Ahold Delhaize N : Q4 2021 Management Prepared Remarks

Management's Prepared Remarks

Q4 2021 Earnings Call

February 16, 2022

JP O'Meara

Senior Vice President, Head of Investor Relations

Thank you operator, and good morning everyone.   

I'm J.P. O'Meara, Head of Investor Relations and I am delighted to welcome you to our Q4 2021 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, which provide extra disclosures and details for your convenience.

To ensure everyone has the opportunity to get their questions answered today, I ask that you initially limit yourself to 2 questions. If you have further questions then please re-enter the queue.

I'll now turn the call over to Frans.  

Frans Muller

President, Chief Executive Officer

Thank you JP.

Good morning everyone.

We ended 2021 on a strong note, with positive fourth quarter Group comparable sales momentum, and Group margins in line with the prior year levels. As we begin the next phase of our Leading Together strategy announced at our Investor Day last November, we are well positioned to execute against our ambitious growth plans.

This is all down to the continued dedication and hard work of our people. Looking back on the past year, I am again most proud of how associates brought our values to life - in the way they responded to the ongoing developments associated with COVID-19 as well as natural disasters including major floods in Belgium, tornadoes in the Czech Republic, fires in Greece and Hurricane Ida in the U.S. Through it all, associates rose to the challenge to care for customers and communities.

For the full year, our COVID-19 care investments totaled €364 million, including our commitment of €20 million in additional 2021 charitable donations spread evenly between the U.S. and Europe. In total, our brands contributed nearly €200 million in food donations and other charitable initiatives across the globe in 2021.

The pandemic highlights the importance of maintaining food and product supplies to local communities - a vital role that we remain focused on fulfilling, together with our brands and suppliers. As a result, we enter 2022 with deeper relationships and trust with customers across our brands' markets with strong and growing market shares in both regions to build upon.

Now let me highlight our key financial results on slide 5: 

The good news is, our financial results in 2021 significantly exceeded our original expectations, with positive full-year sales growth and stable 52-week underlying earnings on a comparable basis versus record results in 2020. You can see the 52- week comparable numbers in the Appendix for context.

Our stable underlying earnings is of particular note, as we were able to deliver this result despite significant supply chain challenges, increasing inflationary pressures and the dilutive effects from rapidly expanding our omnichannel proposition. Due to our strong revenues and continued excellent delivery of our Save for our Customer cost saving initiatives, our underlying operating margins were again very strong relative to historical levels prior to COVID-19.

As a result, I am pleased that we exceeded our initial and later increased guidance for underlying EPS. Free cash flow generation, which is extremely important in this environment, also well exceeded our expectations. This allowed us to take some additional decisions towards the end of the year, that Natalie will walk you through later.

Behind these results, our investment in our omnichannel platform once again proved its worth during 2021. With 15 million active mobile app users and 1,642 pick-up points and click-and-collect locations globally, Group net consumer online sales grew by more than 38% compared to 2020, representing a two-year stack growth of more than 105%. This positively impacted our 2021 Group net sales, which, at €76 billion, was up 3% versus 2020 at constant rates, with 96% of our sales coming from markets where we hold the number one or number two position.

In terms of the fourth quarter, we maintained the momentum we built throughout 2021, and produced Group two-year comparable sales stack growth of 14.2%, accelerating from the 12.2% growth achieved during Q3.

As I said at Investor Day, and represented on slide 6, I truly believe we have a repeatable formula for growth in the US and in Europe. We have a strong operating model, with our leading local brands supported by service brands who operate at scale, and who leverage their best capabilities globally.

Between now and 2025, we have four big priorities we are doubling down on for the next four years.

• Serve our customers through deeper digital relationships
• Accelerate the omnichannel transformation and continue to be the best local operators
• Lead the transformation into a healthy and sustainable food system
• Create the ecosystem for smarter customer journeys

These priorities tie straight to our vision: To create the leading local food shopping experience.

With that in mind, let me spend a few minutes on some of the key operational highlights for the quarter, and give you a sneak preview of what to expect in 2022.

Looking at our Consumer Value Proposition on slide 8 and 9:

• In the Netherlands, we launched the Albert Heijn Premium Loyalty subscription program; which already boasts >300.000 customers
• Giant Food soft-launched Ship2Me, an online marketplace solution, initially offering an additional ~40,000 general merchandise and food items. And this has been extended to The GIANT Company as of January this year
• Delhaize started it's first in-store kitchen in collaboration with Tastyoo
• In CZ, Albert expanded their eCommerce service to greater Brno and
  Olomouc
• And our U.S. brands also added new click-and-collect locations in Q4, for a total addition of 270 in 2021 to 1,386, and we plan to add a further 150+ in 2022.

Looking at our Operational priority on slide 10 and 11:

• In terms of using the power of data, we rolled out Machine Learning based store optimization tool for store managers at Albert Heijn,
• And rolled out a proprietary network optimization engine in the US, leveraging predictive analytics, which will be scaled to Europe in 2022
• In stores, we continue to drive efficiency with electronic shelf labeling and expect ≥ 80% of European grocery stores to be equipped by 2022
• We are also proud of TheGIANT Company's new e-commerce fulfillment center that opened in the Philadelphia market in Q4. It is supporting our ambitions to increase the amount of automation and speed in our supply chain, an important pillar of our Leading Together strategy. We will be looking to take learnings and pilot similar initiatives in Europe in 2022.

Controlling our own destiny across our entire distribution network is an important principle we firmly believe in, particularly when it comes to fostering pace and agility in building out new digital capabilities. In the near term, this will be particularly visible

at bol.com, where we look to reinforce the modern infrastructure we have carefully put in place for the brand over the past years.

Momentum at bol.com remains solid despite significantly less tailwinds as we lap the harsher lockdowns from the COVID-19 pandemic of the last 12 months. The investments we plan for 2022 will kick start a multi-year phase of investment to put the infrastructure in place to match the volume growth and new revenue opportunities we expect from:

1. The underlying ecommerce market growth projected in the coming years, where the Total Addressable Market including VAT, or the TAM, is expected to increase from € 46 billion in 2021 to € 63 billion in 2025.
2. Our plans to increase our position in under penetrated categories as well as cross category selling, which includes the deeper collaboration with our
   Benelux brands announced at Investor Day.
3. As well as the build out and scaling up of highly accretive service capabilities in advertising and logistics. We estimate the Digital Advertising market alone in the Benelux has a TAM of just under € 5 billion.

For 2022, the sub-IPO of bol.com is one of our top priorities. We are excited about this chapter in bol.com's evolution and continue to progress on our plans to get bol.com ready for a sub-IPO during the second half of 2022. Natalie will also share more details on our progress here in her commentary.

Moving over to our Healthy and Sustainable priority. Throughout 2021, food-at-home consumption and a focus on healthier eating were trends which proved very resilient. I am particularly pleased with the share of total own-brand food sales from healthy products of 53.6% in 2021.

At Ahold Delhaize, we believe that what's healthy and sustainable should be accessible and available to all. We are working towards this with our "Grounded in Goodness" strategy, that focuses on both healthier people and a healthier planet.

Grounded in Goodness, officially launched in 2021, is based on the idea that the world's health crisis and climate crisis are intrinsically linked. We believe that if we get it right for ourselves, we usually also get it right for the planet. And acting responsibly today is imperative to securing a better tomorrow for generations to come.

In this respect, during the fourth quarter, we were pleased to have earned an upgrade to our MSCI ESG ranking to 'AA' from our previous 'A' ranking. We also maintained our standing as a leader in the Dow Jones Sustainability Index.

Our score of 83 out of 100 was well above the industry average of 26 points and placed us highest among food retailers in Europe and the U.S..

We also expressed our intention to make continued progress on the ESG front through our decision in Q4 to pull forward our commitment to reach net-zero carbon emissions across our own operations by no later than 2040 for scope 1&2. We focus

primarily on reducing energy consumption (more than half of the emissions), refrigerant leakage (more than one third) and transport. And we will actively apply this lens as we invest in our future. For example, at bol.com, we recently reached an agreement to acquire a majority stake in Cycloon, a green and social delivery expert, which will help support bol.com's last mile delivery ambitions and their sustainability efforts at the same time.

As we look towards 2022, another top priority for the company is doing more homework on what it will take to become a net-zero business across our entire supply chain, products and services by 2050 (scope 3), if not sooner. In our industry, scope 3 represents around 95% of our emissions. Our value chain is immense: we sell over hundreds of thousands of products and have thousands of suppliers worldwide. We are currently working towards an updated target and detailed plan for scope 3, which we will announce later this year.

We have joined the business ambition for 1.5°C, a global coalition of UN agencies, business and industry leaders, in partnership with the Science Based Targets Initiatives and the UN led campaign 'Race to Zero'. This means we also set interim science-based targets across all relevant scopes and in line with the criteria and recommendations of the Science Based Targets initiative.

Three important elements in our approach:

• We need to actively help farmers with a green transition
• We need to standardize healthy and environmental product information for consumers
• And we need full support from governments in setting clear standards and regulation.

Finally, let me spend a moment on our outlook for 2022 on slide 15. While we have already talked about several key initiatives to support comparable sales growth and further elevate our best-in-class omnichannel offering, let me address the one hot topic in the financial community for this year; inflation.

Our role as retailers is to provide value to customers. We pride ourselves on being the best local operators, and we will prove our strength in this area and turn the headwind into a competitive opportunity as we navigate the inflationary environment.

I have said many times before, that the supermarket business has a deflationary role for customers. This is because we have strong insights into which price increases are justified, via our "should-cost" models, which deconstruct products down to component materials (raw materials, packaging, energy, transport etc.) so that we have a good sense of what a product should cost. Given that ~30% (U.S.) and ~50% (Europe) of our products are own-brand, which is industry leading, we have exact and broad knowledge which gives us a significant advantage over competition.