delhaize Group expects a positive annual net earnings impact of more than EUR 18 million at current exchange rates because of lower financial and tax expenses.
First Half 2007 Income Statement
In the first half of 2007, revenues of Delhaize Group decreased by 0.4% to EUR 9.5 billion because the U.S. dollar weakened by 7.5%. Revenue growth at identical exchange rates amounted to 5.3% as a result of the:
- 4.9% increase of U.S. sales driven by the strong performance of Food Lion and Hannaford;
- 4.0% increase of Belgian sales; and
- 14.2% increase of Greek sales due to the continued outstanding performance of the existing stores and new store openings.
Gross margin increased to 25.5% of revenues (compared to 25.4% in the first half of 2006) mainly as a result of price optimization initiatives and assortment management.
Other operating income increased to EUR 48.8 million (EUR 36.3 million in 2006) primarily due to the sale of some of the Cash Fresh stores to independent owners to operate as Delhaize affiliates and certain assets of the Di business.
Selling, general and administrative expenses remained stable at 20.9% of revenues because of successful cost control and the operational leverage of strong sales dynamics in most of our businesses.
Operating profit increased by 5.3% to EUR 478.6 million at actual exchange rates and 11.9% at identical exchange rates. The operating margin of Delhaize Group increased to 5.0% of revenues as compared to 4.8% in the first half of 2006.
Net financial expenses increased to EUR 227.6 million because of the EUR 103.8 million charge related to the Delhaize America debt tender.
The effective tax rate decreased to 31.1% compared to 37.7% in 2006 as a result of the tax deductible debt tender charge in the second quarter as well as a U.S. tax refund received in the first quarter. Last year’s first six months results included tax amounts on the dividend payment from Delhaize America to Delhaize Group, while there was no similar dividend in 2007.
Net profit from continuing operations amounted to EUR 173.0 million, or EUR 1.74 per basic share (EUR 2.03 in 2006).
In the first half of 2007, the result from discontinued operations, net of tax, amounted to EUR 25.1 million, mainly due to a positive accumulated foreign currency translation adjustment of EUR 23.7 million recorded as part of the closing of the sale of Delvita.
As a result, Group share in net profit amounted to EUR 192.8 million. Per basic share, net profit was EUR 2.00 (EUR 2.03 in the first half of 2006) and per diluted share EUR 1.91 (EUR 1.94 in the first half of 2006).
2007 Financial Outlook
The strong performance of the Company in the first half of 2007 and our expectations for the remainder of the year, support guidance near the top end of our range for revenues and operating profit communicated on March 15, 2007.
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 in 2007 near the top end of the range of 2.5% to 3.5%.
- Revenue growth of Delhaize Group near the top end of the 4% to 5.5% range.
- Operating profit growth near the top end of the 6% to 8% range.
Net finance expenses are expected to be approximately EUR 250 million at identical exchange rates, excluding the EUR 103.8 million pre-tax charge related to the Delhaize America debt tender, while the effective tax guidance is brought down to between 34% and 35%.
Excluding the EUR 62.5 million after-tax charge related to the Delhaize America debt tender and related expenses, net profit from continuing operations is expected to grow by 14% to 18% in 2007, instead of the previously communicated expected growth rate of 8% to 12% (at identical exchange rates).
Including the one-time debt tender charge and the results from discontinued operations, the Group share in net profit of Delhaize Group is expected to grow by 23% to 29% in 2007 at identical exchange rates.
In addition Delhaize Group reiterates its plans:
- to end 2007 with a store network of 2,573 stores. The net addition of 97 stores is offset by the divestments of 97 Delvita and 132 Di stores.
- to have in 2007 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.
Segment Reporting
In the second quarter of 2007, thecontribution of the operations in the United States to the revenues of Delhaize Group amounted to USD 4.5 billion (EUR 3.4 billion), an increase of 4.2% over the second quarter of 2006, mainly due to the continued strong sales momentum at Food Lion and Hannaford. During the second quarter of 2007, comparable store sales in the U.S. increased by 2.8%. During the first half of 2007, the U.S. revenues of Delhaize Group grew by 4.9%.
The strong sales momentum at Food Lion was supported by effective price, promotion and marketing initiatives, improved assortment and customer service, and the success of the market renewal initiatives. Hannaford’s sales were also strong, supported by targeted marketing initiatives and a dynamic store opening program. In order to strengthen Sweetbay in the future and faced with increased competitive activity in the Florida market, Sweetbay continued its more targeted price and marketing initiatives and the conversion of the Kash n’ Karry stores to the Sweetbay banner.
In the second quarter of 2007, Delhaize Group opened 10 new stores, and closed 10 stores (of which 4 were relocated) in the U.S. In addition, Delhaize Group remodeled 40 supermarkets in the U.S., including 20 Food Lion stores in the market renewal of Myrtle Beach, South Carolina, while 13 Kash n’ Karry stores were converted to Sweetbay Supermarket. At the end of June 2007, 94 Sweetbay stores were open. The conversion of Kash n’ Karry stores to the Sweetbay banner remains on schedule and should be completed by the end of the third quarter of 2007.
The operating margin of the U.S. business increased by 57 basis points to 5.5% of revenues, particularly due to a stronger gross margin as a result of a better sales mix, especially in private label, price optimization and, at Hannaford, better inventory management. In addition, the operating margin was negatively impacted in the second quarter of 2006 by price reductions by Hannaford. In the second quarter of 2007, the operating profit of the U.S. business increased by 16.0% to USD 252.2 million, and during the first six months of 2007 the operating profit grew by 11.8% to USD 492.8 million.
In 2008, Food Lion plans to remodel approximately 110 stores in Wilmington, North Carolina; Savannah, Georgia; Richmond, Virginia and Charlottesville, Virginia, as part of its continued market renewal initiative, with Wilmington being the first market renewal. Current plans include a multi-brand approach in markets where the Company’s cluster and segmentation information supports the combination of more than one brand in the marketplace.
Delhaize Belgium increased its revenues by 3.8% to EUR 1.1 billion in the second quarter of 2007. Comparable store sales growth amounted to 2.7%. The revenue increase was further supported by store openings. During the first half of 2007, revenue of Delhaize Belgium grew by 4.0%.
Market share decreased slightly during the second quarter due to numerous competitive openings and the temporary loss of sales related to the temporary closings of Cash Fresh stores during their conversion to Delhaize banners. In the second quarter, seven Cash Fresh stores were converted to Delhaize banners and one store was closed.
The operating margin of Delhaize Belgium increased to 5.6% of revenues (5.1% in 2006), mainly due to higher gross margin (partially the result of better inventory results) and higher other operating income as a result of the sale of Cash Fresh businesses to independent owners to operate as Delhaize affiliates. During the second quarter, operating profit increased by 15.7% to EUR 62.6 million and during the first six months of 2007 by 8.8% to EUR 109.1 million.
In the second quarter of 2007, revenues in Greece grew by 13.2% to EUR 287.5 million due to a strong comparable store sales growth and new store openings. This was the fifth consecutive quarter of double-digit revenue growth. Alfa-Beta further expanded its product assortment, especially in the private label ranges and continued its efforts to upgrade its store network.
The operating margin of Alfa-Beta increased sharply to 4.3% of revenues (2.7% in 2006) due to excellent sales, good cost control and effective inventory management. In the second quarter of 2007, the operating profit increased by 79.4% to EUR 12.3 million. In the first half of 2007, revenues increased in Greece by 14.2% and operating profit by 87.7%.
Revenues of the Emerging Markets (Romania and Indonesia) of Delhaize Group increased by 21.1% to EUR 40.3 million due to the continued strong sales performance in both countries. The Emerging Markets of Delhaize Group recorded an operating profit of EUR 0.4 million in the second quarter. In the first six months of 2007, revenues grew by 18.2% and operating profit grew by 52.4%.
The Czech activities of Delhaize Group, formerly included in the Emerging Markets segment, have been reclassified to discontinued operations (for both 2006 and 2007) until the closing on their divestiture on May 31, 2007.
Conference Call and Webcast
Delhaize Group’s management will comment on the second quarter 2007 results during a conference call starting August 9, 2007 at 03.00 pm CET / 09:00 am EST. The conference call can be attended by calling +44 20 7162 0125 (U.K.) or
+32 2 290 14 11 (Belgium) or +1 334 323 6203 (U.S.), with “Delhaize” as password. The conference call will also be broadcast live over the internet at
http://www.delhaizegroup.com. An on-demand replay of the webcast will be available after the conference call at http://www.delhaizegroup.com.
Delhaize Group
Delhaize Group is a Belgian food retailer with operations in seven countries on three continents. At the end of June 2007, Delhaize Group’s sales network consisted of 2,495 stores. In 2006, Delhaize Group posted EUR 19.2 billion (USD 24.1 billion) in revenues and EUR 351.9 million (USD 441.8 million) in net profit. Delhaize Group employs approximately 138,000 people. Delhaize Group is listed on Euronext Brussels (DELB) and the New York Stock Exchange (DEG).
Financial Calendar
Press release - 2007 third quarter results: November 8, 2007
Press release - 2007 fourth quarter and full year 2007 revenues: January 17, 2008
Press release - 2007 fourth quarter and full year 2007 results: March 6, 2008
Contacts
Guy Elewaut: + 32 2 412 29 48
Geoffroy d'Oultremont: + 32 2 412 83 21
Liesbeth Driesen: + 32 2 412 86 69
Amy Shue: + 1 704 633 82 50 (ext. 2529)
Definitions
- Basic earnings per share: profit or loss attributable to ordinary equity holders of the parent company divided by the weighted average number of shares outstanding during the period. Basic earnings per share are calculated on profit from continuing operations less minority interests attributable to continuing operations, and on the Group share in net profit
- Comparable store sales: sales from the same stores, including relocations and expansions, and adjusted for calendar effects
- Diluted earnings per share: calculated by adjusting the profit or loss attributable to ordinary equity shareholders and the weighted average number of shares outstanding for the effects of all dilutive potential ordinary shares, including those related to convertible instruments, options or warrants or shares issued upon the satisfaction of specified conditions
- Free cash flow: cash flow before financing activities, investment in debt securities, and sale and maturity of debt securities
- Net debt: non-current financial liabilities, plus current financial liabilities and derivatives liabilities, minus derivative assets, investments in securities, and cash and cash equivalents
- Net financial expenses: finance costs less income from investments
- Organic sales growth: sales growth, excluding sales from acquisitions and divestitures, at identical currency exchange rates
- Other operating income: primarily rental income on investment property, gains on sale of fixed assets, recycling income, and services rendered to wholesale customers.
- Revenues: sale of goods and point of sale services to customers, including wholesale and affiliated customers, relating to the normal activity of the Company (the sale of groceries, health and beauty and pet products), net of discounts, allowances and rebates granted to those customers
- Shares outstanding: number of shares issued by the Company less treasury shares
- Weighted average number of shares: number of shares outstanding at the beginning of the period less treasury shares, adjusted by the number of shares cancelled, repurchased or issued during the period multiplied by a time-weighting factor
Report of the Statutory Auditor
We have performed a limited review of the accompanying consolidated condensed balance sheet, condensed income statement, condensed consolidated statement of recognized income and expense, condensed cash flow statement and notes (jointly the “interim financial information”) of Delhaize Brothers and Co “The Lion” (Delhaize Group) SA (“the Company”) and its subsidiaries (jointly “the Group”) for the six months period ended 30 June 2007. The Board of Directors of the Company is responsible for the preparation and fair presentation of this interim financial information. Our responsibility is to express a conclusion on this interim financial information based on our review. The interim financial information has been prepared in accordance with IAS 34, “Interim Financial Reporting”.
Our limited review of the interim financial information was conducted in accordance with the recommended auditing standards on limited reviews applicable in Belgium, as issued by the ”Institut des Reviseurs d’Entreprises/Instituut der Bedrijfsrevisoren”. A limited review consists of making inquiries of Group management and applying analytical and other review procedures to the interim financial information and underlying financial data. A limited review is substantially less in scope than an audit performed in accordance with the auditing standards on consolidated annual accounts as issued by the ”Institut des Reviseurs d’Entreprises/Instituut der Bedrijfsrevisoren”. Accordingly, we do not express an audit opinion.
Based on our limited review nothing has come to our attention that causes us to believe that the interim financial information for the six months period ended June 30, 2007 is not prepared, in all material respects, in accordance with legal and regulatory requirements and IAS 34 “Interim Financial Reporting” as adopted by the European Union.
The full report of the statutory auditor on the limited review of the interim consolidated financial information can be found on Delhaize Group’s website at
www.delhaizegroup.com.
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Statements that are included or incorporated by reference in this press release and other written and oral statements made from time to time by Delhaize Group and its representatives, other than statements of historical fact, which address activities, events and developments that Delhaize Group expects or anticipates will or may occur in the future, including, without limitation, statements about strategic options, future strategies and the anticipated benefits of these strategies, are “forward-looking statements” within the meaning of the U.S. federal securities laws that are subject to risks and uncertainties. These forward-looking statements generally can be identified as statements that include phrases such as “guidance”, “outlook”, “projected”, “believe”, “target”, “predict”, “estimate”, “forecast”, “strategy”, “may”, “goal”, “expect”, “anticipate”, “intend”, “plan”, “foresee”, “likely”, “will”, “should” or other similar words or phrases. Although such statements are based on current information, actual outcomes and results may differ materially from those projected depending upon a variety of factors, including, but not limited to, changes in the general economy or the markets of Delhaize Group, in consumer spending, in inflation or currency exchange rates or in legislation or regulation; competitive factors; adverse determination with respect to claims; inability to timely develop, remodel, integrate or convert stores; and supply or quality control problems with vendors. Additional risks and uncertainties that could cause actual results to differ materially from those stated or implied by such forward-looking statements are described in Delhaize Group’s Annual Report on Form 20-F for the year ended December 31, 2006 and other periodic filings made by Delhaize Group with the U.S. Securities and Exchange Commission, which risk factors are incorporated herein by reference. Delhaize Group disclaims any obligation to update developments of these risk factors or to announce publicly any revision to any of the forward-looking statements contained in this release, or to make corrections to reflect future events or developments.