DELHAIZE GROUP 6-K 2008
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16
under the Securities Exchange Act of 1934
For the month of April, 2008
Commission File Number: 333-13302
ETABLISSEMENTS DELHAIZE FRÈRES
ET CIE LE LION (GROUPE DELHAIZE)
(Exact name of registrant as specified in its charter)*
DELHAIZE BROTHERS AND CO.
THE LION (DELHAIZE GROUP)
(Translation of registrants name into English)*
SQUARE MARIE CURIE 40
1070 BRUSSELS, BELGIUM
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F x Form 40-F ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨
Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes ¨ No x
If Yes is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-
Delhaize Groups 2007 annual report, an English copy of which is furnished with this Form 6-K, is available in English, French and Dutch. It can be downloaded from Delhaize Groups website: www.delhaizegroup.com.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Delhaize Group is a Belgian international food retailer with activities in seven countries on three continents. Delhaize Group is listed on Euronext Brussels (ticker symbol: DELB) and the New York Stock Exchange (ticker symbol: DEG).
At the end of 2007, Delhaize Groups sales network consisted of 2,545 stores. In 2007, Delhaize Group posted EUR 19.0 billion in revenues and net profit of EUR 410.1 million. Delhaize Group employs approximately 138,000 people.
Delhaize Group has leading positions in food retailing in key markets. These positions are built through strong regional companies going to market in a variety of food store formats. The operating companies benefit from the Groups global strength and best practices. The Group is committed to offering a locally differentiated shopping experience to its customers in each of its markets, to delivering superior value and to maintaining high social, environmental and ethical standards.
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In 2007, we completed our fifth consecutive year of solid growth at Delhaize Group. We maintained our strong sales momentum with most of our key operating companies posting sales growth acceleration and the Group delivering industry-leading operating margins. At identical exchange rates, revenue growth was 4.9%.
Our strong 2007 sales performance was mainly driven by the dynamic revenue momentum at Food Lion and Hannaford in the U.S. and Alfa-Beta in Greece. U.S. comparable store sales growth amounted to 3.8%, the strongest increase in more than ten years. For the second year in a row, Alfa-Beta posted double-digit organic sales growth as did our Emerging Markets operations.
All of our operating companies benefited from their investments in concept differentiation through industry-leading initiatives in assortment, convenience and customer service. We continued our network expansion to 2,545 stores at year-end. The renewal and conversion work carried on, and more than 160 stores were remodeled throughout the Group. Food Lion remodeled two entire markets: Myrtle Beach, South Carolina and Norfolk, Virginia. In the second half of the year, the last Kashn Karry conversion to a Sweetbay store was finished, thus completing the ambitious three-year remodeling and rebranding program within the planned timeframe. Additionally, Delhaize Belgium converted 20 Cash Fresh stores into Delhaize banners.
Our Groups operating margin remained stable at 4.9% through cost discipline and gross margin support allowing us to offset the ongoing investments in price competitiveness made by our operating companies. Our operating profit increased by 6.3% at identical exchange rates and decreased by 1.0% at actual exchange rates.
During 2007, we successfully refinanced a major part of our long-term debt. This lowered our borrowing cost and provides us greater financial flexibility.
Based on our performance, our strategy for the future and our confidence in the Companys continued success, the Board of Directors will propose to the Ordinary General Meeting in May 2008 to increase the dividend by 9.1% to EUR 1.44 (EUR 1.08 net of 25% Belgian withholding tax). We do this in spite of the strong depreciation of the U.S. dollar versus the euro in 2007 by more than 8%.
What Will 2008 Bring For Our Group?
We expect continued momentum in 2008. While the economy is far more uncertain than last year, it is also true that strong companies will be able to seize opportunities in such an environment. We are confident that Delhaize Group is well equipped in this regard. In 2008, we look forward to consolidating the benefits of many initiatives we started in the past years with respect to concept differentiation and renewal, assortment innovation and network expansion.
We will continue to emphasize the existing pillars of our strategy. These include pursuing dynamic top-line growth through existing and new stores, striving for improvement through continuous investments in people, systems and processes, and reinforcing our corporate citizenship.
Strong top-line growth is key in our industry. It will be even more important in the challenging economic environment we expect to face in 2008. Top-line growth can only be achieved through innovative concept and brand differentiation, vigilant price competitiveness, dynamic store and market renewals, and ambitious network expansion.
Concept differentiation and continuous improvements to our commercial formula in our local markets will remain the drivers of success. Development of the assortment in general and private label, convenience and health products in particular, will continue at full pace. Customer segmentation work will help us with assortment decisions and with brand expansion strategies.
The economic and competitive environment in which we operate demands that we continue to safeguard and reinforce our competitive price position in each of our markets. More than ever, we are prepared to offer our customers great prices combined with a wide product variety, outstanding service and a great shopping experience.
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Our Group plans to invest EUR 775 million in capital expenditures in 2008. Food Lion will renew four additional markets (Wilmington, North Carolina; Savannah, Georgia; and Richmond and Charlottesville, Virginia) during 2008. Delhaize Belgium will finalize the integration and conversion of the remaining Cash Fresh stores. In aggregate, our operating companies plan to remodel approximately 170 stores in 2008.
Increasing revenue within existing stores is just one axis of growth. We will also accelerate our store opening program. After stepping up network expansion at Hannaford and in Greece in the recent years, our Group will begin to significantly accelerate the rate of store openings at Food Lion. Food Lion plans to expand its network with 40 to 45 stores in 2008.
We expect to complete our recent acquisition of Plus Hellas in Greece during the first half of 2008, after which Alfa-Beta will begin the conversion and integration process. Beyond this excellent fill-in acquisition, we will continue to scan our markets for interesting opportunities, as we have done successfully in recent years.
Strong revenue growth must be coupled with world-class systems design and execution of our work at all levels.
In 2008, Delhaize Belgium will start to reap the benefits of the ACIS implementation as was the case at Hannaford, Food Lion and Sweetbay previously. Computer Assisted Ordering, already largely rolled out at Hannaford, will be introduced at Delhaize Belgium. All operating companies will benefit from the Groups expertise and approach to global procurement, private label introduction and associate development.
Ongoing cost savings and synergies will be key drivers in financing sales initiatives such as price reductions and innovation. As the year unfolds, Delhaize Belgium will see the first results of its ambitious plan Excel 2008-2010. The program integrates innovative initiatives for sales growth with ambitious initiatives to increase efficiency and reduce costs. Moreover, Hannaford will continue to work on its new concept store that combines a smaller footprint with the convenience of a large store assortment.
Our Group is committed to be a responsible corporate citizen, supporting the communities in which we operate. We are also focused on environmental activities that leverage our Groups capabilities and make a sustainable and impactful difference. A good example of this is Hannafords plan to build in 2008 the first platinum-certified LEED (Leadership in Energy and Environmental Design) supermarket in the world. We will continue to harvest the results of our investments in the nutritional information system, Guiding Stars. The system helps our customers make healthy choices in their grocery shopping. In Europe, Delhaize Belgium decided at the beginning of 2007 to switch completely to renewable energy as the power source for its company-operated stores, distribution centers and headquarters.
While we discuss our corporate citizenship in this annual report, we also plan to issue a specific report on our Groups efforts with regard to Corporate Responsibility in the second half of 2008.
We realize that our success depends on the enthusiasm, commitment and motivation of the 138,000 associates of our Group, and we are dedicated to build an attractive working environment, offering them opportunities for learning and career development as well as recognizing their accomplishments. We want to thank all our associates for their commitment and creativity that helped our Company grow stronger in 2007. We also want to thank our customers and you, our shareholders, for your trust and loyalty. With your continued support we can make Delhaize Group even more successful in 2008. We look forward to our continued collaboration and success in 2008 and beyond.
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AT THE END OF 2007, DELHAIZE GROUP OPERATED COMPANIES IN SEVEN COUNTRIES ON THREE CONTINENTS: THE UNITED STATES, EUROPE AND ASIA. FOR REPORTING PURPOSES, THESE COMPANIES ARE GROUPED INTO FOUR SEGMENTS: THE UNITED STATES, BELGIUM, GREECE AND THE EMERGING MARKETS.
The U.S. is the largest market for Delhaize Group. At the end of 2007, Delhaize Group operated 1,570 stores under different banners in the U.S. With 2007 revenues of USD 18.2 billion (EUR 13.3 billion), Delhaize U.S. accounted for 69.9% of revenues of the Group. Delhaize U.S. is the third largest supermarket operator by revenues on the east coast of the U.S.
Belgium is Delhaize Groups home market. At the end of 2007, Delhaize Group operated a multi-format network of 738 stores in Belgium, the Grand-Duchy of Luxembourg and Germany. These can be grouped in three categories: supermarkets, proximity stores and specialty stores. Delhaize Belgium also operates a home delivery service. In 2007, Delhaize Belgiums revenues of EUR 4.4 billion accounted for 23% of the Group total.
In Greece, Delhaize Group owns 61.3% of Alfa-Beta, the countrys second largest food retailer. Alfa-Beta operates a network of 159 food stores under different banners, realizing EUR 1.2 billion in revenues (6.2% of the Group total).
Delhaize Groups Emerging Markets include operations in Romania and Indonesia (Delhaize Group holds a 51% investment in Lion Super Indo). In its 78 stores in these countries, Delhaize Group generated in 2007 revenues of EUR 165.5 million (0.9% of the Group total).
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DELHAIZE GROUP WANTS TO OPERATE THE CUSTOMERS STORE OF CHOICE. OUR STRATEGY TO ACCOMPLISH THIS IS TO DEVELOP BRAND LEADERSHIP WITH A UNIQUELY ATTRACTIVE STORE CONCEPT OFFERING, A LOCALLY ADAPTED FOOD ASSORTMENT AND A GREAT IN-STORE SHOPPING EXPERIENCE.
Across the seven countries in which we operate, our stores offer customers a broad variety of food products, from basic items to refined gourmet ingredients or prepared meals. In each operating company, there is a passion and commitment to presenting an assortment that meets our customers needs.
In 2007, Food Lion modified the assortment in 200 stores based on an in-depth study of customer segmentation as well as information related to store clusters. This resulted in cluster-specific basic product assortments for produce and meat and an assortment variety adapted to the specific customer characteristics of the stores.
Fresh products are a key category throughout the Group. In 2007, Food Lion reduced by half the delivery time for fresh products to the stores from three of its distribution centers, thus increasing the quality of its products in-store. In Florida, Sweetbay completed its conversion from Kashn Karry with a strong focus on fresh products and with special attention for the tastes of the large Hispanic community in the Florida market.
Delhaize Belgium renewed a large number of fish departments introducing open workshops. Alfa-Beta continued the roll-out of the Self-Traiteur concept, an in-store preparation department for deli and meal solutions. Mega Image increased the number of offerings in the fruit and vegetable department and also introduced a three-tier private brand program in meat. Our Romanian operations worked closely together with Alfa-Beta on the development of the produce assortment. Super Indo has introduced a special Chinese product assortment, launched a range of fresh organic vegetables and introduced special bakery systems in the stores to increase freshness.
In the U.S., our natural and organic line, Natures Place, was further expanded. At Hannaford, this department now boasts some 3,500 products representing 10% of the assortment in a typical store. Delhaize Belgium enlarged its Bio assortment to 675 items at year-end. One third of all organic products sold in Belgium are sold at a Delhaize store. At Alfa-Beta, the organic range was extended to some 300 items.
In all of our markets, our customers are increasingly looking for finer foods although they have less time to devote to cooking. Our U.S. operating companies are introducing chilled prepared meals starting in early 2008. Hannaford recently introduced Cooking Show to Go, offering ready to cook pre-sliced ingredients with handy instructions.
Prepared meals represent a growing category, particularly at Delhaize Belgium and Alfa-Beta. Delhaize Belgium sold almost 23 million prepared meals in 2007. In Greece, the assortment expanded to 435 items, and approximately 6.5 million prepared meals were sold in 2007, an increase of more than 20% compared to 2006.
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Delhaize Group strives to turn every shopping trip into a pleasant and efficient experience. To that end, our operating companies continuously find innovative ways to speed up navigation through the stores and checkouts. They invest in creating in-store excitement: attractive décors, tasting counters and information kiosks.
In 2007, Delhaize Belgium introduced several new concepts aimed at offering customers an at-a-glance overview of quick lunch opportunities. Food Lion continued to fine-tune its Bloom and Bottom Dollar concepts. Blooms BreezeTM technology helps customers to easily find products, related recipes and nutritional information. Although a deep discount store, Bottom Dollar welcomes customers in a light-hearted, colorful environment.
Hannaford started a research and development project at one of its new stores at the end of 2007. The purpose of the project is to radically change the in-store processes that characterize our industry while improving the customer experience.
Health and Food Safety
Offering customers safe products is a commitment of Delhaize Group and its operating companies. Every year, we reinforce quality and safety guarantees. In 2007, Alfa-Beta launched a new initiative to collaborate more closely with suppliers on food safety. Our operating companies worked on establishing crisis communication scenarios and operational instructions as part of dealing with food safety issues or potential pandemic outbreaks, such as avian flu.
Hannafords nutritional information system Guiding Stars celebrated its first birthday with excellent customer reviews and results that show the system increases customer loyalty. Within nearly one year of its introduction, the customers awareness of the system has reached a high 81% and over 40% of customers confirm they regularly use it. The result is a visible shift in revenues towards starred products, those with higher nutritional value. Sweetbay introduced the system in 2007.
Hannaford continued the roll-out of in-store pharmacies. More than 75% of the Hannaford stores and 70% of the Sweetbay stores now have one. At the end of the year, pharmacy sales represented close to 10% of Hannaford revenues. Pharmacy remains one of the fastest growing categories at Hannaford and Sweetbay.
Delhaize Belgium introduced the concept of The Healthy Stroll, where certified dieticians advise the customer on the nutritional value of products in the stores. Delhaize Belgium also installed Health Check devices to offer customers an opportunity to do a quick check of their health.
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STRONG REVENUE DYNAMICS DEPEND ON A THOROUGH UNDERSTANDING OF PRICE REALITY AND PRICE PERCEPTION. THEREFORE, DELHAIZE GROUPS OPERATING COMPANIES GO TO MARKET WITH A CLEAR AND COMPETITIVE PRICE POSITIONING.
In 2007, Food Lion and Hannaford started the roll-out of a new retail pricing and promotion system that will be completed for all product categories by the end of 2008. Early results for these categories are positive for both sales and margin. In the second half of the year, Hannaford focused on aggressive price and marketing investments to reinforce its Everyday Low Price position throughout the chain. In Florida, Sweetbay rolled out an intensive program to support the brands price positioning. Since the summer months, the company invested heavily in pricing activities such as the Locked in Low Prices and Hot Spot initiatives.
In Europe and Indonesia, Delhaize Groups operating companies offer 365, a private brand line of basic products at prices on the same level as the hard discounters in their markets while maintaining Delhaize Groups quality standards. The 365 line was significantly extended in 2007. At the end of the year, there were nearly 500 such products in Belgium and approximately 370 in Greece. In Romania, the 365 range nearly doubled to 260 items at the end of 2007. Super Indo continued the expansion of its own Super Indo 365 line, which almost tripled in size and at year-end boasts some 140 different products.
In 2007, Delhaize Belgium focused heavily on price perception and price reality and responded to the introduction of national brands at hard discounters by unambiguously lowering its prices on these products to match the competition. Throughout the year, Delhaize Belgium consistently used the results of its certified price comparison methodology to monitor and adapt prices. At the beginning of 2008, Delhaize Belgium further lowered the prices of some 600 basic products.
In 2007, Alfa-Beta lowered prices on 1,500 national brand products, bringing the number of price reductions to more than 7,500 products in the period 2004-2007. Mega Image ran several multi-buy promotion programs to support its price position.
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NETWORK RENEWAL AND EXPANSION
IN ADDITION TO GROWING THE TOP LINE THROUGH SALES-BUILDING INITIATIVES IN EXISTING STORES, DELHAIZE GROUP FOCUSES ON ACCELERATING ITS STORE REMODELING AND NETWORK EXPANSION PROGRAMS.
Since 2003, Food Lion has taken a market based approach to its store remodels. Food Lion each year focuses the majority of its remodeling efforts on a limited number of specific geographic markets. In 2007, two markets (comprised of over 100 stores in total) were totally renewed: Myrtle Beach, South Carolina and Norfolk, Virginia. The Norfolk renewals included Food Lion, Bloom and Bottom Dollar brands. All of the stores now offer greatly enhanced fresh departments, improved checkout and customer service areas, and new signage, graphics and décor.
The impact of these renewals on revenues has been significant: in the first year after the renewal, revenues increase on average more than 5% and continue to grow in years two and three. For 2008, Food Lion has selected four new markets for renewal: Charlottesville and Richmond, Virginia; Savannah, Georgia; and Wilmington, North Carolina.
In Florida, Sweetbay completed its conversions from the Kash n Karry brand, with 31 stores converted in 2007. Throughout the conversion process, Sweetbay has continued to reduce the store investments while increasing the effectiveness of the changes. Customers reacted positively to the conversions and most of the converted stores show major sales uplifts.
Also in 2007, Delhaize Belgium continued the conversion of 20 Cash Fresh stores, acquired in 2005, to Delhaize banners. The remaining Cash Fresh stores will be converted by the end of the third quarter of 2008.
A portion of Alfa-Betas impressive revenue growth over the past years is the result of the companys store renewal program. Alfa-Beta stores are increasingly recognized for their state-of-the-art design and store layout and are considered to be some of the most modern facilities in Greece.
In 2007, Delhaize Group added 69 stores to its network. Hannaford opened seven stores and Food Lion added 15 stores. In Greece, Alfa-Beta added 11 stores in 2007 and in early 2008 announced the acquisition of 33 Plus Hellas stores.
Delhaize Belgium added 27 stores, including 7 company-operated supermarkets and 9 Tom & Co pet supply stores. Delhaize Belgium continued to test the German market, with the opening of a Delhaize supermarket in Köln, bringing the total to four stores in Germany. At the end of 2007, Delhaize Belgium ventured out into the north of France with the opening of a Tom & Co pet supply store.
In Indonesia, Delhaize Group opened 6 new stores and ended 2007 with a network of 56 stores. Mega Image in Romania continued its expansion with 4 stores in 2007 and at year-end operated 22 stores.
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ON THE GO BISTRO
The taste of the consumer is becoming increasingly sophisticated yet most people lack the time to devote to cooking. Over the past decade, Delhaize Belgium has played a pioneering role in Europe in the field of home meal replacement (HMR). Together with a long standing Belgian partner, who has set up a production facility in Pennsylvania, Delhaize Group in the U.S. has developed an entire range of chilled prepared meals of restaurant quality that will be rolled out in the stores throughout 2008 under the On the Go Bistro label.
U.S. PRIVATE BRAND
Private brands continue to represent a significant opportunity in the U.S. In 2007, private brand products at our U.S operating companies Food Lion, Hannaford and Sweetbay represented approximately 17%, 18% and 16% of revenues respectively, whereas the best-in-class private brand penetration in the U.S. is 23% to 25%. To seize this growth opportunity, a common three-tier private brand program was developed for all U.S. operating companies. The program includes a premium brand called Taste of Inspirations, a house brand that carries the banner name and a value line called Smart Option.
In January 2008, Alfa-Beta entered into an agreement to acquire 33 Plus Hellas stores. This transaction represents a great fill-in opportunity since many stores are situated in the North of Greece where Alfa-Beta has only a limited presence. The acquisition also includes a large and brand new distribution center in the north of Greece and a significant number of stores under development that will help to fuel Alfa-Betas further growth. The Plus Hellas stores will be converted to Alfa-Beta banners during a period of approximately 12 months following closing of the transaction.
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TOOLS, SYSTEMS AND PROCESSES
RETAIL IS A HIGH-VOLUME INDUSTRY: MULTIPLE DISTRIBUTION CENTERS TO MANAGE, THOUSANDS OF STORES TO OPERATE, TENS OF THOUSANDS OF PRODUCTS TO HANDLE AND MILLIONS OF TRANSACTIONS TO BE PROCESSED PER DAY. THE RETAIL BUSINESS SHOWS LITTLE TOLERANCE FOR BAD EXECUTION BUT AMPLY REWARDS THOSE THAT MASTER THE ESSENTIAL SKILL: GETTING THE BASICS RIGHT EVERY DAY.
The right tools, systems and processes are key to supporting excellent execution. Associate development and training optimizes the use of tools and systems. Training programs cover a multitude of topics ranging from technical areas to customer interaction and are delivered using a variety of methods: individual and group sessions, computer-based training programs and internships.
In 2007, Food Lion continued to act on the findings of its customer segmentation analysis to better target the consumer-specific characteristics of its stores. It started to roll out new pricing and store planogram software as part of the clustering and segmentation work. By the end of 2007, a number of categories were revised using the new planogram software, resulting in a positive effect on revenues. The remainder of the categories will be addressed throughout 2008.
In the U.S., our Bloom stores continued to fine-tune the concept of service kiosks spread throughout the store. At the start, these stand-alone consoles each had a different function: from locating a product in the store to selecting wine or offering new recipes. Bloom has consolidated all of these functionalities in one technology that makes the customers shopping trip a breeze.
Delhaize Group uses loyalty programs to offer customers specific discounts and promotions. The use of loyalty cards enables our Group to better understand consumer needs and adapt assortments, store concepts and formats accordingly. Food Lions customer segmentation work is in large part based on the data collected from loyalty cards. Delhaize Group has more than 15 million active cardholders at Food Lion, Delhaize Belgium and Alfa-Beta.
At Delhaize Belgium, self-scanning - the use of hand-held terminals by the customer during the store visitis now available at more than one third of Delhaize Belgiums company-operated supermarkets. During 2007, Delhaize Belgium continued to learn from its participation in the Store of the Future project of Living Tomorrow.
An important part of the in-store customer shopping experience is related to the efficiency of the checkout process. All of our operating companies work on making this process more efficient and more agreeable for the customers. Delhaize Belgium tested a next-in-line checkout concept in one of its recent openings and implemented self-checkout systems. Alfa-Beta and Mega Image invested in new checkout registers, as did Sweetbay.
At Hannaford, a new concept store includes a number of check-out innovations increasing throughput. The store features an option for the consumer to leave his groceries for check-out and bagging while he/she retrieves his/her car.
Item lifecycle data management continued to be a major area of investment for all our operating companies in 2007. The objective is to synchronize all items and movement data in a standardized master and event database. This enables efficient integrated processes through data synchronization, workflow management and vendor portals. Item lifecycle management is an essential part of the know-how Food Lion has developed.
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Warehouse management systems are at the heart of efficient product handling. All of our U.S. distribution centers feature voice picking technology. The Delhaize Belgium dry grocery warehouse now also fully operates on voice picking technology.
Food Lion continued the roll out of the Customer Driven Replenishment (CDR) initiative to three additional distribution centers, bringing the total in operation to four. The application of CDR enables Food Lion to reduce significantly the order-to-shelf cycle and out-of-stocks during peak hours and on the highest volume shopping days. As a result, freshness and quality, especially in fresh produce, have increased significantly.
At Delhaize Belgium, construction work is underway for the next phase of the new fresh products warehouse that will boast an automated warehouse system. Also, new techniques are used to optimize transportation sequencing and increase truck loading rates by organizing mixed transports from our fresh warehouses to the stores.
At Alfa-Beta, the capacity of the dry grocery distribution center was increased and the use of backhauling optimized. Mega Image moved to a new distribution facility for food and non-food products that uses radio frequency technology and store sequencing for order preparation, thus improving store productivity. Super Indo opened a new distribution center to serve the Jakarta area. Night shipments will be organized to cope with the difficult Jakarta traffic.
Capturing margin and inventory movements is a critical success factor in our business. That is why our Group has invested significantly in its item-based inventory system ACIS. This system, initially developed by Hannaford, has now been implemented at Food Lion, Sweetbay and Delhaize Belgium. The system has significantly increased our understanding of margin evolution and highlighted important areas for improvement in operations.
Delhaize Belgium finalized the hardware roll-out of ACIS in 2006 and throughout 2007 continued to finetune its use of the reports and data generated by ACIS. Thousands of store associates were trained in interpreting these reports and educated on translating information into concrete action plans. A number of underperforming products have already been taken out of the assortment.
In 2008, Delhaize Belgium expects to see the increasing positive effect of the use of ACIS for better inventory management and margin improvement. Harveys, our operating company in South Georgia in the U.S., implemented ACIS in 2007. Mega Image will implement ACIS in 2008.
Because of its level of detail, ACIS provides us with a treasure of data on which other systems are built. Hannaford rolled out Computer Assisted Ordering (CAO) in center store categories across all its stores. CAO uses ACIS data to determine optimal re-ordering quantities and timing. Early results show that out-of-stocks and inventory losses have decreased significantly, and revenues have increased as a result of CAO. Delhaize Belgium will implement CAO in its company-operated stores in 2008, and the expectations are high: a 2007 pilot showed a 50% decrease in store delivery time.
Effective support systems need to ensure proper management of our operations. Substantial investments have been made in the renewal of our financial systems. In 2007, SAP financial software was installed at Alfa-Beta and Mega Images SAP environment was upgraded. Delhaize Belgium will implement an upgrade in 2009.
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GROUP SYNERGIES AND EXCHANGE OF BEST PRACTICES
OUR STRENGTH AS A GROUP STEMS FROM THE CONTINUOUS EXCHANGE OF IDEAS AND THE CREATIVITY OF THE LOCAL COMPANIES SUPPORTED BY THE GLOBAL SCALE OF THE GROUP. SHARING EXPERIENCES, LEARNING AND LEVERAGING OUR SIZE ARE FUNDAMENTAL TO OUR SUCCESS.
To support the creation of Group synergies and the exchange of best practices, Delhaize Group regularly offers international training and development opportunities to its managers. In 2007, the Group continued its series of global sharing sessions, holding ten such events. These summits bring associates together online to share experiences on specific topics that are important to our business. The Leadership College initiative moved into its second year in 2007. Each year, a small group of senior high-potential executives from different operating units and functions are chosen to work together on a significant business issue in a team environment that is supported by executive management and development professionals.
Three years ago, Delhaize Group launched the Skill of the Year concept. Since then, various domains of expertise have been covered including a finance training program aimed at strengthening the financial knowledge of the Groups corporate and operating company leadership. In 2007, the central theme was Executional Excellence, building organizational capability to facilitate stronger execution in retail and support functions. Several sessions were held around the world to reach the management of the operating companies.
Building sales is the heart of our business and the subject of many of our cross-banner initiatives. Delhaize Belgium, with a decade of experience in chilled prepared meals, supported Delhaizes U.S. operating companies in their development of a range of restaurant-quality prepared meals to be introduced in 2008. The U.S. operating companies also benefited from Delhaize Belgiums leadership position in the area of private brand development. Hannaford and Food Lion supported Sweetbay during the conversion from Kash n Karry.
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RIGOROUS COST MANAGEMENT
RUNNING A MORE EFFICIENT AND EFFECTIVE OPERATION ALLOWS FOR COST SAVINGS TO BE USED TO SUPPORT TOP-LINE GROWTH. THIS, IN TURN, WILL RESULT IN BETTER ABSORPTION OF THE FIXED COST BASE AND WILL FREE UP MORE RESOURCES TO FUEL THE COMPANYS DEVELOPMENT. THUS IS CREATED A VIRTUOUS CYCLE OF GROWTH.
In 2007, Delhaize Belgium completely and thoroughly reviewed a number of processes, some basic, others more complicated, at its Brussels headquarters. This approach followed the example of Food Lion, Hannaford and Sweetbay projects in the past. The Top 4 recommendations coming out of this review have an annual savings potential of more than EUR 10 million and are included in Delhaize Belgiums plan Excel 2008-2010.
Important cost saving opportunities continue to lie in energy use, particularly in light of recent high energy prices. Through its efforts, Food Lion, since 2000, has reduced energy consumption by more than 2.4 trillion BTUs (approximately 730 million kWh), the energy equivalent of powering 450 Food Lion stores, or approximately one third of the chain. Delhaize Belgium also continued its investments in energy conservation: during 2007 all open freezer displays in the stores were equipped with covers in order to decrease energy consumption. During 2007, Delhaize Belgium managed to reduce its energy consumption by 2%.
Food Lion and Hannaford assisted Sweetbay with a diagnostic review called Speedwork, aimed at streamlining Sweetbays operations and cutting costs. Since the launch of Sweetbay and the conversions from Kash n Karry to this new brand, capital expenditures as well as conversion operating costs have decreased.
Alfa-Beta continued its smart retailing projects in its stores throughout 2007: a new labor scheduling tool was introduced that resulted in productivity increases, changes were made to the operating procedures in the bake-off and dairy departments, and overall store inventory levels decreased.
Mega Image and Lion Super Indo took several initiatives to increase productivity in 2007, both in their stores and in logistics. Mega Image introduced electronic ordering systems in the stores and reduced the number of direct store deliveries to increase store efficiency. Mega Image introduced new, more efficient concepts in store shelving and presentation tables in close collaboration with Alfa-Beta.
Shelf-ready packaging increases store productivity. Bottom Dollar makes extensive use of this concept. Delhaize Belgium started implementation of this technique as did Super Indo in 2007.
In addition to efficiency increases and expense control, Delhaize Group also takes a disciplined approach to its asset and portfolio management. In 2007, the Groups U.S. operations closed 12 underperforming stores in order to improve the overall performance of the store network. In 2007, the Group sold its non-strategic health and beauty specialty business Di. In 2007, Delhaize Group also completed the sale transaction of its Czech business, Delvita.
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COST SAVINGS AT DELHAIZE BELGIUM
Delhaize Belgium created a project team of associates and managers to review the processes and work habits of departments other than their own. Employing 125 man-weeks of effort, they were taken out of their daily routines and immersed in the workflows of their colleagues domains. A Food Lion manager who had worked on similar projects at Food Lion and Hannaford joined the team. Their assignment was to take a third partys view of the organization of central operations and support services and to identify redundant activities or department overlaps. The result was an impressive list of more than 50 projects that will rationalize working methods, increase efficiency and reduce costs.
HANNAFORD CONCEPT STORE
A small team at Hannaford was sent on a mission to develop a brand new store on a smaller footprint but at the same time honoring the Hannaford brand. The project required significant creativity. The result was a concept store that opened at the end of 2007. The store features, for example, unique developments in the check-out area to enhance customer convenience and combines work stations in fresh food departments for efficiency. The concept store manages to fit a large assortment in a smaller footprint. This research and development project will continue in 2008, and gradually successful elements will be included in future store design.
EUROPEAN IT CENTER
In 2007, a European IT Shared Service Center was set up to serve Delhaize Belgium, Alfa-Beta and Mega Image. The common center is virtual since it is composed of IT specialists located in the three European operating companies who serve all of the European operations. For example, a network specialist located in Greece will also assist the Romanian or Belgian operating companies. This shared service approach is not only cost efficient, it also facilitates business process convergence.
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24 DELHAIZE GROUP / ANNUAL REPORT 2007
DELHAIZE GROUP / ANNUAL REPORT 2007 25
DELHAIZE GROUPS FIRST OBJECTIVE IN DEVELOPING ITS ASSORTMENT IS TO OFFER A BROAD VARIETY OF HIGH QUALITY FOOD PRODUCTS AT COMPETITIVE PRICES. IN ADDITION, DELHAIZE GROUP INCREASINGLY CONSIDERS CRITERIA SUCH AS FOOD SAFETY, NUTRITIONAL COMPOSITION, ENVIRONMENTAL IMPACT, LABOR CONDITIONS AND LOCAL SOURCING WHEN DEVELOPING PRODUCT ASSORTMENTS.
Safety and Sourcing
Our first concern about food products is food safety. Close adherence to local and international standards, such as the Safe Quality Food (SQF) program recognized by the Global Food Safety Initiative, and engagement with authorities and suppliers, strong focus on a tight supply chain and strict controls on food handling allow us to ensure the best products every day for our customers. Supplementing the numerous local initiatives by our operating companies, Delhaize Group in 2007 distributed over 92,000 copies of a brochure to educate associates who handle food products covering personal hygiene, temperature management, cleaning and disinfection, cross contamination risk and shelf life management.
More and more customers want food produced without the use of chemicals such as pesticides and fertilizers. Delhaize Belgium is a longstanding pioneer in the area of organic products: approximately one third of organic products in Belgium are sold at a Delhaize store. In 2007, our U.S. operating companies continued the roll-out of organic and natural food sections, called Natures Place as first developed by Hannaford. In 2007, Hannaford became the only large supermarket operator in the Northeast of the U.S. to obtain the Organic Retailer Certification by Quality Assurance International, an independent, third party organization.
To support local industry and to limit the environmental impact of its business, Delhaize Group increasingly sources products from local producers. In 500 Food Lion stores, customers could choose and sample a wide variety of North Carolina products. In 2007, Hannaford had more than 220 local growers supplying its stores.
Our Belgian operations have a long-standing partnership with Max Havelaar, one of the most important organizers of fair-trade that also awards quality labels to fair-trade products. In 2007, Delhaize Belgium organized a Week of Fair Trade to further promote this product range.
Another recent element of product innovation is nutritional information to support our customers in making better informed nutritional decisions. Hannaford became a U.S. supermarket industry pioneer in September 2006 when it launched its nutritional information system Guiding Stars. The reaction to this first all-encompassing nutritional information program for U.S. consumers has been overwhelmingly positive, both by consumers and by industry observers.
Guiding Stars ranks more than 25,000 food items according to their nutritional value using a good, better and best ranking. The program rates a product one, two or three stars based on the points it earns: food is credited for the presence of vitamins, minerals, fiber and whole grains but debited for trans or saturated fats, cholesterol, added sugars or sodium. More than one year after the launch, the awareness rate of the program among Hannaford customers exceeds 80%. In addition, purchase data reflects a noticeable shift in consumer patterns toward the selection of foods with higher nutritional ratings.
Sweetbay has also introduced Guiding Stars, and Food Lion will do so in 2008. The Group intends to license and market the Guiding Stars program to supermarket chains and others who are interested in helping people make nutritious food choices.
Delhaize Belgium has opted voluntarily to follow the nutritional information guidelines set out by the CIAA, the European federation of food and drink industries. These rules outline requirements with respect to product labeling. Delhaize Belgium plans to adapt its entire private brand range to these guidelines by 2010.
In private label products sold in 2007, Delhaize Belgium made recipe changes that reduced fat by more than 70 tons and salt by 9 tons and increased the amount of vegetables and fruits in fresh ready-meals by 60 tons. It also launched the new Diet-in-a-Box assortment of fresh and nutritious ready-meals for strict weight control.
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DELHAIZE GROUP WANTS TO ATTRACT AND RETAIN A DIVERSE BASE OF MOTIVATED AND SKILLED ASSOCIATES, DEVELOP AND RECOGNIZE THEM ACCORDINGLY AND OFFER THEM AN ATTRACTIVE WORKPLACE AND COMPENSATION. DELHAIZE GROUPS OPERATING COMPANIES ALSO ACTIVELY SUPPORT THE COMMUNITIES IN WHICH THEY OPERATE SO AS TO BE AN INTEGRAL PART OF THEIR SOCIAL NETWORK.
Through an annual cycle of performance and development dialogues, Delhaize Group identifies associates development needs and career opportunities. Many of our positions are filled through internal promotion even though the Group also recruits externally to bring in additional skills, perspectives and experience. In 2007, approximately 13,400 associates were promoted.
The Company aims to create a learning environment promoting our associates innovative mindset. Delhaize Group associates engaged in more than 1.1 million hours of training during 2007. Our training programs cover a wide range of topics and can take different forms: individual and collective training sessions, computer-based training programs and internships.
In each of our markets, our Group offers attractive compensation packages based on an associates position, skill set and experience while taking into account local compensation standards. In addition, our Group fosters recognition programs for individual and collective outstanding performance.
Delhaize Group takes great care in making sure that its associates are aligned with the strategic choices the Company makes. On a regular basis, associates across departments in the operating companies are updated on strategy and our position in the market place.
Delhaize Group values diversity and encourages its operating companies to take initiatives in this area. In the U.S., Food Lions Office of Diversity and Inclusion has associates Advisory Councils up to the CEO level to help develop strategy and make recommendations on how to encourage an inclusive organization that prizes diversity.
Delhaize Group wants to be a safe and healthy workplace. As in prior years, training programs emphasize occupational safety training and healthy lifestyles. In 2007, Hannaford was the only retailer in the U.S. to receive platinum-level honors in the Best Employers for Healthy Lifestyles Award. The Award recognizes organizations that apply creative solutions to improve the health of employees. Delhaize Belgium invests considerable effort disseminating nutritional information, communicating healthy diet suggestions and promoting physical activity for its associates.
In Romania, Mega Image was nominated as one of the 100 best companies to work for, next to large organizations like banks, international audit and consultancy firms and pharmaceutical companies.
Delhaize Group actively supports the communities of which it is a part. In 2007, our Group participated in projects to improve education, reduce hunger and poverty, encourage healthy eating habits and lifestyles and provide healthcare support.
In 2007, Delhaize Groups operating companies donated approximately EUR 6 million in cash to various organizations. In addition, EUR 4.3 million in cash and approximately 16,000 tons of products were donated with the help of customers, associates and suppliers.
Each of our operating companies has a long-term partnership with a local food bank. Food Lion is associated with several non-profit organizations that provide grants to schools and the Lions Pride Foundation helps individuals and families with financial hardships. Food Lion also invests in a variety of school programs that support reading, food safety education and career training. Hannaford Helps Schools is a program that encourages substantial consumer support for local education.
During 2007, Food Lion raised more than USD 3.7 million for the Childrens Miracle Network, a non-profit organization dedicated to helping children by raising funds and awareness for 170 childrens hospitals. Hannaford sponsored more than 100 Food Play shows, an Emmy Award-winning live theater tour that motivates elementary school children to improve their eating habits.
Delhaize Belgium has set up an initiative where associates can get financial aid for charity projects with which they are actively involved. Delhaize Belgium reaches out to the local community with special attention for minorities and children from low income families. Alfa-Beta participates in the construction of a number of houses for individuals with special needs and contributed to the funding of construction work at the Childrens Psychiatric Hospital of Attica, Greece. Mega Image supports the Romanian Special Olympics Team. In Indonesia, Lion Super Indo participates in a book donation program for school children and supported several disaster relief programs.
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DELHAIZE GROUP STRIVES TO LIMIT ITS ECOLOGICAL FOOTPRINT. WIDESPREAD ATTENTION IS PAID TO REDUCING ENERGY CONSUMPTION, INTRODUCING INNOVATIVE PACKAGING SOLUTIONS AND ELIMINATING WASTE.
The food retail industry is a significant consumer of energy for lighting, cooling, heating and transportation. All of the Delhaize Group operating companies are involved in various projects to conserve energy usage.
In 2007, the U.S. Environmental Protection Agency (EPA) recognized Food Lion with an Energy Star Partner Award for the sixth time for its outstanding leadership in setting ambitious goals and employing innovative approaches in reducing energy consumption. Buildings that earn the Energy Star label, on average consume 35% less energy than a typical building and also release 35% less carbon dioxide. Food Lion continued to upgrade the energy efficiency of its stores, with more than half of its locations awarded the Energy Star label from the EPA. Hannaford entered the Energy Star program in 2006 and already a tenth of its stores have received the Energy Star label. Of the 1,300 Energy Star-labeled stores in the U.S., more than 700 are Delhaize Group stores.
Hannaford has announced that in 2008 it will begin construction on its first LEED store. LEED stands for Leadership in Energy and Environmental Design. The store is designed to meet the platinum level certification of the U.S. Green Building Council, making it the first supermarket in the world with that designation. The store is expected to be a research laboratory for the whole Group to test innovations supporting lower energy usage, sustainable construction technologies and reduced waste and water consumption.
Through a variety of initiatives, Delhaize Belgium limits its energy use: open freezers were covered with a lid resulting in 30% energy savings, some new stores are equipped with photovoltaic solar panels, and heat from refrigeration units is reclaimed. In 2007, Delhaize became Belgiums largest user of renewable energy by shifting to green energy for all company-operated stores, distribution centers and its support office. Delhaize Belgium also committed that by the end of 2010, all of its operations will switch to the use of energy saving lamps. Long-life, energy-saving light bulbs will replace standard incandescent light bulbs in Delhaize Belgiums assortment.
Alfa-Beta developed a new lighting control system to reduce store energy consumption. Our Greek operations have also introduced the use of solar energy for power generation in some stores and will further explore this renewable energy source for their warehouses and support offices.
In 2007, Delhaize Belgium put an end to the distribution of disposable plastic carrier bags at check-out. Instead, it promoted various forms of reusable bags and crates, thus reducing plastic waste by more than 700 tons. Delhaize Belgium received the Bioplastics Award in recognition of its leadership in replacing petroleum-based plastic trays and packaging with bio-degradable alternatives made from non-fossil materials (such as corn and potatoes). Since their introduction, some 20 million items have been used, an equivalent of 180 tons of traditional plastic.
Alfa-Beta and Super Indo started similar initiatives to develop reusable bags. Hannaford started to introduce Clynk, a drop and go system for returnable cans and bottles. At the end of 2007, Alfa-Beta had installed recycling centers in a fifth of its stores.
Corporate Responsibility Report
In the second half of 2008, Delhaize Group will issue its first stand-alone Corporate Responsibility report. This document will contain a detailed overview of Delhaize Groups sustainability performance and report on the Groups policies, realizations, challenges and objectives centered around three topics: our people, our planet and our products.
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PRINCESS ELISABETH ANTARCTIC STATION
Delhaize Group is a sponsor of the Princess Elisabeth Antarctic Station project of the International Polar Foundation. This new research station, commissioned by the Belgian government, strives to obtain a better understanding of the effects of climate change and global warming. The Princess Elisabeth will be the first zero emission polar station and be entirely run on renewable energy and recycle all waste.
CHAMPION OF DIVERSITY AWARD
Supermarket News, a leading U.S. retail magazine, granted Delhaize Group the 2008 annual Champion of Diversity award. Delhaize Group was celebrated for integrating diversity into its core operating philosophy and using it as a competitive strength across all continents to enhance the shopping experience. Supermarket News highlighted furthermore that Delhaize Group nurtures its diverse workforce through a policy of inclusion and maximizing the associates potential through training and creating an exciting workplace.
Food Lion and Hannaford are founding members of the U.S. Environmental Protection Agencys Greenchill partnership. The Greenchill partners pledge to go above and beyond regulatory requirements to protect the ozone layer and reduce greenhouse gas emissions. As leaders in the Greenchill partnership, these Delhaize Group companies will require all of their new and remodeled stores to be ozone friendly and to participate in industry and government research initiatives to assess the performance of advanced refrigeration technologies.
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DELHAIZE GROUP / ANNUAL REPORT 2007 31
In 2007, Delhaize Group recorded revenues of EUR 19.0 billion. Compared to 2006, this represents a 1.4% decrease due to the weakening of the U.S. dollar by 8.4% against the euro. At identical exchange rates, revenues would have increased by 4.9%. Organic revenue growth was 5.2%, the fastest rate of organic growth in seven years.
Delhaize Group ended 2007 with a sales network of 2,545 stores, taking into account a net addition of 69 stores to continuing operations, the divestiture of 97 Delvita stores in the Czech Republic and 132 Di stores in Belgium in 2007. Detailed information on the store network evolution per country can be found on p. 106 of this report.
The U.S. operations generated 69.9% of revenues, Belgium accounted for 23.0% and Greece and the Emerging Markets (Romania and Indonesia) posted 6.2% and 0.9% of Group revenues, respectively.
Delhaize Groups operations in the United States realized revenues of USD 18.2 billion (EUR 13.3 billion), 5.1% higher than in 2006, in local currency. Revenue growth was supported by outstanding comparable store sales growth of 3.8% and more store openings, particularly at Food Lion. Comparable store sales growth in the U.S. was driven by dynamic revenue growth at all three operating companies. Food Lion continued to benefit from its market renewal program and customer segmentation work. Hannaford posted strong revenue growth, supported by its competitive pricing and innovative strategy. Following the completion of the conversion work from Kash n Karry to Sweetbay at the end of August 2007 and price investments that started during the summer months, Sweetbays revenue growth was strong in most of the stores of the network in the second half of 2007.
Revenues at Delhaize Belgium amounted to EUR 4.4 billion in 2007, a 1.7% increase over 2006. Excluding the divestiture of the beauty and body care business Di, revenues would have grown by 2.9% in 2007. Comparable store sales growth amounted to 1.6%. Market share declined by 36 basis points to 25.7% (source: AC Nielsen) due to many competitive openings, particularly of discount stores, and the temporarily disruptive impact of the conversion of Cash Fresh stores to Delhaize banners.
In 2007, revenues in Greece grew by 13.9% to EUR 1.2 billion due to high comparable store sales growth and many new store openings. Revenues of the Emerging Markets (Romania and Indonesia) of Delhaize Group increased by 20.9% in 2007 to EUR 165.5 million due to the continued good revenue performance in both countries. This amount does not include the results of Delvita, which have been reclassified to discontinued operations since 2006 until its divestiture at the end of May 2007.
Gross margin increased to 25.3% of revenues (25.2% in 2006) due to higher gross margin in the U.S. and Greece. In the U.S., gross margin increased by 20 basis points to 27.4% due to an improvement in the sales mix at Food Lion, primarily through a higher mix in fresh sales and more private label sales, margin optimization at Food Lion and excellent inventory results at Hannaford. These improvements more than offset price investments at Hannaford and Sweetbay. At Delhaize Belgium, gross margin declined by 11 basis points to 19.7% of revenues due to price investments and the conversion of company-operated Cash Fresh stores to affiliated stores.
Other operating income increased by 30.2% to EUR 107.9 million mainly due to a USD 11.3 million gain on the disposal of idle real estate property at Hannaford, EUR 7.9 million gains on the sales of Cash Fresh stores to independent owners and higher recycling income that can be attributed mainly to an increase in the price of recycled paper.
Selling, general and administrative expenses (SG&A) increased 8 basis points to 20.7% of revenues. In the U.S., SG&A as a percentage of revenues increased by 16 basis points to 22.0% of revenues due to increased payroll expenses related primarily to the favorable USD 19.5 million retirement
In its financial communication, Delhaize Group uses certain measures that have no definition under IFRS or other generally accepted accounting standards (non-GAAP measures). Delhaize Group does not represent these measures as alternative measures to net profit or other financial measures determined in accordance with IFRS. These measures as reported by Delhaize Group might differ from similarly titled measures by other companies. We believe that these measures are important indicators for our business and are widely used by investors, analysts and other parties. A reconciliation of these measures to IFRS measures can be found in the chapter Supplementary Information of this report (p. 106). A definition of non-GAAP measures and ratios composed of non-GAAP measures can be found in the glossary on p. 116. The non-GAAP measures provided in this report have not been audited by the statutory auditor.
32 DELHAIZE GROUP / ANNUAL REPORT 2007
and profit sharing plan adjustment in 2006 and higher advertising expenses to support our various sales initiatives and higher fuel prices. In Belgium, SG&A increased 18 basis points to 16.5% of revenues due to the weak sales momentum. SG&A decreased as a percentage of revenues in Greece and the Emerging Markets as a result of good sales momentum.
Other operating expenses amounted to EUR 36.5 million in 2007, compared to EUR 19.2 million in 2006, mainly due to a USD 18.6 million impairment charge at Sweetbay in the fourth quarter related to an adjustment of the carrying value of 25 stores. Delhaize Belgium recorded a EUR 5.3 million charge related to the conversion of Cash Fresh stores.
Delhaize Group was able to maintain a strong operating margin at 4.9% of revenues. Operating profit increased by 6.3% at identical exchange rates (-1.0% at actual exchange rates) to EUR 937.2 million. Excluding the impairment charge at Sweetbay, Delhaize Group operating profit would have grown by 7.8% at identical exchange rates. Delhaize Groups U.S. business contributed 79.6% of the total Group operating profit, Delhaize Belgium 19.1% and Greece 5.5%.
Net financial expenses amounted to EUR 332.7 million, including a EUR 100.7 million charge related to the debt refinancing performed in the second quarter of 2007. Without this one-time charge, net financial expenses decreased by 15.8% (9.3% at identical exchange rates) due to the positive impact of the 2007 debt refinancing transaction and to major debt repayments made in the first half of 2006. At the end of 2007, Delhaize Groups financial debt had an average interest rate of 6.7% (7.2% in 2006), excluding finance leases and taking into account the effect of interest rate swaps.
As a result of the lower operating profit and higher net financial expenses, Delhaize Groups profit before tax and discontinued operations decreased by 9.9% to EUR 604.5 million.
In 2007, income taxes amounted to EUR 203.7 million, 16.9% lower than in 2006. The effective tax rate decreased from 36.5% to 33.7% primarily due to the favorable impact of the debt refinancing, the absence of a dividend payment by Delhaize America in 2007 and a tax refund received in the first quarter of 2007.
Net profit from continuing operations increased by 0.1% at identical exchange rates (-5.8% at actual exchange rates) to EUR 400.8 million, or EUR 3.96 basic per share (EUR 4.39 in 2006). Excluding the impact of the one-time debt refinancing charge, net profit from continuing operations increased by 15.6%.
In 2007, the result from discontinued operations, net of tax, amounted to EUR 23.7 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 in the second quarter of 2007.
Net profit attributable to minority interest amounted to EUR 14.4 million, compared to EUR 8.4 million in 2006. This increase is due to the significantly higher net profit of Alfa-Beta.
Group share in net profit amounted to EUR 410.1 million, an increase of 16.5% compared to 2006. Per share, basic net profit was EUR 4.20 (13.3% more than the EUR 3.71 in 2006) and diluted net profit EUR 4.03 (EUR 3.55 in 2006). Without the one-time debt refinancing charge, net profit grew by 42.3% at identical exchange rates.
CASH FLOW STATEMENT
In 2007, net cash provided by operating activities amounted to EUR 932.3 million compared to EUR 910.3 million in 2006. Working capital requirements increased in 2007 by EUR 118.8 million due to an increase in inventories of EUR 49.1 million mainly in the U.S. as a result of a different closing date compared to 2006, an increase in receivables of EUR 60.6 million primarily at Delhaize Belgium as a result of the growth of the affiliate business, and a decrease in accounts payable of EUR 9.1 million, particularly in Belgium as a result of a change in supplier payment policy, offset by increases in the U.S. and Greece.
Net cash used in investing activities amounted to EUR 629.8 million, a 12.8% decrease compared to 2006 mainly as a result of the EUR 118.8 million proceeds received for the disposal of Delvita in the Czech Republic and Di in Belgium.
Capital expenditures increased by 4.2% to EUR 729.3 million (EUR 699.9 million in 2006) or 3.8% of revenues primarily due to the market renewal program at Food Lion, the conversion of Cash Fresh stores to Delhaize banners, the renewal of distribution centers in Belgium and an active store opening program. In 2007, 75.0% of total capital expenditures were invested in the U.S. activities of the Group, 15.6% in the Belgian operations, 5.0% in Greece, 1.7% in the Emerging Markets and 2.7% in the Corporate activities.
Investment in new stores increased from EUR 164.1 million in 2006 to EUR 172.6 million in 2007 (23.7% of total capital expenditures). Delhaize Group invested EUR 316.7 million (43.4% of total capital expenditures) in store remodeling and expansions (EUR 297.8 million in 2006). In the U.S., 159 existing stores were remodeled. In Belgium, nine company-operated
DELHAIZE GROUP / ANNUAL REPORT 2007 33
supermarkets underwent a remodeling and 20 Cash Fresh stores were converted into Delhaize banners. Capital spending in information technologies, logistics and distribution, and miscellaneous categories amounted to EUR 240.0 million (32.9% of total capital expenditures), compared to EUR 238.0 million in 2006.
Net cash used in financing activities decreased from EUR 636.8 million to EUR 333.7 million mainly due to a significant decrease in the redemption of long-term loans. In February and April of 2006, Delhaize Group redeemed EUR 627.5 million of longterm debt. In 2007, the Groups net repayment of long-term debt was EUR 181.5 million, mostly the redemption of USD 145.0 million (EUR 105.8 million) Delhaize America notes.
In 2007, Delhaize Group generated free cash flow of EUR 326.7 million, compared to EUR 215.1 million in 2006. This increase was the result of higher cash provided by operating activities and the cash proceeds from the divestitures of Delvita and Di.
At the end of 2007, Delhaize Groups total assets amounted to EUR 8.8 billion, 5.1% lower than at the end of 2006. This decrease was due to the 10.5% weakening of the U.S. dollar compared to the euro between the two closing dates.
At the end of 2007, Delhaize Groups sales network consisted of 2,545 stores, 160 less than one year earlier because of the divestiture of Di and Delvita. Of these 2,545 stores, 325 were owned by the company, 720 were held under finance leases and 1,139 under operating leases. The remaining 361 stores were affiliated stores owned by their operators or directly leased by their operators from a third party. Delhaize Group owned 12 of its 13 warehousing and distribution facilities in the U.S., six of the seven distribution centers of Delhaize Belgium, two of its four distribution centers in Greece and two of its four distribution centers in the Emerging Markets
At the end of 2007, total equity, including minority interests, increased to EUR 3.7 billion. The increase in equity as a result of the recognized income and expense of the year, the exercise of warrants and stock options and the conversion of convertible bonds, was partially offset by the purchase of treasury shares and dividends declared.
The number of Delhaize Group shares, including treasury shares, increased in 2007 by 3.8 million shares to 100.3 million due to the exercise of warrants and the conversion of convertible bonds. In connection with stock option exercises, the Group repurchased 536,275 of its shares and used 515,925 treasury shares in 2007. At the end of 2007, Delhaize Group owned 938,949 treasury shares, at a value of EUR 62.3 per share, compared to an average purchase price of EUR 61.6 per share.
In May of 2007, Delhaize Group implemented debt cross-guarantees with its U.S. subsidiary Delhaize America and received an investment grade rating of Baa3 (with stable outlook) from Moodys, while S&P gave a BB+ rating with a positive outlook. Delhaize Group thus became the rated entity instead of Delhaize America.
In June of 2007, Delhaize America purchased USD 1,050 million of its 2011 debt and USD 50 million of its debentures due in 2031 through a public tender. The transaction was financed with the issuance by Delhaize Group of EUR 500 million 7 year senior notes at 5.625% and USD 450 million 10 year senior notes at 6.50%. The euro bond was entirely swapped to USD in order to match the currency of the debt to the currency of the underlying assets and earnings.
The refinancing transformed Delhaizes debt profile to a more balanced set of maturities. At year-end 2007, 80% of profit from operations of Delhaize Group was generated in USD and 80% of its financial obligations were in USD. The transaction allowed Delhaize Group to reduce its average cost of long-term debt from 7.2% in 2006 to 6.7% for 2007, with a first full-year impact in 2008.
At the end of 2007, Delhaize Group had financial debt of EUR 2.7 billion, a 12.7% decrease compared to the end of 2006 primarily due to the weakening of the U.S. dollar, the conversion of EUR 129.3 million convertible bonds and the generation of free cash flow. Of the total financial debt at year-end, 25.3% was at variable interest rates and 74.7% at fixed interest rates; 80.3% was denominated in U.S. dollar and 19.7% in euro. Approximately 98% of financial debt excluding finance leases is long-term. The average maturity of the debt, excluding finance leases, increased due to the refinancing transaction to 10.7 years compared to 9.2 years in 2006.
On December 31, 2007, Delhaize Group had finance lease obligations outstanding of EUR 634.9 million compared with EUR 636.5 million at the end of 2006. The average interest rate on financial lease obligations was 11.7% in 2007.
At the end of 2007, Delhaize Groups net debt amounted to EUR 2.2 billion, a decrease of EUR 390.5 million or -14.8% mainly due to the weakening of the U.S. dollar between the two balance sheet dates (currency translation effect
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of EUR 37.7 million), the conversion of part of the convertible bond and the generation of free cash flow. The net debt to equity ratio continued to improve, decreasing from 74.0% at the end of 2006 to 61.0% at the end of 2007.
At the end of 2007, Delhaize Group had total annual minimum operating lease commitments for 2008 of EUR 198.8 million, including approximately EUR 15.8 million related to closed stores. These leases generally have terms that range between three and 27 years with renewal options ranging within similar ranges.
In January 2008, Delhaize Groups Greek subsidiary, Alfa-Beta, announced that it had entered into an agreement with the German Tengelmann Group to acquire its Greek subsidiary Plus Hellas. The acquisition includes 33 new stores with an average selling area of 795m² and a new distribution facility measuring 36,000m² in the north of Greece. Many stores are located in the north of Greece, where Alfa-Beta has a limited presence. Plus Hellas also has several new stores in the development pipeline. The purchase price is EUR 69.5 million, subject to contractual adjustments. The acquisition of Plus Hellas is subject to customary conditions, including the approval by the Greek antitrust authorities. The transaction is expected to close in the second quarter of 2008. The Plus stores will be converted to Alfa-Beta banners.
DELHAIZE GROUP / ANNUAL REPORT 2007 35
ADDED 21 STORES FOR A TOTAL OF 1,570
CONCLUDED NORFOLK, VIRGINIA AND MYRTLE BEACH, SOUTH CAROLINA MARKET RENEWALS
CONTINUED APPLICATION OF MARKET SEGMENTATION WORK
COMPLETED THE CONVERSION TO SWEETBAY
In 2007, the United States posted real GDP growth of 2.2% compared to 2.9% in 2006. Unemployment rates increased slightly compared to 2006 both nationally and in Delhaize Groups operating areas. U.S. personal consumption expenditures increased by 2.9% (3.1% in 2006) in real terms and by 5.5% (5.9% in 2006) in nominal terms. Overall inflation was 4.1% (2.5% in 2006) and external food inflation was 4.2%, a significant acceleration compared to last year (1.7% in 2006)1.
The U.S. retail industry overall continued to see aggressive competition. During 2007, Delhaize Groups U.S. operating companies generated strong sales momentum despite an economy that began to slow down, confirming their strong position through competitive pricing, convenient neighborhood locations and excellent product quality and variety.
Delhaize Group focuses on operating supermarkets on the East Coast of the United States, from Maine to Florida. All the stores have a strong focus on a large variety in food offering, excellent service, competitive pricing and a convenient location and store layout.
To better address local consumer needs and characteristics, Delhaize Group operates its U.S. stores through different operating companies (Food Lion LLC, Hannaford and Sweetbay) and under different banners. This has resulted in leading market shares and strong brand recognition in the regions where it operates.
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OUTLOOK FOR 2008
OPEN 50-55 NEW STORES AND REMODEL 150
ROLL-OUT PREPARED MEAL PROGRAM, ON THE GO BISTRO
INTRODUCE GUIDING STARS AT FOOD LION
EXPAND THREE-TIER PRIVATE LABEL PROGRAM
RENEW FOUR FOOD LION MARKETS
In Southeast and Mid-Atlantic U.S., Food Lion LLC goes to market using a multi-banner strategy. Food Lion, its most important banner, combines a broad food offering with highly competitive prices and a dense store network. Bloom offers a rich and highly qualitative assortment with competitive prices and a very convenient shopping experience. Bottom Dollar is a discount format, focused on very competitive prices with an assortment of approximately 7,000 products. Harveys is a strong regional supermarket operator in rural areas in Georgia and Northern Florida.
In the Northeast of the U.S., Hannaford operates large supermarkets most of which feature a pharmacy. Hannaford focuses on exceptional perishable variety and quality while being very well positioned and perceived in terms of price. Hannaford is a pioneer in new industry developments, in food products, services and shopping experience.
On the West Coast of Florida, Sweetbay is an entirely new brand in a fast growing market with a strong focus on fresh products and service departments combined with a competitive value proposition. Sweetbay also has a strong ethnic offering to serve its diverse Floridian customer base.
DELHAIZE GROUP / ANNUAL REPORT 2007 37
NUMBER OF STORES
(DECEMBER 31, 2007)
Food Lion, LLC operated 1,299 stores across 11 states at the end of 2007. Food Lion, LLC opened 32 new stores (including 3 Bloom and 3 Harveys stores), taking into consideration 17 store closings resulting in a net increase of 15 stores. The company touched close to 140 of its stores in its remodel programs. During 2007, the Myrtle Beach, South Carolina (20 stores) and Norfolk, Virginia (84 stores) markets were renewed.
Hannaford ended the year with 165 stores which represents an increase of seven new stores over last year. In two years, Hannaford has opened 20 stores, an accelerated pace. In 2007, Hannaford remodeled nine stores.
In 2007, Sweetbay finished the ambitious conversion project from the Kash n Karry to the Sweetbay brand. At the end of August 2007, Sweetbay completed the last conversion concluding a three-year remodel and re-branding program. In 2007, 30 stores were converted, 5 stores opened and 6 stores closed. Sweetbay operated 106 supermarkets in the state of Florida at the end of 2007.
38 DELHAIZE GROUP / ANNUAL REPORT 2007
DELHAIZE GROUP / ANNUAL REPORT 2007 39
STRENGTHENED PRICE FOCUS
ADDED 27 STORES FOR A TOTAL OF 738
CONTINUED INTEGRATION OF CASH FRESH
COMPLETED SALE OF DI BEAUTY AND BODY CARE STORES
In 2007, the Belgian real GDP grew by 2.6%, compared to 2.9% growth in 20061. The unemployement rate decreased 9.5% compared to 2006. Overall consumer confidence improved from a difficult 2006 during the year but decreased again at the end of the year. Overall inflation was 1.8%, and national food inflation was 3.6%2. Retail capacity particularly discount stores, grew significantly with 69 net competitive store openings compared to the end of 2006. During 2007, consumer attention was increasingly focused on price as inflation reached high levels and economic uncertainty grew.
Delhaize Belgium goes to market through a variety of company-operated and affiliated store formats: supermarkets, convenience stores and specialty stores. Delhaize Belgium builds on a number of strategic pillars to grow sales: a differentiated and very attractive assortment, convenient stores, a competitive price proposition, and continued network growth.
In 2007, Delhaize Belgium on a net basis added 27 stores to its network. This includes six company-operated supermarkets in Belgium, 32 proximity stores, one City store and a company operated supermarket in Köln. Delhaize Belgium converted 20 Cash Fresh stores to Delhaize banners. At the end of 2007, 17 Cash Fresh stores remained to be converted. Delhaize Group expects to complete the Cash Fresh conversion in 2008. The company expanded its network of pet supply stores with the addition of nine Tom & Co units, including the first store in the North of France. Delhaize Belgium sold Di, its health and beauty chain, in 2007.
An important part of the growth of Delhaize Belgium is based on the continued expansion of the network of affiliated stores operating under Delhaize banners. These stores include large supermarkets as well as smaller sized proximity stores. Over the past years, these affiliated operators have invested heavily in remodeling their stores and are increasingly adopting the new concepts developed in the company-operated stores such as open fish workshops, deli stands and butcher shops.
40 DELHAIZE GROUP / ANNUAL REPORT 2007
OUTLOOK FOR 2008
FINISH CONVERSION OF CASH FRESH STORES TO DELHAIZE BANNERS
CONTINUE SECOND PHASE OF DISTRIBUTION CENTER EXPANSION
START EXECUTION OF EXCEL 2008-2010 PLAN
OPEN BETWEEN 50 AND 55 STORES
At the end of 2007, Delhaize Belgiums network consisted of 738 stores, including 34 stores in the Grand-Duchy of Luxembourg and four in Germany. Total capital expenditures in Belgium amounted to EUR 114 million, a 6.3% increase from 2006.
In 2007, Delhaize Belgium posted revenues of EUR 4.4 billion, an increase of 1.7% over 2006. Comparable stores sales increased by 1.6%. Total revenue growth was negatively impacted by the divestiture of the Di beauty and body care business at the end of the second quarter of 2007. Excluding the Di divestiture, revenues would have increased by 2.9%. Market share for the full year decreased by 36 basis points to 25.7% (source: AC Nielsen) due to the many competitive openings and the disruptive effect of the conversion of Cash Fresh stores to Delhaize banners.
During 2007, Delhaize Belgium focused mainly on initiatives to bridge the gap between price perception and price reality. It extended the range of its private label assortment, especially in the value line assortment of 365. Particular attention was paid to center store items. The network was expanded even though considerable attention went to the integration and conversion of Cash Fresh stores to Delhaize banners.
The gross margin of Delhaize Belgium decreased by 11 basis points due to continued investments in price competitiveness and higher inventory losses. The lower gross margin, the expenses related to the integration of Cash Fresh and higher depreciation led to a decrease in the operating margin of Delhaize Belgium from 4.3% to 4.1% of revenues. Operating profit decreased by 2.7% to EUR 179.0 million.
In 2008, Delhaize Belgium will start the implementation of its ambitious plan Excel 2008-2010 aimed at seizing new growth opportunities and addressing competitive challenges. The plan includes a number of initiatives that will accelerate comparable store sales growth, increase network expansion, reduce costs, increase efficiency, support gross margin and reinforce price positioning.
DELHAIZE GROUP / ANNUAL REPORT 2007 41
ADDED 11 STORES FOR A TOTAL OF 159
EXPANDED AFFILIATE NETWORK
CONTINUED IMPLEMENTATION OF EFFICIENCY PROJECTS
MODERNIZATION OF STORE NETWORK
In 2007, the real gross domestic product of Greece increased by 4.1%, compared to 4.3% in 2006. Unemployment rates continued to decline. Overall inflation was 2.9% (3.2% in 2006) and national food inflation amounted to 3.2% (3.8% in 2006)1. Competitors added 26 stores during the year.
Alfa-Beta strives to be the preferred Greek food retailer. Its stores are focused on fresh products, local specialties and outstanding variety, service and convenience. The company operates a rapidly growing multi-format store network comprising supermarkets, proximity stores and cash and carry stores.
In 2007, Alfa-Beta added 11 stores to its network, including five company-operated supermarkets and six proximity stores operated by independent store owners. At the end of 2007, the Alfa-Beta store network consisted of 159 stores. Alfa-Betas total capital expenditures decreased by 2.1% to EUR 36.7 million.
In 2007, Alfa-Beta posted revenues of EUR 1.2 billion, an increase of 13.9% compared to 2006, a second year of double digit organic revenue growth. This increase is the result of high comparable store sales growth and store network expansion leading to an increase in market share from 12.8% in 2006 to 13.7% in 2007 (source: AC Nielsen).
42 DELHAIZE GROUP / ANNUAL REPORT 2007
OUTLOOK FOR 2008
FURTHER REINFORCE DIFFERENTIATION IN ASSORTMENT AND SERVICE
COMPLETE PLUS HELLAS ACQUISITION AND CONVERT STORES TO ALFA-BETA BANNERS
ADD 49 STORES FOR A TOTAL OF 208 (INCLUDING 33 PLUS HELLAS STORES)
Alfa-Beta continued to extend its product range, including new private label items. It increased its service offering, supported a competitive price policy and executed a dynamic remodeling and store opening program. The company continued to invest in store and supply chain efficiency.
Alfa-Beta increased its gross margin from 22.2% to 22.9% in 2007 due to a more favorable sales mix and better inventory management partially offset by price investments during the year. Selling, general and administrative expenses declined 57 basis points as a percentage of revenues to 18.8%, due to strong sales and cost discipline. As a consequence, operating margin significantly increased to 4.4% of revenues (3.2% in 2006). The higher operating margin and revenues resulted in a 56.8% increase in operating profit to EUR 51.5 million.
PLUS HELLAS ACQUISITION
At the beginning of 2008, Alfa-Beta concluded an agreement to acquire the Greek retailer Plus Hellas. This transaction, expected to be closed in the second quarter of 2008, presents a great fill-in opportunity for Alfa-Beta. The chain operates 33 stores, most of which are located in the north of Greece. The agreement also includes a new distribution center. Plus Hellas has several new stores in its development. The purchase price is EUR 69.5 million, subject to contractual adjustments. The Plus stores will be converted to Alfa-Beta banners.
DELHAIZE GROUP / ANNUAL REPORT 2007 43
ADDED FOUR STORES IN ROMANIA AND SIX IN INDONESIA
COMPLETED NEW DISTRIBUTION CENTER IN INDONESIA
EXPANDED VALUE LINE 365
COMPLETED THE DELVITA DIVESTMENT
In 2007, real gross domestic product in Romania increased by 6.0%. General inflation was 4.9%, while food inflation amounted to 9.4%.1
General inflation in Indonesia amounted to 6.6% in 20072. Real gross domestic product growth was 6.1%. The Indonesian economy accelerated during 2007, but high oil prices continued to weigh on the consumers buying power.
Lion Super Indo (51% owned by Delhaize Group) and Mega Image focus on urban areas with a supermarket concept comprising fresh products, variety, proximity and low prices. In these markets, Delhaize Group fosters local management expertise offering training and support from mature operations in the Group.
The Emerging Markets sales network of Delhaize Group included 78 supermarkets at year-end, ten more than in 2006. Of these, 22 stores were located in Romania and 56 in Indonesia. Thirteen Super Indo and six Mega Image stores were remodeled. In 2008, Delhaize Group expects to increase its sales network in its Emerging Markets by 15 units to a total of 93 stores.
44 DELHAIZE GROUP / ANNUAL REPORT 2007
OUTLOOK FOR 2008
ADD APPROXIMATELY 15 STORES TO THE NETWORK
FURTHER EXTEND PRODUCT ASSORTMENT
INCREASE STORE EFFICIENCY
In 2007, the Emerging Markets segment of Delhaize Group (including 51% of Lion Super Indo) recorded revenue growth of 20.9% to EUR 165.5 million. This growth was fueled by strong comparable store sales growth and continued network expansion in both countries. Product assortments continued to be extended and innovated. In 2007, both Mega Image and Lion Super Indo moved to new distribution facilities to increase efficiency and service levels to the stores. Delhaize Groups Emerging Markets segment generated operating profit of EUR 3.8 million in 2007.
Delhaize Group plans to further increase store efficiency and product offering innovation at Mega Image and Lion Super Indo in 2008.
SALE OF DELVITA
In the fall of 2006, Delhaize Group announced an agreement to sell its Czech business Delvita to the German Rewe Group. Delhaize Group completed this transaction in the second quarter of 2007.
DELHAIZE GROUP / ANNUAL REPORT 2007 45
BOARD OF DIRECTORS
46 DELHAIZE GROUP / ANNUAL REPORT 2007
THE FOLLOWING FORMER DIRECTORS AND EXECUTIVES HAVE BEEN GRANTED A HONORARY TITLE IN GRATITUDE FOR THEIR CONTRIBUTION TO DELHAIZE GROUP:
Mr. Henry Stroobant, Honorary Chairman and Director, passed away on February 18, 2007. Chevalier Philippe van der Plancke, Honorary Director, passed away on March 4, 2007. Delhaize Group expresses its gratitude for their contributions to the Company and offers their families its sincere condolences.
DELHAIZE GROUP / ANNUAL REPORT 2007 47
The Delhaize Group Board of Directors and its management ensure that the Company serves the interests of its shareholders and other key stakeholders with the highest standards of responsibility, integrity and compliance with all laws. Dehaize Group strives to continually earn investor confidence by being a leader in good corporate governance, complying with the law wherever it operates and providing clear, consistent and transparent communication about its performance and strategy. Upholding this commitment is in line with our high ethical standards and is important for our continued success.
CORPORATE GOVERNANCE CHARTER OF DELHAIZE GROUP
In accordance with the recommendations and guidelines described in the Belgian Code on Corporate Governance, the corporate governance framework in which Delhaize Group operates is specified in Delhaize Groups Corporate Governance Charter. The Corporate Governance Charter is reviewed and updated from time to time. The latest update of the Charter is available on the Companys website (www.delhaizegroup.com).
The Corporate Governance Charter of Delhaize Group includes the rules and policies of the Company that, together with applicable law, the securities exchange rules and the Companys Articles of Association, govern the manner in which the Company operates.
While the Company refers to its Corporate Governance Charter for its corporate governance framework, this Corporate Governance chapter in the annual report focuses, as recommended by the Belgian Code on Corporate Governance, on factual information relating to the Companys corporate governance, including changes in the Companys corporate governance structure together with relevant events that took place during 2007.
THE BOARD OF DIRECTORS
Mission of the Board of Directors
The Board of Directors of Delhaize Group is responsible for the strategy and the management of the Company in its best corporate interests. This responsibility includes the maximization of shareholder value, including the optimization of long-term financial returns, while also taking into account the responsibilities the Company has to its customers, associates, suppliers and the communities where it operates. To achieve this, the Board of Directors, as the Companys ultimate decision-making body, is entrusted with all powers that are not reserved by law to the General Meeting of shareholders.
The Terms of Reference of the Board are attached as Exhibit A to the Companys Corporate Governance Charter.
Composition of the Board of Directors
On December 31, 2007, the Board of Directors of Delhaize Group consisted of eleven members, including ten non-executive directors and one executive director. As indicated in the Terms of Reference of the Board of Directors, the Board periodically reviews the Board membership criteria in the context of the current make-up of the Board and its committees against current and future conditions and circumstances.
The Board of Directors has determined that all directors, with the exception of Chief Executive Officer Pierre-Olivier Beckers, are independent under the criteria of the Belgian Company Code, the Belgian Code on Corporate Governance and the rules of the New York Stock Exchange (NYSE). The Board made its determination based on information furnished by all directors regarding their relationships with Delhaize Group.
The shareholders also have determined that all directors with the exception of Chief Executive Officer Pierre-Olivier Beckers are independent under the criteria of the Belgian Company Code. Such determination was made, as applicable, either upon a directors election or re-election to the Board or at the Ordinary General Meeting held in 2004 under applicable transition rules.
Activity Report of the Board in 2007
In 2007, the Board of Directors met six times. All directors were present at all of those meetings.
In 2007, the Boards activities included, among others:
48 DELHAIZE GROUP / ANNUAL REPORT 2007
Delhaize Group Board of Directors and Committee Membership in 2007
Nomination and Tenure of Directors
Pursuant to the Companys Articles of Association, directors may be appointed by the general meeting of shareholders for a maximum term of six years. In practice, the members of the Board are appointed for a maximum term of three years. No director after having attained the age of 70 years shall be nominated for re-election or reappointment to the Board. Directors may be removed from office at any time by a majority vote at any general meeting of shareholders.
Proposed Renewal of Director Mandates
Upon recommendation of the Remuneration and Nomination Committee, the Board will propose the renewal of the mandate of the incumbent directors Count de Pret Roose de Calesberg, Jacques de Vaucleroy, Hugh Farrington and Baron Vansteenkiste for a term of three years to the shareholders at the Ordinary General Meeting to be held on May 22, 2008.
The Board of Directors considered all criteria applicable to the assessment of independence of directors under the Belgian Company Code, the Belgian Code on Corporate Governance and the NYSE rules and determined that, based on the information provided by Count de Pret Roose de Calesberg, Jacques de Vaucleroy, Hugh Farrington and Baron Vansteenkiste, each of them qualify as independent under all these criteria. The Board will propose at the Ordinary General Meeting of May 22, 2008 that the shareholders acknowledge that Count de Pret Roose de Calesberg, Jacques de Vaucleroy, Hugh Farrington and Baron Vansteenkiste are independent within the meaning of the Belgian Company Code.
Proposed Appointment of New Director
Upon recommendation of the Remuneration and Nomination Committee, the Board will propose the appointment of Mr. François Cornélis as director for a term of three years to the shareholders at the Ordinary General Meeting to be held on May 22, 2008.
Mr. Cornélis (58) has been Vice Chairman of the Executive Committee of Total and President of its chemicals division since 2003. He joined PetroFina in 1973 and was appointed CEO and Managing Director of PetroFina in 1990. He became Vice Chairman of the Executive Committee first of Totalfina after the merger of Total with PetroFina in 1999, and in 2000 of TotalFinaElf (renamed Total in 2003) after the merger with Elf. Mr. Cornélis is Chairman of the European Chemical Industry Council (CEFIC) and the Royal Automobile Club of Belgium and a member of the Global Advisory Council of The Conference Board and Chairman of its European Steering Committee. He is also Director of Sofina. Mr. Cornélis holds a degree in mechanical engineering from the Université Catholique de Louvain (UCL), Belgium.
The Board of Directors considered all criteria applicable to the assessment of independence of directors under the Belgian Company Code, the Corporate Governance Code and NYSE rules and determined that, based on the information provided by Mr. Cornélis, he qualifies as independent under all these criteria. The Board will propose at the Ordinary General Meeting of May 22, 2008 that the shareholders acknowledge that Mr. Cornélis is independent within the meaning of the Belgian Company Code.
DELHAIZE GROUP / ANNUAL REPORT 2007 49
Remuneration of the Board
The Companys directors are remunerated for their services with a fixed compensation, decided by the Board of Directors and not to exceed the maximum amounts set by the Companys shareholders. The maximum amount approved by the shareholders is EUR 80,000 per year per director, increased with an additional amount of up to EUR 10,000 per year for the Chairman of any standing committee of the Board and increased with an amount of up to EUR 5,000 per year for services as a member of any standing committee of the Board. For the Chairman of the Board, the maximum amount is EUR 160,000 per year (including any amount due as Chairman or member of any standing committee).
Non-executive directors of the Company do not receive any remuneration, benefits, equity-linked consideration or other incentives from the Company other than their remuneration for their service as director of the Company. The amount of the remuneration granted for fiscal year 2007 individually to directors of the Company is described in Note 38 to the Financial Statements, Related Party Transactions, page 102. Delhaize Group has not extended credit, arranged for the extension of credit or renewed an extension of credit in the form of a personal loan to or for any member of the Board.
Committees of the Board of Directors
The Board of Directors has two standing committees: the Audit Committee and the Remuneration and Nomination Committee. The table on page 49 provides an overview of the membership of the standing committees of the Board of Directors.
The Audit Committee was appointed by the Board to assist the Board in monitoring the integrity of the financial statements of the Company, the Companys compliance with legal and regulatory requirements, the Statutory Auditors qualification and independence, the performance of the Companys internal audit function and Statutory Auditor, and the Companys internal controls and risk management. The Audit Committees specific responsibilities are set forth in the Terms of Reference of the Audit Committee, which are attached as Exhibit B to the Companys Corporate Governance Charter.
The Audit Committee is composed solely of independent directors. The composition of the Audit Committee can be found in the table on page 49. The Board of Directors has also determined that Mr. Robert J. Murray, Count de Pret Roose de Calesberg, and Ms. Claire Babrowski are audit committee financial experts as defined under applicable U.S. law.
In 2007, the Audit Committee met five times. All members of the Audit Committee attended all of those meetings.
The activities of the Audit Committee in 2007 included, among others:
Remuneration and Nomination Committee
The principal responsibilities of the Remuneration and Nomination Committee are to: (i) identify individuals qualified to become Board members, consistent with criteria approved by the Board; (ii) recommend to the Board the director nominees for each Ordinary General Meeting; (iii) recommend to the Board director nominees to fill vacancies, (iv) recommend to the Board qualified and experienced directors for service on the committees of the Board; (v) recommend to the Board the compensation of the members of executive management, (vi) recommend to the Board any incentive compensation plans and equity-based plans, and awards thereunder, and profit-sharing plans for the Companys associates; (vii) evaluate the performance of the Chief Executive Officer; and (viii) advise the Board on other compensation issues. The Remuneration and Nomination Committees specific responsibilities are set forth in the Terms of Reference of the Remuneration and Nomination Committee, which are attached as Exhibit C to the Companys Corporate Governance Charter.
The Remuneration and Nomination Committee is composed solely of non-executive directors, and all of them are independent directors under the Belgian Company Code, the Belgian Code on Corporate Governance and the rules of the NYSE. The composition of the Remuneration and Nomination Committee can be found in the table on page 49.
In 2007, the Remuneration and Nomination Committee met five times. All members of the Remuneration and Nomination Committee attended all of those meetings.
The activities of the Remuneration and Nomination Committee in 2007 included, among others:
50 DELHAIZE GROUP / ANNUAL REPORT 2007
Chief Executive Officer and Executive Committee
Delhaize Groups Chief Executive Officer, Pierre-Olivier Beckers, is in charge of the day-to-day management of the Company with the assistance of the Executive Committee (together referred to as Executive Management). The Executive Committee, chaired by the Chief Executive Officer, prepares the strategy proposals for the Board of Directors, oversees the operational activities and analyzes the business performance of the Company. The Terms of Reference of Executive Management are attached as Exhibit D to the Companys Corporate Governance Charter.
The composition of the Executive Committee and the changes thereto in the course of 2007 can be found on page 47 of this report.
The members of the Executive Committee are appointed by the Board of Directors. The Chief Executive Officer is the sole member of the Executive Committee who is also a member of the Board of Directors.
The individual remuneration of the members of Delhaize Groups Executive Management is determined by the Board of Directors upon the recommendation of the Remuneration and Nomination Committee. The Remuneration Policy of the Company is attached as Exhibit E to the Companys Corporate Governance Charter.
Executive Management Compensation in 2007
For the year 2007, the aggregate amount of compensation, including contributions to pension plans, but excluding employer social security contributions and expense for share-based compensation, expensed by Delhaize Group and its subsidiaries for Executive Management as a group for services was EUR 12.7 million compared to EUR 11.0 million in 2006. Employer social security contributions and share-based compensation expense for the Executive Management in the aggregate are disclosed in Note 38 to the Financial Statements (page 102). An aggregate number of 144,598 Delhaize Group stock options/warrants and 26,760 restricted stock unit awards were granted to the Executive Management in 2007. Delhaize Group has not extended credit, arranged for the extension of credit or renewed an extension of credit in the form of a personal loan to or for any member of the Executive Management.
In line with the recommendation of the Belgian Code on Corporate Governance, the compensation and benefits paid by Delhaize Group and its subsidiaries individually to Mr. Pierre-Olivier Beckers, President and Chief Executive Officer, and in the aggregate to the nine other members of the Executive Management in 2007 is described in Note 38 to the Financial Statements, Related Party Transactions (page 102).
The Executive Managers also participate in the equity-linked component of the Companys long-term incentive program. The aggregate numbers of Delhaize Group shares, stock options/warrants or other rights to acquire Delhaize Group shares granted by the Company and its subsidiaries during 2007 to the Chief Executive Officer and other Executive Managers are described individually in Note 38 to the Financial Statements, Related Party Transactions (page 102).
Main Contractual Terms of Hiring and Termination Arrangements with Executive Managers
The Companys Executive Managers, in accordance with employment-related agreements and applicable law, are (i) compensated in line with the Companys Remuneration Policy, (ii) assigned duties and responsibilities in line with current market practice for their position and with the Companys Terms of Reference of the Executive Management, (iii) required to abide by the Companys policies and procedures, including the Companys Code of Business Conduct and Ethics, (iv) subject to confidentiality and non-compete obligations to the extent authorized by law and (v) subject to other clauses typically included in employment agreements for executives. In addition, for the Executive Managers, the combination of employment-related agreements and applicable law provide for, or would likely result in: (i) payment of approximately 2-3 times base salary and annual incentive bonus, accelerated vesting of all or substantially all of the long-term incentive awards, and the continuation of Company health and welfare benefits for a comparable period, in the case of termination without cause by the Company or for good reason by the Executive Manager, and (ii) accelerated vesting of all or substantially all of the long-term incentive awards, in the event of a change of control of the Company.
Each holder of Delhaize Group ordinary shares is entitled to attend any general meeting of shareholders and to vote on all matters on the agenda, provided that such holder complies with the formalities specified in the notice for the meeting.
To vote at a general meeting of shareholders, a Delhaize Group shareholder must deposit his or her Delhaize Group ordinary shares for which voting rights will be exercised with Delhaize Groups registered office, or such other place as specified in the notice for the meeting, at least four business days prior to such meeting.
Similarly, a holder of Delhaize Group American Depositary Receipts (ADRs) who gives voting instructions to the depositary must arrange for blocking transfers of those ADRs during the period from the date on which such voting instructions are received by the depositary until the day after such meeting.
DELHAIZE GROUP / ANNUAL REPORT 2007 51
Belgian law does not require a quorum for the ordinary general meetings of shareholders. Decisions are taken by a simple majority of votes cast at the meeting, irrespective of the number of Delhaize Group ordinary shares present or represented at the meeting.
Resolutions to amend any provision of the Articles of Association, including any decision to increase the capital or an amendment which would create an additional class of shares, require a quorum of 50% of the issued capital at an extraordinary general meeting (provided that if this quorum is not reached, the Board may call a second extraordinary general meeting for which no quorum is required), as well as the affirmative vote of at least 75% of the shares present or represented and voting at the meeting, or 80% of such shares if the amendment would change Delhaize Groups corporate objective or authorize the Board to repurchase Delhaize Group ordinary shares.
Extraordinary General Meeting of April 27, 2007
The Board called an Extraordinary General Meeting on April 27, 2007. Since the required quorum was not achieved, no decisions were taken during that meeting, and a second Extraordinary General Meeting, which was combined with the Ordinary General Meeting into a single meeting, was called with the same agenda on May 24, 2007.
Ordinary and Extraordinary General Meeting of May 24, 2007
The Ordinary General Meeting is held annually at the call of the Board of Directors. The Ordinary and Extraordinary General Meeting of 2007 was held on May 24, 2007. During the Ordinary General Meeting portion of the meeting, the Companys management presented the Management Report, the report of the statutory auditor and the consolidated annual accounts. The Ordinary General Meeting then approved the non-consolidated annual accounts of fiscal year 2006 and discharged the Companys directors and the Statutory Auditor of liability for their mandate during 2006. The Ordinary General Meeting decided to renew the directors mandate of Count Goblet dAlviella, Mr. Robert J. Murray and Dr. William Roper. The Ordinary General Meeting appointed Count Goblet dAlviella, Mr. Murray and Dr. Roper as independent directors under the Belgian Company Code. Additionally, the Ordinary General Meeting approved (i) an early redemption of bonds upon a change of control of the Company, (ii) an amendment to the Delhaize Group 2002 Stock Incentive Plan, (iii) the Delhaize Group 2007 Stock Option Plan for associates of non-U.S. companies with respect to equity awards that could be granted to Executive Management and (iv) the accelerated vesting of stock options to be granted under those plans upon a change of control over the Company.
During the Extraordinary General Meeting portion of the meeting, the shareholders renewed the power of the Board of Directors to increase the share capital of Delhaize Group and to repurchase its own shares and approved the progressive conversion of Delhaize Group ordinary shares in bearer form to dematerialized form and the means of voting in writing at shareholder meetings. The minutes of the Ordinary and Extraordinary General Meeting of May 24, 2007, including the voting results, are available on the Companys website together with all other relevant documents.
Shareholder Structure and Ownership Reporting
Based on currently applicable Belgian law and the Companys Articles of Association, any beneficial owner or any two or more persons acting as a partnership, limited partnership, syndicate or group (each of which shall be deemed a person for such purposes) who, after acquiring directly or indirectly the beneficial ownership of any shares, American Depositary Receipts (ADRs) or other securities giving the right to acquire additional shares or ADRs of the Company, is directly or indirectly the beneficial owner of 3%, 5% or any other multiple of 5% of the total outstanding and potential voting rights of the Company which causes such beneficial owners total voting rights to increase or decrease past any such threshold percentage, shall report its ownership to the Company and to the Belgian Banking, Finance and Insurance Commission. Under the current regime (as set forth in the March 2, 1989 Law on the disclosure of important participations in listed companies and the regulation of public takeovers or in the Royal Decree implementing this law). such ownership notification must be made within two Belgian business days after such person makes such acquisition or disposition. The current regime on ownership notification will change as a result of the entry into force of the Law of May 2, 2007, implementing in Belgian law the EU Transparency Directive. This Law shall enter into force on September 1, 2008. In order to take the new legislation into account, the Board of Directors of the Company intends to propose to the shareholders, at the General Meeting of Shareholders to be held in May 2008, the approval of modifications to the Companys Articles of Association reflecting the new legislation.
Any person failing to comply with the reporting requirements mentioned above may forfeit all or part of the rights attributable to such Delhaize Group securities, including, but not limited to, voting rights or rights to distributions of cash or share dividends or may even be ordered by the President of the Belgian Commercial Court to sell the securities concerned to a non-related party.
Delhaize Group is not aware of the existence of any shareholders agreement with respect to the voting rights pertaining to the securities of the Company.
With the exception of the shareholders identified in the table below, no shareholder or group of shareholders had declared as of December 31, 2007 holdings of at least 3% of the outstanding shares, warrants and convertible bonds of Delhaize Group.
52 DELHAIZE GROUP / ANNUAL REPORT 2007
DELHAIZE GROUP / ANNUAL REPORT 2007 53
On December 31, 2007, the directors and the Companys Executive Management owned as a group 354,383 ordinary shares or ADRs of Delhaize Group SA, which represented approximately 0.35% of the total number of outstanding shares of the Company as of that date. On December 31, 2007, the Companys Executive Management owned as a group 658,995 stock options, warrants and restricted stock units over an equal number of existing or new ordinary shares or ADRs of the Company.
The external audit of Delhaize Group SA is conducted by Deloitte Reviseurs dEntreprises/Bedrijfsrevisoren, Registered Auditors, represented by Mr. Philip Maeyaert, until the Ordinary General Meeting in 2008.
Certification of Accounts 2007
In 2008, the Statutory Auditor has certified that the statutory annual accounts and the consolidated annual accounts of the Company, prepared in accordance with legal and regulatory requirements applicable in Belgium, for the year ended December 31, 2007 give a true and fair view of its assets, financial situation and results of operations. The Audit Committee reviewed and discussed the results of the Statutory Auditors audits of these accounts with the Statutory Auditor.
Statutory Auditors Fees for Services Related to 2007
The following table sets forth the fees of the Statutory Auditor and its associated companies relating to the services with respect to fiscal year 2007 to Delhaize Group SA and its subsidiaries.
As a company that has securities registered with the U.S. Securities and Exchange Commission, Delhaize Group must provide (i) a management report on the effectiveness of the Companys internal control over financial reporting, (ii) an attestation report from the Companys Statutory Auditor on such management report and (iii) the Statutory Auditors assessment of the effectiveness of internal control over financial reporting, as described in Section 404 of the U.S. Sarbanes-Oxley Act of 2002 and the rules implementing such act. This counts for a part of the Statutory Auditors fees for the Statutory audit of Delhaize Group SA, the Statutory audit subsidiaries of Delhaize Group and the Legal audit of the consolidated financial statements in 2007.
The Audit Committee has monitored the independence of the Statutory Auditor under the Companys pre-approval policy, setting forth strict procedures for the approval of non-audit services performed by the Statutory Auditor.
ADDITIONAL GOVERNANCE MATTERS
Related Party Transactions Policy
In line with the recommendations of the Belgian Code on Corporate Governance, the Company adopted a Related Party Transactions Policy containing requirements applicable to the members of the Board and the Executive Management in addition to the requirements of the conflicts of interest policy in the Companys Code of Business Conduct and Ethics. The Companys Related Party Transactions Policy is attached as Exhibit G to the Companys Corporate Governance Charter. The Companys Code of Business Conduct and Ethics is attached as Exhibit F to the Companys Corporate Governance Charter. The members of the Board and the Executive Management of the Company and of its subsidiaries completed a Related Party Transaction Questionnaire in 2007 for internal control purposes. Further Information on Related Party Transactions, as defined under International Financial Reporting Standards, can be found under Note 38 to the Financial Statements (page 102).
Insider Trading and Market Manipulation Policy
The Company has a Policy Governing Securities Trading and Prohibiting Market Manipulation (Trading Policy) which reflects the Belgian rules of market abuse (consisting of insider trading and market manipulation). The Companys Trading Policy contains, among other things, strict trading restrictions that apply to persons who regularly have access to material non-public information. More details concerning the Companys Trading Policy can be found in the Companys Corporate Governance Charter. The Company maintains a list of persons having access to material non-public information and regularly informed these persons in 2007 about the rules of the Trading Policy and about upcoming restriction periods for trading in Company securities.
Section 404 of the Sarbanes-Oxley Act of 2002
As a company that has securities registered with the U.S. Securities and Exchange Commission, Delhaize Group must provide (i) a management report on the effectiveness of the Companys internal control over financial reporting, (ii) an attestation report from the Companys Statutory Auditor on such management report and (iii) the Statutory Auditors assessment of the effectiveness of internal control over financial reporting, as described in Section 404 of the U.S. Sarbanes-Oxley Act of 2002 and the rules implementing such act. Managements assessment and the Statutory Auditors related opinions will be included in the Annual Report on Form 20-F for the year ending
54 DELHAIZE GROUP / ANNUAL REPORT 2007
December 31, 2007, which is required to be filed with the U.S. Securities and Exchange Commission by June 30, 2008.
The Groups 2006 annual report filed on Form 20-F includes managements conclusion that the Groups internal control over financial reporting was effective as of December 31, 2006. The Statutory Auditor concluded that this management assessment was, in all material respects, fairly stated and that the Group maintained, in all material respects, effective control over financial reporting as of December 31, 2006.
Compliance with the Belgian Code on Corporate Governance
Delhaize Group follows the corporate governance principles described in the Belgian Code on Corporate Governance. In line with the comply-or-explain principle of the Belgian Code on Corporate Governance, the Company concluded that the best interests of the Company and its shareholders are served by variance from the Code in a limited number of specific cases. These variances are explained below:
Undertakings Upon Change of Control over the Company
Management associates of non-U.S. operating companies received warrants issued by the Board of Directors under a 2000 Warrant Plan granting to the beneficiaries the right to subscribe to new ordinary shares of the Company. They also received stock options issued by the Board of Directors under the Stock Option Plans 2001-2007, granting to the beneficiaries the right to acquire ordinary shares of the Company. Management associates of U.S. operating companies received options, which qualify as warrants under Belgian law, issued by the Board of Directors under the Delhaize Group 2002 Stock Incentive Plan, as amended, granting to the beneficiaries the right to subscribe to new American Depositary Receipts of the Company. The General Meeting of Shareholders approved a provision of these plans that provide that in the event of a change of control over the Company the beneficiaries will have the right to exercise their options and warrants, regardless of their vesting period. The number of options and warrants outstanding under those plans as of December 31, 2007 can be found under Note 29 (page 96) to the Financial Statements.
The General Meeting of Shareholders also approved a provision in the relevant documentation relating to the convertible bonds issued by the Company in April 2004 for an amount of EUR 300 million by which the holders of such convertible bonds have the right to redeem their bonds in the event of a public offer on the Company. As of December 31, 2007 the remaining nominal value of the convertible bonds was EUR 170.8 million.
In 2003, the Company adopted a global long-term incentive program which incorporates a Performance Cash Plan. The grants under the Performance Cash Plan provide for cash payments to the beneficiaries at the end of a three-year period that are dependent on Company performance against Board approved financial targets that are closely correlated to building long-term shareholder value. The General Meeting of Shareholders approved a provision of the Performance Cash Plan that provides that the beneficiaries are entitled to receive the full cash payment with respect to any outstanding grant in the event of a change of control over the Company.
On June 27, 2007 the Company issued EUR 500 million 5.625% senior notes due 2014 and USD 450 million 6.50% senior notes due 2017 in a private placement to qualified investors. The 5.625% euro notes are listed on the regulated market of the Luxembourg Stock Exchange. Pursuant to an exchange offer registered under the U.S Securities Act, the 6.50% U.S. dollar notes were subsequently exchanged for 6.50% U.S. dollar notes that are freely transferable in the U.S. The General Meeting of Shareholders approved the inclusion of a provision in each of these series of notes granting its holders the right to early repayment for an amount not in excess of 101% in the event of a change of control over the Company.
DELHAIZE GROUP / ANNUAL REPORT 2007 55
The following discussion reflects business risks that are evaluated by our management and our Board of Directors. This section should be read carefully in relation to our prospects and the forward-looking statements contained in this annual report. Any of the following risks could have a material adverse effect on our financial condition, results of operations or liquidity and lead to impairment losses on goodwill, intangible assets and other assets. There may be additional risks of which the Group is unaware. There may also be risks Delhaize Group now believes to be immaterial but which could turn out to have a material adverse effect.
Delhaize Groups operations are conducted primarily in the U.S. and Belgium and to a lesser extent in other parts of Europe and in Southeast Asia. The results of operations and the financial position of each of Delhaize Groups entities outside the euro zone are accounted for in the relevant local currency and then translated into euro at the applicable foreign currency exchange rate for inclusion in the Groups consolidated financial statements. Exchange rate fluctuations between these foreign currencies and the euro may have a material adverse effect on the Groups consolidated financial statements as reported in euro. These risks are monitored on a regular basis at a centralized level.
Because a substantial portion of its assets, liabilities and operating results are denominated in U.S. dollars, Delhaize Group is particularly exposed to currency risk arising from fluctuations in the value of the U.S. dollar against the euro. The Group does not hedge the U.S. dollar translation exposure. The transaction risk resulting from the substantial portion of U.S. operations is managed by striving to achieve a natural currency offset between assets and liabilities and between revenues and expenditures denominated in U.S. dollars.
Remaining intra-Group cross-currency transaction risks which are not naturally offset concern primarily dividend payments by the U.S. subsidiary and cross-currency lending. When appropriate, the Group enters into agreements to hedge against the variation in the U.S. dollar in relation to dividend payments between the declaration by the U.S. operating companies and payment dates. Intra-Group cross-currency lending not naturally offset is generally fully hedged through the use of foreign exchange forward contracts or currency swaps. After cross-currency swaps, 80.0% of total debt is denominated in U.S. dollar and 80.3% of cash flows are generated in U.S. dollar. Significant residual positions in currencies other than the functional currency of the operating companies are generally also fully hedged in order to eliminate any remaining currency exposure.
If at the end of the year, the U.S. dollar exchange rate had been 1 cent higher/ lower and all other variables were held constant, the Groups net profit would have increased/decreased by EUR 2.0 million (2006 : increase/decrease by EUR 4.1 million). This is mainly attributable to the Groups exposure to exchange rates on its revenues in U.S. dollars.
INTEREST RATE RISK
Delhaize Group is exposed to interest rate risk due to working capital financing and the overall financing strategy. Daily working capital requirements are typically financed with operational cash flow and through the use of various committed and uncommitted lines of credit and a commercial paper program. The interest rate on these short and medium term borrowing arrangements is generally determined either as the inter-bank offering rate at the borrowing date plus a pre-set margin or based on market quotes from banks.
Delhaize Groups interest rate risk management objective is to achieve an optimal balance between borrowing cost and management of the effect of interest rate volatility on earnings and cash flows. The Group manages its debt and overall financing strategies using a combination of short, medium, long-term debt and interest rate derivatives.
Delhaize Group reviews its interest rate risk exposure on a quarterly basis and at the inception of any new financing operation. As a part of its interest rate risk management efforts, Delhaize Group enters into interest rate swap agreements when appropriate. At the end of 2007, 74.7% of the financial debt of the Group was fixed-rate debt and 25.3% was variable-rate debt.
The sensitivity analysis presented in the tables on page 57 is calculated as the impact on the income statement of a parallel shift in the interest rate curve. This estimate is based on the standard deviation of daily volatilities of the reference interest rates (Euribor 3 months and Libor 3 months) during 2007 using a 95% confidence interval.
56 DELHAIZE GROUP / ANNUAL REPORT 2007
Delhaize Group is exposed to liquidity risk as it has to be able to pay its short and long-term obligations when they fall due. Delhaize Group has a centralized approach to reduce the exposure to liquidity risk which aims at matching the maturities of its short- and long-term obligations with its cash position. The Groups policy is to finance its operating subsidiaries through a mix of retained earnings, third-party borrowings and capital contributions and loans from the parent and Group financing companies.
Delhaize Group manages the exposure by closely monitoring the cash resources required to fulfill the working capital needs, capital expenditures and debt requirements. Furthermore, Delhaize Group closely monitors the maturity profiles and the amount of short-term funding and the mix of short-term funding to total debt, the composition of total debt and the availability of committed credit facilities in relation to the level of outstanding short-term debt. A liquidity gap analysis is performed on a quarterly basis in which Delhaize Group anticipates large future cash inflows and outflows.
Delhaize Group is exposed to credit risk through its holdings in investment securities, its trade receivables, in cash and cash equivalents and in derivatives. Delhaize Group manages this risk by requiring a minimum credit quality of its financial investments or by obtaining credit insurance in case of trade receivables.
The Groups short-term investments are required to have a rating of at least A1 (Standard & Poors) / P1 (Moodys). Delhaize Groups long-term investment policy requires a minimum credit rating of A-/A3 for its financial investments.
The Groups exposure to changes in credit ratings of its counterparties is continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties.
PENSION PLAN RISK
Most operating companies of Delhaize Group have pension plans, the structures and benefits of which vary with conditions and practices in the countries concerned. Pension benefits may be provided through defined contribution plans or defined benefit plans.
In defined contribution plans, retirement benefits are determined by the value of funds provided by contributions paid by the associates and/or the Group and the subsequent performance of investments made with these funds. For defined benefit plans, retirement benefits are based on the associates pensionable salary and length of service or on guaranteed returns on contributions made.
Delhaize Group has defined benefit plans at Delhaize Belgium and Hannaford, supplemental executive retirements plans covering certain executives of Food Lion, Hannaford and Kash n Karry, and a post-employment benefit at Alfa-Beta. In total, approximately 20% of Delhaize Groups associates was covered by defined benefit plans at the end of 2007.
When the assets of a defined benefit plan fall short of the obligations, the Group bears an underfunding risk. At the end of 2007, the underfunding of Delhaize Groups defined benefit plans amounted to EUR 61.1 million and was recognized as a liability in the balance sheet.
More details on pension plans at Delhaize Group and its subsidiaries can be found in Note 24 to the Financial Statements, Benefit Plans, p. 89.
Major macroeconomic risks of Delhaize Group are reduced consumer spending and cost inflation. Weaker consumer spending can impact profitability negatively due to pressure on sales and margins. If labor cost and the cost of merchandise sold, which are the Groups primary operating costs, increase above retail inflation rates, this could have an adverse effect on the Groups profitability. In addition, rising fuel and energy prices can increase the Groups cost for heating, lighting, cooling and transport. Where possible, cost increases are recovered through retail price adjustments and increased operating efficiencies.
Delhaize Group is particularly susceptible to macroeconomic risks in the U.S. In 2007, 69.9% of the Groups revenues were generated in the U.S., where all its stores are located on the East Coast. Consequently, Delhaize Groups operations depend significantly upon the conditions in this area.
RISK RELATED TO COMPETITIVE ACTIVITY
The food retail industry is competitive and characterized by narrow profit margins. Delhaize Group faces heavy competition from many store chains. The Groups profitability could be impacted by the pricing, purchasing, financing, advertising or promotional decisions made by these competitors. To the extent Delhaize Group reduces prices or increases expenses to support sales in the face of competition, net income and cash generated from operations could be affected.
DELHAIZE GROUP / ANNUAL REPORT 2007 57
RISK RELATED TO SOCIAL ACTIONS
At the end of 2007, Delhaize Group had union representation in its operations in Belgium, the Grand-Duchy of Luxembourg, Romania and Greece. In its U.S. operations, the Group had union representation in one of Hannafords three distribution centers, for which a collective bargaining agreement with the union is in effect until February 2009.
Delhaize Groups operations and results could be negatively affected by social actions initiated by trade unions or other parts of its workforce, in the event of which the Group cannot assure that it would be able to adequately meet the needs of its customers.
RISK RELATED TO INFORMATION TECHNOLOGY SYSTEMS
Delhaize Groups operations are for many functions and processes dependent on IT systems, developed and maintained by internal experts or external suppliers. Failure of these systems could possibly cause disruptions in Delhaize Groups operations, affecting sales and profitability. Delhaize Group has business continuity plans in place to take the necessary measures to reduce the negative impact from IT failures on its operations.
Delhaize Groups ability to open new stores is dependent on purchasing or entering into leases on commercially reasonable terms for properties that are suitable for its needs. If the Group fails to secure property on a timely basis, its growth may be impaired. Similarly, its business may be harmed if it is unable to renew the leases on its existing stores on commercially acceptable terms.
ACQUISITION AND INTEGRATION RISK
As part of its strategy, Delhaize Group continues to reinforce its operations by pursuing acquisition opportunities in the food retail industry. Delhaize Group looks for the acquisition of businesses operating the same or similar store formats in geographical areas where it currently operates or in adjacent areas. By acquiring other businesses, the Group faces risks related to the integration of these businesses. The lack of suitable acquisition targets at acceptable prices may limit the Groups growth.
RISK RELATED TO EVENTS OF EXCEPTIONAL NATURE
Delhaize Groups operations, assets and staff can be exposed to risks related to events of an exceptional nature such as, but not limited to: severe weather, natural disasters, terrorist attacks, hostage taking, political unrest, fire, power outages, information technology failures, food poisoning, health epidemics and accidents. Such events could have a significant effect on the Groups relationships with its customers and on its financial condition, results of operations and cash flows. The Group is continuously evaluating and addressing possible threats linked to external events and has business continuity plans and crisis procedures in place. The effectiveness of these plans in limiting financial loss will vary according to the nature and severity of any exceptional event.
Delhaize Group is from time to time involved in legal actions. The Group has estimated its exposure to the claims and litigation arising in the normal course of operations and believes it has made adequate provisions for such exposure. Any litigation, however, involves risk and unexpected outcomes that could result in an adverse effect on the Groups financial statements. More information on pending litigation can be found in Note 40 to the Financial Statements, Contingencies, p. 103.
Delhaize Group is subject to federal, regional, state and local laws and regulations in each country in which it operates relating to, among others, zoning, land use, antitrust restrictions, work place safety, public health, environmental protection, community right-to-know, alcoholic beverage sales and pharmaceutical sales. A number of jurisdictions regulate the licensing of supermarkets, including retail alcoholic beverage license grants. Under certain regulations, Delhaize Group is prohibited from selling alcoholic beverages in some of its stores. Employers are also subject to laws governing their relationship with employees, including minimum wage requirements, overtime, working conditions, disabled access and work permit requirements. Compliance with, or changes in, these laws could reduce the revenues and profitability of the Groups stores and could affect its business, financial condition or results of operations.
The Group is subject to a variety of antitrust and similar legislation in the jurisdictions in which it operates. In a number of markets, the Group has market positions which may make future significant acquisitions more difficult and may limit its ability to expand by acquisition or merger, if it wished to do so. In addition, Delhaize Group is subject to legislation in many of the jurisdictions in which it operates relating to unfair competitive practices and similar behavior. Delhaize Group has been subject to and may in the future be subject to allegations of, or further regulatory investigations or proceedings into, such practices. Such allegations or investigations or proceedings (irrespective of merit), may require the Group to devote significant management resources to defending itself against such allegations. In the event that such allegations are proved, Delhaize Group may be subject to significant fines, damages awards and other expenses, and its reputation may be harmed.
Delhaize Group actively strives to ensure compliance with all laws and regulations to which it is subject. A Code of Business Conduct and Ethics has been developed and implemented, anti-fraud and other appropriate training has been implemented within the Group, and the internal audit function has been reinforced during the recent years.
RISK RELATED TO INTERNAL CONTROLS
Undetected control weaknesses or controls that function ineffectively represent a risk of loss and/or financial misstatement. Delhaize Group routinely assesses the quality and effectiveness of its internal controls. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If the Group fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, or if it experiences difficulties in the implementation
58 DELHAIZE GROUP / ANNUAL REPORT 2007
of internal controls, the Groups business and operating results could be harmed, and it could fail to meet its reporting obligations.
As a foreign company filing financial reports under U.S. law, Delhaize Group is required to meet the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which, beginning with Delhaize Groups annual report on Form 20-F for the year ending December 31, 2006, requires management and the Statutory Auditor to report on their assessment of the effectiveness of the Groups internal control over financial reporting.
The Groups 2006 annual report filed on Form 20F included managements conclusion that the Groups internal control over financial reporting was effective as of December 31, 2006. In the same Form 20-F, the Statutory Auditor concluded that this management assessment is, in all material respects, fairly stated and that the Group maintained, in all material respects, effective control over financial reporting as of December 31, 2006.
TAX AUDIT RISK
Delhaize Group is regularly audited in the various jurisdictions in which it does business, which it considers to be part of its ongoing business activity. While the ultimate outcome of these audits is not certain, Delhaize Group has considered the merits of its filing positions in its overall evaluation of potential tax liabilities and believes it has adequate liabilities recorded in its consolidated financial statements for potential exposures. Unexpected outcomes as a result of these audits could adversely affect Delhaize Groups financial statements.
PRODUCT LIABILITY RISK
The packaging, marketing, distribution and sale of food products entail an inherent risk of product liability, product recall and resultant adverse publicity. Such products may contain contaminants that may be inadvertently redistributed by Delhaize Group. These contaminants may, in certain cases, result in illness, injury or death.
As a consequence, Delhaize Group has an exposure to product liability claims. If a product liability claim is successful, the Groups insurance may not be adequate to cover all liabilities it may incur, and it may not be able to continue to maintain such insurance or obtain comparable insurance at a reasonable cost, if at all.
In addition, even if a product liability claim is not successful or is not fully pursued, the negative publicity surrounding any assertion that the Groups products caused illness or injury could affect the Groups reputation and its business and financial condition and results of operations.
Delhaize Group takes an active stance towards food safety in order to offer customers safe food products. The Group has worldwide food safety guidelines in place, and their application is vigorously followed.
RISK OF ENVIRONMENTAL LIABILITY
Delhaize Group is subject to laws and regulations that govern activities that may have adverse environmental effects. Delhaize Group may be responsible for the remediation of such environmental conditions and may be subject to associated liabilities relating to its stores and the land on which its stores, warehouses and offices are situated, regardless of whether the Group leases, subleases or owns the stores, warehouses or land in question and regardless of whether such environmental conditions were created by the Group or by a prior owner or tenant. The Group has put in place control procedures at the operating companies in order to identify, prioritize and resolve adverse environmental conditions.
The Group manages its insurable risk through a combination of external insurance coverage and self-insurance. In deciding whether to purchase external insurance or manage risk through self-insurance, the Group considers its success in managing risk through safety and other internal programs and the cost of external insurance coverage.
External insurance is used when available at a reasonable cost. The associated insurance levels are set using exposure data gained through risk assessment, by comparison with standard industry practices and by assessment of the available financing capacity in the insurance market.
The main risks covered by Delhaize Groups insurance policies are the following:
In addition to Group policies, Delhaize Group purchases, in the various countries where it is present, policies of insurance of a mandatory nature or designed to cover specific risks such as vehicle or workers compensation.
The U.S. operations of Delhaize Group are self-insured for workers compensation, general liability, vehicle accident and druggist claims and healthcare (including medical, pharmacy, dental and short-term disability). The self-insured reserves related to workers compensation, general liability and vehicle coverage are reinsured by The Pride Reinsurance Company, an Irish reinsurance captive wholly-owned by Delhaize Group. The purpose for implementing the captive reinsurance program was to provide Delhaize Groups U.S. operations with continuing flexibility in their risk program, while providing certain excess loss protection through anticipated reinsurance contracts with Pride.
Self-insurance liabilities are estimated based on actuarial valuations of claims filed and an estimate of claims incurred but not yet reported. Delhaize Group believes that the actuarial estimates are reasonable; however, these estimates are subject to changes in claim reporting patterns, claim settlement patterns and legislative and economic conditions, making it possible that the final resolution of some of these claims may require Delhaize Group to make significant expenditures in excess of its existing reserves.
Self-insurance reserves of EUR 110.9 million are included as liabilities on the balance sheet. More information on self-insurance can be found in Note 23 to the Financial Statements, Self Insurance Provision (p. 89).
DELHAIZE GROUP / ANNUAL REPORT 2007 59
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67 Notes to the Financial Statements
DELHAIZE GROUP / ANNUAL REPORT 2007 61
62 DELHAIZE GROUP / ANNUAL REPORT 2007
Consolidated Liabilities and Equity
DELHAIZE GROUP / ANNUAL REPORT 2007 63
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(in millions of EUR, except earnings per share)
66 DELHAIZE GROUP / ANNUAL REPORT 2007
1. General Information
The principal operational activity of Delhaize Group (also referred to, with our consolidated and associated companies, except where the context otherwise requires, as we, us, our, the Group and the Company) is the operation of food supermarkets in North America, Europe and Southeast Asia. Delhaize Groups sales network also includes other store formats such as proximity stores and specialty stores. In addition to food retailing, Delhaize Group engages in food wholesaling to stores in its sales network and in retailing of non-food products such as pet products.
Delhaize Groups ordinary shares are listed on Euronext Brussels under the symbol DELB and Delhaize Groups American Depositary Shares (ADS), as evidenced by American Depositary Receipts (ADR), are listed on the New York Stock Exchange (NYSE) under the symbol DEG.
The consolidated financial statements for the year ended December 31, 2007 as presented in this annual report were prepared under the responsibility of the Board of Directors and authorized for issue on March 5, 2008 subject to approval of the statutory non-consolidated accounts by the shareholders at the Ordinary General Meeting to be held on May 22, 2008. In compliance with Belgian law, the consolidated accounts will be presented for informational purposes to the shareholders of Delhaize Group at the same meeting. The consolidated financial statements are not subject to amendment except conforming changes to reflect decisions, if any, of the shareholders with respect to the statutory non-consolidated financial statements affecting the consolidated financial statements.
2. Summary of Significant Accounting Policies
Basis of Presentation
Delhaize Groups consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), and as adopted by the European Union (EU), and Delhaize Group has not applied any EU variations from IFRS. These financial statements have been prepared under the historical cost convention except for certain accounts for which IFRS requires another convention, as disclosed in the corresponding notes.
Certain reclassifications have been made to the 2006 and 2005 financial statements to be consistent with the current years presentation.
Delhaize Groups fiscal year ends on December 31. However, the year-end of Delhaize Groups U.S. businesses is the Saturday closest to December 31. The Groups consolidated results of operations and balance sheet include that of the Delhaize U.S. subsidiaries based on their fiscal calendar year. No adjustment has been made for the difference in reporting date as the impact is immaterial to the consolidated financial statements taken as a whole. The consolidated results of Delhaize Group for 2007, 2006 and 2005 include the results of operations of its U.S. subsidiaries for the 52 weeks ended December 29, 2007, 52 weeks ended December 30, 2006 and 52 weeks ended December 31, 2005, respectively. The results of operations of the companies of Delhaize Group outside the United States are prepared on a calendar year basis.
Group Accounting Policies
The consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. The accounts of consolidated subsidiaries are restated as necessary to comply with the accounting policies adopted in the consolidated financial statements where such restatement has a significant effect on the consolidated accounts taken as a whole.
Principles of Consolidation
All companies over which Delhaize Group can exercise control are fully consolidated. Delhaize Group owns directly or indirectly more than half of the voting rights of all subsidiaries that are fully consolidated. Companies over which joint control is exercised, as evidenced by a contractual agreement, are proportionately consolidated. Companies over which Delhaize Group has significant influence (generally 20% or more of the voting power) but for which it neither exercises control nor joint control are accounted for under the equity method. Subsidiaries are fully and joint ventures proportionately consolidated from the date on which control or joint control is transferred to the Group. They are deconsolidated from the date that control or joint control ceases.
Translation of Foreign Currencies
Delhaize Groups financial statements are presented in euros, the parent companys functional currency. The balance sheets of foreign subsidiaries are converted to euros at the year-end exchange rate (closing exchange rate). The income statements are translated at the average daily exchange rate (i.e., the yearly average of exchange rates on each working day). The differences arising from the use of the average daily exchange rate for the income statement and the closing exchange rate for the balance sheet are recorded in the cumulative translation adjustment component of equity.
Foreign currency transactions are initially recognized at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are subsequently translated at the balance sheet date exchange rate. Gains and losses resulting from the settlement of foreign currency transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are included in the income statement. Exchange differences arising on monetary items that form part of a net investment in a foreign operation (i.e., items that are receivable from or payable to a foreign operation, for which settlement is neither planned, nor likely to occur in the foreseeable future) are recognized in the cumulative translation adjustment component of equity. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in the income statement except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognized directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognized directly in equity.
DELHAIZE GROUP / ANNUAL REPORT 2007 67
Use of Estimates
The preparation of financial statements in conformity with IFRS requires the application of judgment by Delhaize Group in selecting appropriate assumptions for calculating financial estimates, which inherently contain some degree of uncertainty. These estimates are based on experience and assumptions we believe to be reasonable under the circumstances and form the basis for making judgments that affect the carrying amounts of assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from these estimates. Our estimates generally have not deviated significantly from actual results. Estimates and judgments are particularly important to, but not limited to, determining the provisions for closed stores, self-insurance obligations, defined benefit plan obligations, income taxes, inventory losses and assessing assets for impairment.
The purchase method of accounting is used to account for acquisitions of businesses by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of acquisition, plus costs directly attributable to the acquisition. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Groups share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the business acquired, the difference is recognized directly in the income statement.
Upon adoption of IFRS on January 1, 2003, Delhaize Group did not apply IFRS 3 Business Combinations retrospectively and did not restate business combinations that occurred before January 1, 2003.
Goodwill is not amortized, but is reviewed for impairment annually and whenever there is an indication that goodwill may be impaired. For the purpose of testing goodwill for impairment, goodwill is allocated to the operating entity level, which is the lowest level at which the goodwill is monitored for internal management purposes. Any impairment is recognized immediately in the income statement and cannot be subsequently reversed. Consistent with all other assets and liabilities, goodwill arising on the acquisition of a foreign operation is treated as an asset of the foreign operation and is carried in the functional currency of the foreign operation and converted at the closing exchange rate into euros.
Intangible assets include trade names and favorable lease rights that have been acquired in business combinations, and computer software, various licenses and prescription files. Intangible assets are stated at cost less accumulated depreciation and accumulated impairment losses. Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. The useful lives of intangible assets with definite lives are as follows:
Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually and when there is an indication that the asset may be impaired. The Group believes that trade names have indefinite lives because they contribute directly to the Groups cash flows as a result of recognition by the customer of each banners characteristics in the marketplace. There are no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of the trade names.
Property, Plant and Equipment and Investment Property
Property, plant and equipment and investment property are stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is calculated using the straight-line method based on the estimated useful lives of the related assets. Finance lease assets and leasehold improvements are depreciated over the lesser of the expected useful life of similar owned assets or the relevant lease term. Land is not depreciated. Useful lives of tangible fixed assets are as follows:
Non-current Assets and Disposal Groups Held for Sale
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management with proper authority must be committed to the sale and the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets held for sale are measured at the lower of the assets carrying amount or fair value less costs to sell.
Borrowing costs attributable to the construction or production of qualifying assets are capitalized.
Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. All other leases are classified as operating leases.
Assets held under finance leases are recognized as assets at the lower of fair value or present value of the minimum lease payments at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are allocated between finance costs and a reduction of the lease obligation to achieve a constant rate of interest over the lease term.
Rents paid on operating leases are charged to income on a straight-line basis over the term of the lease. Benefits received and receivable as an incentive to enter into an operating lease are spread over the relevant lease term on a straight-line basis as a reduction in rent expense.
Impairment of Assets
The Group tests assets for impairment whenever events or circumstances indicate that impairment may exist. Goodwill and intangible assets with indefinite lives are tested for impairment at least annually. For impairment testing of tangible assets, the Group considers each store to be a cash generating unit. Stores for which there is potential impairment are tested for impairment by comparing the carrying value of the assets to their recoverable amount, i.e., the higher of their value in use (projected discounted cash flows) or fair value less costs to sell. If impairment exists, the assets are written down to their recoverable amount. If impairment of assets other than goodwill is no longer justified in future periods due to a recovery in fair value or value in use of the asset, the impairment is reversed.
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Delhaize Group applies IAS 39 Financial Instruments: Recognition and Measurement, IAS 32 Financial Instruments: Presentation and IFRS 7 Financial Instruments: Disclosures for financial instruments.
Inventories are valued at the lower of cost on a weighted average cost basis or net realizable value. Inventories are written down on a case-by-case basis if the anticipated net realizable value declines below the carrying amount of the inventories. Net realizable value is the anticipated selling price less the estimated costs necessary to make the sale. When the reason for a write-down of the inventories has ceased to exist, the write-down is reversed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and deposits with an original maturity of three months or less. Negative cash balances are reclassified to liabilities.
Income tax expense represents the sum of the tax currently payable and deferred tax. Tax currently payable is based on the taxable profit of the year under applicable tax law and includes taxes related to prior years recorded in the current year. Taxable profit differs from profit before tax as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The liability for current tax is calculated using tax rates that have been enacted or substantively enacted on the balance sheet date.
Deferred tax liabilities and assets are established for temporary differences between the carrying amount and the tax basis of assets and liabilities (including finance leases) and are subsequently adjusted to reflect changes or substantially enacted changes in tax rates expected to be in effect when the temporary differences reverse. Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries, associates and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are included in the consolidated accounts only to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences, the unused tax losses and unused tax credits can be utilized.
Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated.
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Provisions for closed store costs, including lease liabilities and severance costs, are included in other operating expenses or result from discontinued operations, as appropriate. Store closing provisions are reviewed quarterly to ensure that accrued amounts appropriately reflect the outstanding commitments and that additional expenses are accrued or amounts that are no longer needed for their originally intended purpose are reversed.
The value of owned property and equipment related to a closed store is reduced to reflect the recoverable value based on the Groups previous experience in disposing of similar assets and economic conditions at closing. The resulting impairment loss is included in other operating expenses.
Inventory write-downs, if any, in connection with store closings are classified in cost of sales or result from discontinued operations. Costs to transfer inventory and equipment from closed stores are expensed as incurred.
Sale of products to the Groups retail customers is recognized at the point of sale and sales to wholesale customers are recognized upon delivery. Sales are recorded net of sales taxes and value-added taxes. Discounts and incentives, including discounts from regular retail prices for specific items and buy one, get one free incentives, are offered to retail customers through certain loyalty card programs and are recognized as a reduction in sales as the products are sold. Loyalty programs also exist whereby customers earn points for future purchases. Sales are reduced when the points are awarded and a liability is recognized for expected redemption of points.
Discounts provided by vendors, in the form of manufacturers coupons, are recorded as a receivable. Revenue from the sale of gift cards and gift certificates is recognized when the gift card or gift certificate is redeemed by the retail customer.
Cost of Sales
Purchases are recorded net of cash discounts and other supplier discounts and allowances. Cost of sales includes all costs associated with getting products to the retail stores including buying, warehousing and transportation costs.
Delhaize Group receives allowances and credits from suppliers primarily for in-store promotions, co-operative advertising, new product introduction and volume incentives. These allowances are included in the cost of inventory and recognized when the product is sold unless they represent reimbursement of a specific, identifiable cost incurred by the Group to sell the vendors product in which case they are recorded as a reduction in selling, general and administrative expenses. Income from new product introduction consists of allowances received to compensate for costs incurred for product handling and is recognized over the product introductory period in cost of sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include store operating expenses, administrative expenses and advertising expenses.
A discontinued operation is a component of a business that either has been disposed, or is classified as held for sale, and:
Delhaize Groups primary segment reporting is geographical because its risks and returns are affected predominately by the fact that it operates in different countries. Reportable segments include the United States, Belgium (including Belgium, the Grand-Duchy of Luxembourg and Germany), Greece and Emerging Markets. Emerging Markets include the Groups operations in Romania and Indonesia. Delhaize Group has only one business segment. In 2007, the operation of retail food supermarkets represented approximately 90% of the Groups consolidated revenues.
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Standards and Interpretations which Became Applicable During 2007
The following standards and interpretations became effective in 2007 and, with the exception of IFRS 7, had no material impact on the financial statements or disclosures of the Group.
IFRS 7 Financial Instruments: Disclosures is applicable for accounting years beginning on or after January 1, 2007 and introduces new requirements to enhance disclosures on financial instruments. IFRS 7 aims at greater transparency, mainly with regard to the risk that entities run from the use of financial instruments.
Standards and Interpretations Issued but not yet Effective
The Group did not early apply the following IFRS Standards and Interpretations which were issued at the date of authorisation of these financial statements but not yet effective on the balance sheet date. The Group anticipates that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group in the period of initial application:
3. Business Acquisitions
In 2005, Delhaize Group acquired 100% of Cash Fresh, a chain of 43 supermarkets mainly located in northeastern Belgium. Delhaize Group paid an aggregate amount of EUR 159.1 million in cash for the acquisition of Cash Fresh, net of EUR 1.7 million in price adjustments received by Delhaize Group in 2006. This amount included EUR 1.6 million costs directly attributable to the acquisition, and was net of EUR 6.4 million in cash and cash equivalents acquired. Cash Freshs results of operations are included in Delhaize Groups consolidated results from May 31, 2005. Cash Freshs net profit was EUR 4.3 million in 2005, since the acquisition date. Goodwill recognized on the acquisition of Cash Fresh is attributable to anticipated future economic benefits and synergies.
The assets and liabilities arising from the acquisition of Cash Fresh are as follows:
Cash Freshs carrying value of assets and liabilities prior to the acquisition have not been disclosed because Cash Fresh followed Belgian GAAP and not IFRS, and therefore, no IFRS information was available.
On March 15, 2007, Delhaize Group reached a binding agreement to sell Di, its Belgian beauty and body care business to NPM/CNP and Ackermans & Van Haaren. This transaction was approved by the European antitrust authorities on June 1, 2007, and was closed on June 30, 2007. Delhaize Group received an amount of EUR 33.4 million in cash, subject to contractual adjustments. A pre-tax gain of EUR 1.5 million has been recorded, including EUR 3.0 million in other operating income, EUR 2.5 million in other operating expenses and EUR 1.0 million in income from investments. The Di network consisted of 132 company-operated and franchised stores, which contributed EUR 95.5 million to Delhaize Groups 2006 revenues.
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5. Disposal Group Classified as Held for Sale
In November 2006, Delhaize Group reached a binding agreement to sell Delvita, its operations in the Czech Republic, to the German retail group Rewe, for EUR 100 million, subject to contractual adjustments. The assets and liabilities of Delvita were classified as assets held for sale and liabilities associated with assets held for sale as of September 30, 2006.
The carrying value of assets classified as assets held for sale and liabilities associated with assets held for sale were as follows as of December 31, 2006:
In 2006, an impairment loss of EUR 64.3 million was recorded in discontinued operations to write down the value of Delvita to its fair value less costs to sell (EUR 99.9 million).
On May 31, 2007, the transaction was completed, after unconditional approval by the European antitrust authorities on April 26, 2007.
A gain of EUR 22.5 million, including a positive accumulated foreign currency translation adjustment of EUR 23.7 million, was recorded in the result from discontinued operations.
Delhaize Group entered the Czech market in 1991 through the newly-founded subsidiary Delvita. In 2005, Delvita sold its Slovakian stores to REWE. At the end of March 2007, Delvitas sales network included 97 stores. At the end of 2006, Delvita employed approximately 3,700 associates.
See also Note 28 on discontinued operations.
6. Segment Information
Delhaize Groups primary segment reporting is geographical because its risks and returns are affected predominately by the fact that it operates in different countries. Delhaize Group is engaged in one line of business, the operation of retail food supermarkets, under different banners that have similar economic and operating characteristics.
The operation of retail food supermarkets represents approximately 90% of Delhaize Groups consolidated revenues and was its only reportable business segment in 2007, 2006 and 2005.
Beginning in 2008, certain costs previously included in Corporate (Unallocated) costs will be allocated to the segment Belgium. Prior to 2008, certain Corporate costs were allocated only to segments operating in separate legal entities. Delhaize Group and its Belgium business unit operate within the same legal entity. Segment information for prior periods presented for comparative purposes will be revised accordingly. Amounts allocated to Delhaize Belgiums selling, general and administrative expenses would have been EUR 11.3 million, EUR 8.3 million and EUR 7.0 million in 2007, 2006 and 2005, respectively. This change will have no effect on Delhaize Groups consolidated financial results.
The geographical segment information for 2007, 2006, and 2005 is as follows:
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The allocation of goodwill is as follows:
Goodwill is allocated and tested for impairment at the operating entity level, which is the lowest level at which goodwill is monitored for internal management purpose. Delhaize Group conducts an annual impairment assessment for goodwill in the fourth quarter of each year and whenever events or circumstances indicate that impairment may have occurred. The impairment test of goodwill involves comparing the recoverable amount of each operating entity with its carrying value, including goodwill. The recoverable amount of each operating entity is determined based on the higher of value in use calculations and the fair value less cost to sell. The value in use calculations use cash flow projections based on financial plans approved by management covering a three-year period. Cash flows beyond the three-year period are extrapolated using estimated growth rates. The growth rate does not exceed the long-term average growth rate for the supermarket retail business. The fair value less cost to sell of each operating company is based on earnings multiples paid for similar companies in the market and market capitalization for publicly traded subsidiaries. In 2007, 2006 and 2005, goodwill was tested for impairment using the discounted cash flows methodology and comparing to market multiples for reasonableness for the U.S. entities. Goodwill at the other Group entities was tested for impairment using the market multiple approach and market capitalization approach and discounted cash flows if the market approach indicated that there was potential impairment. An impairment loss is recorded if the carrying value exceeds the recoverable amount.
In 2006, EUR 17.1 million goodwill associated with Delvita was classified as held for sale and was fully impaired upon writing down the value of Delvita to fair value less costs to sell (see Note 5). No impairment loss was recorded in 2005 and 2007.
Key assumptions used for value in use calculations in 2007: