Zaandam, The Netherlands, August 29, 2002
- Ahold, the international food retailer and foodservice operator, today announced a second quarter 20021 net loss of Euro 197.5 million (2001: net profit of Euro 323.8 million). The second quarter 2002 results include exceptional charges of Euro 490 million, of which Euro 410 million relates to the default of Velox Retail Holdings (VRH), Ahold's former joint venture partner in Latin America, and Euro 80 million relates to goodwill impairment for Argentina.
Remarks by Cees van der Hoeven, Ahold President & CEO
"This quarter Ahold reports its first loss in many years. That hurts because we are a proud company, always striving for excellence towards all stakeholders. Fortunately the cause is incidental and not structural. As communicated earlier, we had to take an exceptional charge as well as goodwill impairment for our Argentine operations. We think we have finally put this behind us and we can concentrate on reinforcing Disco's position as the best company in its market.
1 12 weeks of the year from April 22 through July 14, 2002
"Almost everywhere in the world, the trading environment is challenging. It is difficult to grow sales and the outlook is not as yet improving. In these circumstances our performance is very solid, as we are able to grow market share and operating margins at the same time. It is the real strength of Ahold that collectively our companies are stronger than individually by realizing many synergies and cost reductions behind the scenes. Once again we thank our people because it is their motivation and dedication that makes it happen.
"For the first time in a second-quarter press release, we are providing a preliminary outlook for next year. It reflects our expectation of a challenging financial and trading environment, but also underscores the increasing priority to focus on organic growth, margin improvement and capital efficiency. We are convinced that this represents a realistic plan that will deliver real benefits to all Ahold stakeholders."
Sales and earnings for the second quarter were negatively impacted by lower average exchange rates of mainly the U.S. Dollar (USD 1 = Euro 1.06 vs. USD 1 = Euro 1.16 last year), the Brazilian Real (BRL 1 = Euro 0.41 vs. BRL 1 = Euro 0.49 last year) and the Argentine Peso (ARS 1 = Euro 0.31 vs. ARS 1 = Euro 1.16 last year).
Consolidated sales rose 7.3% to Euro 17.3 billion (+16.0% excluding currency impact). Excluding currency fluctuations, organic sales growth amounted to 2.9%. Operating earnings were Euro 777.8 million, representing an increase of 11.9% (+20.9% excluding currency impact).
Net earnings showed a loss of Euro 197.5 million and were substantially below last year for the following reasons:
- Exceptional charges of Euro 490 million, mainly related to the default of VRH, Ahold's former joint venture partner in Latin America;
- Higher amortization of goodwill as a consequence of the acquisition of Alliant and Bruno's Supermarkets in December 2001 (Euro 33.5 million);
- Higher net financial expense (Euro 43.8 million), partly due to devaluation and inflation adjustment losses in Argentina, related to third-party U.S. Dollar and Argentine Peso debt.
The exceptional charges of Euro 490 million consist of two parts:
- A Euro 410 million charge related to VRH as a consequence of contingent liabilities that were already disclosed in Ahold's 2001 Annual Report. As a result of VRH's default on certain indebtedness, these liabilities were no longer contingent. Ahold was therefore required to take over certain bank debts and purchase substantially all of VRH's shares in Disco Ahold International Holdings for a total amount of USD 452 million, thereby assuming full ownership of former joint venture Disco Ahold International Holdings;
- A Euro 80 million charge related to goodwill impairment for Argentina, reflecting the devaluation of the Argentine Peso.
Cash flow from operating activities amounted to Euro 950.5 million (2001: Euro 514.4 million). Investments in tangible and intangible fixed assets amounted to Euro 568.7 million (2001: Euro 723.3 million).
Earnings common shareholders excluding goodwill amortization and exceptional items amounted to Euro 364.9 million or Euro 0.39 per average common share (+0.7% excluding currency impact).
The average number of common shares increased primarily due to the issue of 80.5 million new common shares through the equity offering in September 2001. The proceeds from the equity offering were used to finance the acquisitions of Bruno's Supermarkets and Alliant in December 2001.
In the United States, retail sales rose both organically and as a result of the consolidation of Bruno's Supermarkets with effect from December 2001. All retail operating companies contributed to sales growth. Organic retail sales growth amounted to 5.6% (2001: 8.5%). Comparable retail sales growth was 2.1% (2001: 5.5%) and identical retail sales growth totaled 1.4% (2001: 5.1%). Lower fuel prices depressed identical sales by approximately 0.3%.
Operating earnings rose as a result of strong improvements at most operating companies and due to the aforementioned consolidation of Bruno's Supermarkets. In particular, performance at Stop & Shop, Giant (Landover) and Giant (Carlisle) was excellent. BI-LO's operating earnings are improving but still lower than last year. Internet grocer Peapod - where sales rose 19% - reduced its operating loss to USD 7.6 million (2001: loss of USD 11.3 million).
In the United States, foodservice sales grew mainly due to the consolidation of Alliant with effect from December 2001. Organic foodservice sales decline was 1.7%, primarily as a result of the exit from unprofitable business at Alliant. Voluntary market exits reduced organic sales growth by 2.6%. The integration of Alliant is ahead of schedule. U.S. Foodservice expects to have completed the major part of the integration process by year-end 2002.
Foodservice operating earnings in the United States were significantly higher primarily as a result of the consolidation of Alliant, purchasing synergies and cost reductions. Results at U.S. Foodservice were strong.
In Europe, organic sales growth, excluding currency impact, amounted to 3.2% (2001: 9.2%). All retail operations in The Netherlands, Scandinavia, Spain and Central Europe contributed to the sales rise. Sales in Portugal were lower as a result of the exit from unprofitable product categories.
Operating earnings at Albert Heijn, ICA Ahold and Portugal showed considerable improvement. Spain, although profitable, came in lower than last year mostly as a result of increased integration costs. In Central Europe, operating results in the Czech Republic reached break-even point, partly offset by higher operating expenses related to the entry into the Slovakian market. Operations in Poland are still loss making.
In Latin America, sales were lower as a result of the devaluation of several currencies, mainly the Argentine Peso and the Brazilian Real as well as the deconsolidation of La Fragua. Organic sales growth, excluding currency impact, amounted to 3.0% (2001: 2.0%). In local currencies, Santa Isabel in Chile, Peru and Paraguay generated higher sales. Sales at Disco in Argentina in local currency were higher than last year partly as a result of strongly increased inflation. In Brazil sales in local currency were much higher mainly due to the acquisition of G. Barbosa in January of this year.
The devaluation of the Brazilian Real and Argentine Peso as well as the deconsolidation of La Fragua also led to lower operating earnings in Latin America. Operating earnings in local currency in Brazil were higher than last year and include the acquisition of G. Barbosa. Operating earnings in local currency at Santa Isabel and Disco were slightly lower.
Central America
In Central America - Guatemala, Costa Rica, Honduras, Nicaragua and El Salvador - the joint venture Paiz Ahold, owner of La Fragua, formed a new regional joint venture with CSU named CARHCO, effective January 1, 2002. Since that date, La Fragua has been deconsolidated. CARHCO's results are reported as income from unconsolidated subsidiaries and affiliates. Sales in the second quarter amounted to Euro 382.0 million.
Operating earnings in the second quarter in Central America increased to Euro 12.0 million (2001: Euro 6.9 million), mainly attributable to the formation of the new joint venture. The net income from CARHCO, reported as income from unconsolidated subsidiaries and affiliates, amounted to Euro 2.4 million.
In Asia, sales rose 13.3% to Euro 109.6 million. In local currencies, sales in Thailand and Indonesia were higher than last year. Sales in Malaysia were in line with last year. Organic sales growth, excluding currency impact, amounted to 15.3%, mainly as a result of store openings.
Operating losses in Asia amounted to Euro 5.6 million (2001: loss of Euro 4.6 million).
Corporate costs
Corporate costs amounted to Euro 13.8 million (2001: Euro 12.3 million).
Net interest expense decreased to Euro 221.6 million (2001: Euro 230.9 million), reflecting a favorable currency impact (especially the U.S. Dollar) partly off-set by the consolidation of new debt related to acquisitions. Financing currency differences were unfavorable compared to last year primarily due to the inclusion of devaluation losses on third-party U.S. Dollar debt (Euro 13.0 million) as well as inflation adjustment losses on third-party Argentine Peso debt (Euro 15.2 million) in Argentina. The rolling interest coverage ratio improved to 3.3 (2001: 3.1). The rolling ratio of net interest-bearing debt to EBITDA improved to 2.4 (2001: 2.7). Net interest-bearing debt amounted to Euro 11,610 million.
Tax rate
The tax rate, expressed as a percentage of pre-tax earnings adjusted for exceptional charges, was 29.0% (2001: 26.0%). The increase is mainly caused by higher non-deductible goodwill amortization.
Income from unconsolidated subsidiaries and affiliates
Income from unconsolidated subsidiaries amounted to a net profit of Euro 6.1 million compared to a net profit of Euro 4.9 million last year.
Minority interests
Minority interests increased from Euro 15.8 million in 2001 to Euro 38.7 million this year. This is mainly caused by the following factors:
- Earnings at ICA in Scandinavia and Jerónimo Martins in Portugal increased;
- The purchase of the remaining shares in Peapod in August 2001 brought the minority shareholders' portion of the losses of Peapod to an end;
- With effect from year-end 2001 no minority interest for the losses of Disco Ahold International Holdings has been included.
Cash flow statement
The second quarter of 2002 generated a cash flow from operating activities of Euro 950.5 million (2001: Euro 514.4 million), largely due to a strong development of operating earnings and lower investment in working capital. Investments in working capital were substantially lower than last year and resulted in a cash inflow of Euro 117.0 million (2001: cash outflow Euro 71.4 million). Cash outflows from investing activities amounted to Euro 561.2 million (2001: Euro 817.8 million), mainly consisting of investments in tangible and intangible fixed assets totaling Euro 568.7 million (2001: Euro 723.3 million).
Group equity
Group equity, expressed as a percentage of the balance sheet total, amounted to 18.2% (at year-end 2001: 20.4%). Assuming conversion of the convertible subordinated notes outstanding, group equity amounted to 23.8%. Capital accounts amounted to 24.3% of the balance sheet total. Shareholders'
equity was Euro 4.8 billion. In the second quarter of 2002, net earnings after deduction of the dividend on cumulative preferred financing shares were added to shareholders' equity. The final 2001 dividend on common shares and the negative balance of exchange rate fluctuations were deducted from shareholders' equity. Goodwill related to acquisitions through November 2000 was charged to shareholders' equity. Goodwill related to acquisitions after November 2000 was capitalized.
US GAAP reconciliation
Under US GAAP, the second quarter net loss amounted to Euro 74.2 million (2001: net earnings of Euro 181.0 million). Earnings per share under US GAAP decreased to a loss of Euro 0.08 (2001: earnings of Euro 0.22). In particular, lower goodwill amortization related to the adoption on December 31, 2001, of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), contributed to a lower net loss under US GAAP than under Dutch GAAP.
Goodwill impairment test
Under US GAAP, Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142") was adopted on December 31, 2001, and at that time Ahold discontinued amortizing goodwill under US GAAP. Ahold is required to test all goodwill for impairment by the end of 2002 under US GAAP. The relevant goodwill amounts that are tested for impairment amount to Euro 14.9 billion. In the second quarter an exceptional charge of Euro 430 million was booked mainly related to the VRH default. By the end of 2002, the impairment test on the remaining goodwill under US GAAP will be finalized.
Under Dutch GAAP, Ahold is also required to test capitalized goodwill for impairment. Goodwill related to acquisitions through November 2000 was charged to shareholders' equity. Goodwill related to acquisitions after November 2000 was capitalized. The goodwill that was capitalized is amortized over a period of maximum 20 years and is subject to an annual impairment test. In the second quarter an exceptional charge of Euro 490 million was booked consisting of Euro 410 million related to the VRH default and Euro 80 million related to a goodwill impairment charge in Argentina.
Interim Dividend
The Corporate Executive Board, with the approval of the Supervisory Board, has decided to declare an interim dividend per common share outstanding of Euro 0.22 in cash or as a pay-out of 1% in shares per outstanding common share (2001: Euro 0.22 or 1% in common shares). The interim dividend is payable as of September 13, 2002. Also payable from that date is the interim dividend on cumulative preferred financing shares.
Outlook for full-year 2002
Ahold reconfirms its 2002 earnings per share (EPS) growth, excluding currency impact, goodwill amortization and exceptional items, at between 5-8%, as announced on July 17, 2002. The outlook was revised due to the impact of the prolonged integration process in Spain, real estate gains coming in at the lower end of the range and rising interest rates in Ahold's Latin American markets.
Organic operating earnings growth, excluding currency impact, will amount to approximately 15%. Including the acquisitions of Alliant and Bruno's Supermarkets, but excluding currency impact, operating earnings are expected to increase by approximately 20%. Operating earnings are expected to grow faster in the second half of 2002 than in the first half of the year, mainly reflecting completion of the integration of Alliant into U.S. Foodservice.
Preliminary Outlook 2003
In view of today's challenging financial and trading environment Ahold has started to outline the main qualitative parameters for the 2003 plan. The following should serve as guidance for the company's preliminary outlook:
- Focus on profitable organic sales (4-5%) and earnings growth at constant exchange rates;
- Continued margin expansion as a consequence of additional synergies and further cost reduction programs;
- Improved capital efficiency and additional working capital reduction;
leading to:
Ahold expects no major acquisitions and therefore no need for additional equity funding. However, the company's strategy does include smaller acquisitions and potential divestitures.
Within appropriate ranges, quantification of several of the above key parameters will be communicated on March 5, 2003, the date of Ahold's annual 2002 results release.
Accounting principles
The accounting principles are unchanged compared to the accounting principles as stated in the Ahold 2001 Annual Report.
The data included in this press release are unaudited.
Definitions
[Sales year n] divided by [Sales year (n-1)(i) Ahold base + sales year (n-1)(i) of acquired companies(ii)]
(i) Adjusted for currency impact.
(ii) Applies to acquisitions dating back less than one year and to the extent that the sales of the acquired company represent > 5% of the sales of the acquiring entity, or that the acquisition is an entry into a new business channel or market area.
- Identical sales compare sales from exactly the same stores.
- Comparable sales are identical sales plus sales from replacement stores.
- Currency impact is defined as the impact of using different exchange rates to translate the financial figures of our subsidiaries to Euros. The financial figures of the previous year are restated using the actual exchange rates in order to eliminate this currency impact.
- Pro forma earnings are defined as reported earnings adjusted for the impact of goodwill amortization, exceptional items, results on the sale or divestment of tangible fixed assets and exchange rate differences as included in net financial income and expense.
- The interest coverage ratio is calculated as EBITA excluding exceptional items, divided by the net interest expenses.
- Net debt / EBITDA definition:
Net debt includes long and short term interest bearing debt, netted with loans receivable and cash and cash equivalents, divided by the EBITDA excluding exceptional items.
Editors' Note
The second quarter 2002 earnings conference call will be webcast on www.ahold.com at 2:00 p.m. CET. To access, please click on the link on the homepage. Photographs related to this quarterly report can be obtained from the media section of the Ahold web site.
To access the full press release, including the financial enclosures, please click on the link.
