CORRECTED PRESS RELEASE: Ahold announces results for first three quarters of 2003

Wednesday, November 26, 2003

 

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-CORRECTED PRESS RELEASE: Ahold announces results for first three quarters of 2003

Zaandam, The Netherlands, November 26, 2003 - Ahold today published its results for the first three quarters of 2003. Commenting on the results, Hannu Ryöppönen, CFO, said: "The results for the third quarter of 2003 reflected the trends of the first half-year as published on November 7, 2003 with some slippage of operating income in our U.S. retail operations and an increase in operating losses at U.S. Foodservice. Non-recurring items have negatively affected results both at our U.S. retail operations and in U.S. Foodservice. Operating income in Europe declined primarily due to a decrease at Albert Heijn."

Net sales
The 10.5% decrease in net sales was largely attributable to lower currency exchange rates against the Euro, particularly for the U.S. Dollar. The average U.S. Dollar to Euro exchange rate decreased approximately 16.7% in the first three quarters of 2003 compared to the same period last year. Net sales excluding currency impact increased by 3.3% mainly due to a 3.2% increase in net sales in the U.S. retail trade operations, a 1.3% increase in the Europe retail trade operations and a 1.2% increase at U.S. Foodservice.

In addition, net sales in the first three quarters of 2003 were:

? favorably impacted by the full period consolidation in Ahold's consolidated financial statements of Disco and Santa Isabel in South America, which began to be consolidated in the second and third quarters of 2002, respectively;

? favorably impacted by the acquisition of Lady Baltimore and Allen Foods in September and December 2002, respectively, which, together with the consolidation of Disco and Santa Isabel discussed above, contributed approximately 1.2% of the 3.3% net sales growth; and




? marginally negatively impacted by the divestments of Jamin and De Tuinen in The Netherlands in the second quarter of 2003 and of the Company's Chilean, Malaysian, Indonesian and Paraguayan operations and De Walvis in The Netherlands in the third quarter of 2003.

Operating Income
The 47.3% decrease in operating income was primarily caused by weaker operating performance in all business segments, the weakening of the U.S. Dollar against the Euro and higher audit, legal and consultancy fees. In addition, as discussed below, exceptional losses of Euro 110 million were recorded in the third quarter of 2003 related to the divestment of a number of foreign subsidiaries, principally Ahold's Chilean activities. Operating income in the same period last year was negatively impacted by an exceptional loss of Euro 372 million in the first three quarters of 2002. The exceptional loss was caused by the default by Velox Retail Holdings (VRH), Ahold's former joint venture partner, on bank debt that Ahold had guaranteed.

Operating income before impairment and amortization of goodwill and exceptional losses in 2003 decreased by 53.4% compared to the same period last year. Excluding currency impact, operating income before impairment and amortization of goodwill and exceptional losses would have decreased by 45.5% in the first three quarters of 2003 compared to the same period last year. As mentioned above, this decrease was primarily caused by a weaker operating performance across all business segments, as well as higher audit, legal and consultancy fees.

Goodwill Amortization
Goodwill amortization in the first three quarters of 2003 amounted to Euro 131 million, a decrease of 35.1% compared to the same period last year. This decrease was primarily due to lower goodwill balances at year-end 2002 resulting from the goodwill impairment charges of Euro 1,281 million recorded in fiscal 2002 of which Euro 1,185 million were recognized in the fourth quarter of fiscal 2002 and to the lower average currency exchange rate of the U.S. Dollar against the Euro.

Goodwill Impairment
No goodwill impairment charges were recorded in the first three quarters of 2003 compared to Euro 96 million in the same period last year. The goodwill impairment charge recorded in the first three quarters of 2002 mainly related to the purchase of the remaining shares in DAIH in July and August 2002.

Exceptional Losses
Exceptional losses of Euro 110 million were recorded in the third quarter of 2003 related to the divestment of foreign subsidiaries, principally Ahold's Chilean activities. Of these exceptional losses, Euro 70 million related to the recognition of accumulated foreign currency translation adjustments in the statement of operations and Euro 36 million to the reversal of goodwill, both of which had previously been charged to shareholders' equity. These exceptional losses were non-cash and had no impact on the overall level of shareholders' equity. Exchange rate differences related to the translation of the financial results of foreign subsidiaries are recorded directly in shareholders' equity.




When these exchange rate differences are realized upon the sale or liquidation of the underlying foreign subsidiary, the cumulative foreign currency translation adjustments are recognized in the statement of operations. Also, under Dutch GAAP, goodwill previously deducted directly from shareholders' equity upon acquisition has to be reclassified pro-rata to the statement of operations if sold within six years of the initial acquisition.

Net sales
The 10.5% decrease in net sales was largely attributable to lower currency exchange rates against the Euro, particularly for the U.S. Dollar. The average U.S. Dollar to Euro exchange rate decreased approximately 16.7% in the first three quarters of 2003 compared to the same period last year. Net sales excluding currency impact increased by 3.3% mainly due to a 3.2% increase in net sales in the U.S. retail trade operations, a 1.3% increase in the Europe retail trade operations and a 1.2% increase at U.S. Foodservice.

In addition, net sales in the first three quarters of 2003 were:

? favorably impacted by the full period consolidation in Ahold's consolidated financial statements of Disco and Santa Isabel in South America, which began to be consolidated in the second and third quarters of 2002, respectively;

? favorably impacted by the acquisition of Lady Baltimore and Allen Foods in September and December 2002, respectively, which, together with the consolidation of Disco and Santa Isabel discussed above, contributed approximately 1.2% of the 3.3% net sales growth; and




? marginally negatively impacted by the divestments of Jamin and De Tuinen in The Netherlands in the second quarter of 2003 and of the Company's Chilean, Malaysian, Indonesian and Paraguayan operations and De Walvis in The Netherlands in the third quarter of 2003.

Operating Income
The 47.3% decrease in operating income was primarily caused by weaker operating performance in all business segments, the weakening of the U.S. Dollar against the Euro and higher audit, legal and consultancy fees. In addition, as discussed below, exceptional losses of Euro 110 million were recorded in the third quarter of 2003 related to the divestment of a number of foreign subsidiaries, principally Ahold's Chilean activities. Operating income in the same period last year was negatively impacted by an exceptional loss of Euro 372 million in the first three quarters of 2002. The exceptional loss was caused by the default by Velox Retail Holdings (VRH), Ahold's former joint venture partner, on bank debt that Ahold had guaranteed.

Operating income before impairment and amortization of goodwill and exceptional losses in 2003 decreased by 53.4% compared to the same period last year. Excluding currency impact, operating income before impairment and amortization of goodwill and exceptional losses would have decreased by 45.5% in the first three quarters of 2003 compared to the same period last year. As mentioned above, this decrease was primarily caused by a weaker operating performance across all business segments, as well as higher audit, legal and consultancy fees.

Goodwill Amortization
Goodwill amortization in the first three quarters of 2003 amounted to Euro 131 million, a decrease of 35.1% compared to the same period last year. This decrease was primarily due to lower goodwill balances at year-end 2002 resulting from the goodwill impairment charges of Euro 1,281 million recorded in fiscal 2002 of which Euro 1,185 million were recognized in the fourth quarter of fiscal 2002 and to the lower average currency exchange rate of the U.S. Dollar against the Euro.

Goodwill Impairment
No goodwill impairment charges were recorded in the first three quarters of 2003 compared to Euro 96 million in the same period last year. The goodwill impairment charge recorded in the first three quarters of 2002 mainly related to the purchase of the remaining shares in DAIH in July and August 2002.

Exceptional Losses
Exceptional losses of Euro 110 million were recorded in the third quarter of 2003 related to the divestment of foreign subsidiaries, principally Ahold's Chilean activities. Of these exceptional losses, Euro 70 million related to the recognition of accumulated foreign currency translation adjustments in the statement of operations and Euro 36 million to the reversal of goodwill, both of which had previously been charged to shareholders' equity. These exceptional losses were non-cash and had no impact on the overall level of shareholders' equity. Exchange rate differences related to the translation of the financial results of foreign subsidiaries are recorded directly in shareholders' equity.




When these exchange rate differences are realized upon the sale or liquidation of the underlying foreign subsidiary, the cumulative foreign currency translation adjustments are recognized in the statement of operations. Also, under Dutch GAAP, goodwill previously deducted directly from shareholders' equity upon acquisition has to be reclassified pro-rata to the statement of operations if sold within six years of the initial acquisition.

Net Financial Expense
Net interest expense increased by 4.1% due to an increase in banking fees and interest expenses related to the credit facility signed on March 3, 2003, new debt assumed or incurred in connection with acquisitions in the course of 2002 and an increase in cash dividends paid in 2002. This increase in banking fees and interest expenses was partly offset by a favorable currency impact, especially relating to the U.S. Dollar against the Euro. Net interest expense excluding currency impact increased by 18.8%.

The increase in banking fees and interest expenses was due in part to the higher applicable borrowing rate for the 2003 credit facility compared with the previous credit facility. The applicable borrowing rate under the 2003 credit facility as of the end of the third quarter of 2003 was LIBOR (or EURIBOR on Euro borrowings) plus 3.25%. The applicable borrowing rate under the previous credit facility as of year-end 2002 was LIBOR (or EURIBOR on Euro borrowings) plus a margin of 0.35% to 0.40%, depending upon the amount of debt drawn under the facility.

Ahold's level of borrowing and letters of credit under its 2003 credit facility have increased compared to the level under the previous credit facility. Ahold also has incurred significant fees under the 2003 credit facility and in connection with the extension and amendment of its accounts receivable securitization programs. Ahold's borrowings under the 2003 credit facility as of the end of the third quarter of 2003 were USD 750 million and Euro 600 million, plus USD 353 million of issued letters of credit that bore a fee of 3.25% of the stated amount. Its borrowings under the previous credit facility as of year-end 2002 were USD 80 million, plus USD 150 million of issued letters of credit with a fee of 0.40%.

The gain on foreign exchange in the first three quarters of 2003 amounted to Euro 16 million and mainly related to the positive impact of the revaluation of the Argentine Peso on U.S. Dollar-denominated debt in Argentina. In the first three quarters of 2002, a foreign exchange loss of Euro 85 million was mainly incurred related to the negative impact of the devaluation of the Argentine Peso on U.S. Dollar-denominated debt and inflation adjustment losses related to Argentine Peso-denominated debt in Argentina.




Income Taxes
The effective income tax rate, adjusted for the impact of non-tax-deductible impairment and amortization of goodwill and exceptional losses, increased to 50.9% in the first three quarters of 2003 compared to 30.0% in the same period last year. The main factor contributing to this increase in the effective tax rate was a different geographic mix of earnings, and higher losses in areas where no tax credit could be recorded.

Share in Income (Loss) of Joint Ventures and Equity Investees
The share in income (loss) of joint ventures and equity investees in the first three quarters of 2003 amounted to an income of Euro 139 million, compared to a loss of Euro 42 million in the same period last year. The share in income of ICA, included in European joint ventures, increased considerably in the first three quarters of 2003 mainly as a result of a gain related to the sale and leaseback of several distribution centers.

The loss in the first three quarters of 2002 was primarily caused by losses at DAIH. The loss at DAIH of Euro 126 million reflects the losses incurred at Disco and Santa Isabel at the time that they were not consolidated, which were mainly caused by the negative impact of the devaluation of the Argentine Peso on U.S. Dollar-denominated debt, as well as inflation adjustment losses on third-party Argentine Peso-denominated debt in Argentina. The losses in the first three quarters of 2002 at DAIH were partially offset by income from ICA AB, Jerónimo Martins Retail (JMR) and Paiz Ahold in this period.

Net Income (Loss)
Net loss in the first three quarters of 2003 was Euro 42 million, compared to a net income of Euro 17 million in the same period last year. The net loss in the 2003 period was primarily caused by lower operating performance at all business segments and higher audit, legal and consultancy fees, as well as the weakening of the U.S. Dollar against the Euro and the Euro 110 million of exceptional losses related to divestments.

Net Income (Loss) after Preferred Dividends per Common Share-Basic
Net loss after preferred dividends per common share-basic amounted to Euro 0.08 per common share in the first three quarters of 2003 compared to a net loss of Euro 0.01 per common share in the same period last year.

Set forth below is a discussion of net sales and operating income for Ahold's business segments and certain other financial information.




Retail Trade - United States
Third Quarter 2003
Operating income before impairment and amortization of goodwill and exceptional losses in the third quarter of 2003 decreased as a result of reduced gross margin due to increased promotional activity, particularly at Giant-Landover and Tops. Stop & Shop continued its solid performance during the quarter.

Operating income also was significantly impacted by impairment charges relating to long-lived assets and other non-recurring items. In addition, in the third quarter of 2002, real estate gains totaling Euro 29 million had a positive impact on operating income, as reported last year, versus a gain of Euro 4 million this year.

First Three Quarters 2003
The decrease in net sales in the first three quarters of 2003 was largely attributable to a lower U.S. Dollar to Euro exchange rate. U.S. Dollar net sales increased by 3.2% resulting from comparable sales growth and the opening of new stores. Identical sales increased by 0.1% and comparable sales at existing and replacement stores increased by 0.9%. At Stop & Shop and Giant-Carlisle, U.S. Dollar net sales increased by 6.6% and 7.8%, respectively. Giant-Landover and Tops experienced pressure on net sales due to the weak economy and heightened competition, resulting in only slight increases in U.S. Dollar net sales. Due to the difficult trading environment in the southeastern United States, U.S. Dollar net sales at Bruno's and BI-LO (excluding Golden Gallon) were lower.

Operating income before impairment and amortization of goodwill and exceptional losses in the first three quarters of 2003 decreased primarily as a result of the decline in the third quarter. Operating expenses at all of the companies in the U.S. retail operations were impacted by higher pension expenses, as well as continued rising health care costs. The pressure on operating expenses caused by these factors was partially offset by various cost saving initiatives.

Retail Trade - Europe
Third Quarter 2003
Operating income before impairment and amortization of goodwill and exceptional losses at Albert Heijn in the third quarter of 2003 decreased significantly compared to the same period in 2002. The decrease was primarily due to lower net sales and gross margins partially offset by lower operating expenses from cost reduction programs. As part of these programs, Albert Heijn is restructuring its head office and logistics functions, including through the reduction of 440 jobs.

Operating income before impairment and amortization of goodwill and exceptional losses at other Europe retail trade operations increased in the third quarter of 2003, compared to the same period in 2002. This increase was primarily due to a strong increase at Schuitema as a result of higher sales and lower operating costs. In Central Europe, operating loss before impairment and amortization of goodwill and exceptional losses increased partly due to fixed asset impairment charges related to the sale of two hypermarkets in Poland and increased operating costs due to new stores. Spain incurred a small operating loss before impairment and amortization of goodwill and exceptional losses mainly due to slightly lower gross margins and higher operating costs partly related to new stores as well as fixed asset impairment charges.

First Three Quarters 2003
Net sales at Albert Heijn in the first three quarters of 2003 decreased by 2.0% compared to the same period last year. Identical sales at Albert Heijn in the first three quarters of 2003 declined by 2.0% primarily due to lower consumer spending and a negative market sentiment towards Albert Heijn. As a result, Albert Heijn introduced a new pricing strategy in October 2003.

Net sales at other Europe retail trade operations in the first three quarters of 2003 increased by 4.1% compared to the same period last year, primarily due to strong net sales growth at Schuitema and an increase in net sales in Central Europe and Spain. Net sales were marginally offset by the disposals of Ahold's specialty stores (Jamin and De Tuinen) in The Netherlands, which were completed in the second quarter of 2003. In Central Europe and Spain, net sales increased due to the opening of new stores, however, net sales in Central Europe were negatively impacted by deflation and a negative currency impact.




Operating income before impairment and amortization of goodwill and exceptional losses in the Europe retail trade operations decreased primarily due to lower operating income at Albert Heijn. This was principally caused by lower net sales and gross margins, partially offset by lower operating expenses due to the start-up of cost reduction programs. In response to the competitive environment, Albert Heijn announced its price repositioning campaign on October 5, 2003.

Operating income before impairment and amortization of goodwill and exceptional losses at other Europe retail trade operations in the first three quarters of 2003 was almost at the same level as the comparable period of last year.

Foodservice
Foodservice - United States

Third Quarter 2003
The operating loss before impairment and amortization of goodwill and exceptional losses in the third quarter of 2003 was primarily due to continued substantial pressure on gross profit at U.S. Foodservice as a result of its continued focus on controlling inventory levels and, hence, reduced purchases from vendors. As a result of the latter, volume allowances, which are based on purchases from vendors and which are an offset against cost of goods sold, were reduced.

First Three Quarters 2003
Net sales at U.S. Foodservice in the first three quarters of 2003 decreased by 15.7% compared to the same period last year primarily due to a lower currency exchange rate of the U.S. Dollar against the Euro. U.S. Dollar net sales increased slightly by 1.2% due to the acquisition of Lady Baltimore and Allen Foods in September and December 2002, respectively, which contributed approximately 1.8% of the increase in net sales in the first three quarters of 2003, meaning that there has been a slight decrease in net sales excluding these acquisitions.




The operating loss before impairment and amortization of goodwill and exceptional losses was primarily due to substantial pressures on operating profit at U.S. Foodservice principally as a result of the repercussions from the accounting issues and investigations in 2003. Furthermore, U.S. Foodservice experienced a weakening of its procurement leverage as vendors raised prices and shortened payment terms, resulting in a sharp deterioration in profitability.

Food Service - Europe

Net sales at the Deli XL food service operations, located in The Netherlands and Belgium, in the first three quarters of 2003 decreased by 3.3% compared to the same period last year. This decrease was primarily due to continuing unfavorable economic circumstances.

Operating income at the Deli XL food service operations in the first three quarters of 2003 decreased by 75.0% compared to the same period last year.

Other Business Areas
Retail Trade - South America
Net sales in the South America retail trade operations in the first three quarters of 2003 increased by 13.6% compared to the same period last year. This increase was mainly due to the consolidation of Disco and Santa Isabel since the second and third quarter of 2002, respectively. This increase was partially offset by the impact of the divestment of Santa Isabel's Chilean and, to a lesser extent, Paraguayan operations in July and September 2003, respectively.

The operating loss before impairment and amortization of goodwill and exceptional losses in the first three quarters of 2003 was a result of the consolidation of Disco and Santa Isabel since the second and third quarter of 2002, respectively, both of which had operating losses, and the negative impact of lower net sales and lower margins recorded at the company's Brazilian operations.




Retail Trade - Asia
Net sales in the Asia retail trade operations in the first three quarters of 2003 decreased by 17.7% compared to the same period last year. This decrease was primarily due to the disposal of operations in Malaysia and Indonesia completed in September 2003 and a decline in net sales in Thailand due to strong competition.

The increase in operating loss was primarily due to lower net sales and gross margin and to restructuring charges incurred as a result of the divestment program in Asia in the first three quarters of 2003.

Other Activities
Other activities include operations of three real estate companies which acquire, develop and manage store locations in Europe and the United States and corporate overhead costs of the Ahold parent company. The operating loss before impairment and amortization of goodwill and exceptional losses in the first three quarters of 2003 partially reflected corporate costs of Euro 124 million compared to Euro 24 million in the same period last year. The higher corporate costs in the 2003 period were mainly caused by the significant costs incurred in connection with the forensic accounting and legal investigations that have been conducted, ongoing litigation and ongoing government and regulatory investigations, as well as higher audit fees in connection with the audit of the company's 2002 financial statements. Furthermore, corporate costs increased as a result of an increase in the company's provision for self insurance and a decrease in gains from the sale of real estate compared to the same period last year.

Cash Flow Statement
Net cash from operating activities in the first three quarters of 2003 decreased by 48% compared to the same period last year, mainly as a consequence of lower operating income. Changes in working capital resulted in a cash outflow of Euro 131 million in the first three quarters of 2003 partly due to shorter payment terms imposed by certain suppliers to U.S. Foodservice as a consequence of the discovery of the accounting irregularities as announced. As a consequence, changes in accounts payable resulted in a cash outflow of Euro 532 million in the first three quarters of 2003. This was offset by a cash inflow related to changes in inventory partly as a result of U.S. Foodservices' focus on controlling inventory levels and purchases from vendors.

Investments in tangible fixed assets in the first three quarters of 2003 amounted to Euro 805 million compared to Euro 1,445 million in the same period last year. Divestments of tangible and intangible fixed assets amounted to Euro 455 million in the first three quarters of 2003 compared to Euro 318 million in the same period last year.

Shareholders' Equity
Shareholders' equity, expressed as a percentage of the balance sheet total, was 10.0% at the end of the third quarter of 2003 compared to 10.5% at year-end 2002.

The rolling interest coverage ratio at the end of the first three quarters of 2003 amounted to 1.2, compared to 2.5 at the end of the same period last year. The rolling net debt / EBITDA ratio amounted to 4.3 at the end of the third quarter of 2003, compared to 3.1 at the end of the same period last year.

Outlook for 2003
Ahold expects that its consolidated net sales in 2003, excluding currency impact, will be slightly higher than in 2002, primarily as a result of an increase in net sales in the U.S. retail trade operations resulting from comparable sales growth and the opening of new stores. This positive factor will be partially offset by the weakened global economy and strong competition in the markets that the company serves, as well as the need for management to deal with the repercussions of the announcements on February 24, 2003 and related developments. In addition, 2003 net sales will be negatively affected by completed and future divestments closed in 2003.