Ladies and gentlemen, thank you for holding and welcome to the Sligro Food Group event call. During the presentation, all lines will be in listen-only mode, and later we will conduct a question and answer session. I would now like to hand over the call to Mr. Rob van der Sluijs. Go ahead please, sir.
Thank you. Thank you everybody for joining in this call on our half year figures for 2018. I will start with a short presentation. I will use the slide deck, which you can find on the website of Sligro Food Group. I will refer to the slide numbers I am speaking about. After the introduction, there will be room for questions. Well, I would like to start off with the net sales of the activities. Maybe just upfront, all the figures presented are based on continued operations, which means that the retail activity is completely summarized in the last lines of this P&L overview, net profit on discontinued operation. The rest of the figures is the foodservice activity. We have seen that net sales increased by 11%.
That was a result of the acquisitions that we did last year and are now coming into effect in our figures in the first half of 2018. We see an atypical picture for Sligro Food Group with a small minus on organic growth of minus 0.1. That is also the result of a number of more technical effects, which you can see on slide number three, where we have presented our figures in a slightly different manner. There is a number of effects that are involved in explaining the organic increase. One of them is change in bookkeeping rules. IFRS 15 is in effect as of January 1st last year, which means that the fees that we get from our fresh partners no longer count as sales, which means that sales have declined compared to last year by EUR 9 million.
Another more technical explanation, it is actual turnover lost for our company, is export volumes of baby powder, specifically to Asia. A number of our customers have been exporting these products the last two and a half year. At the peak of that proceedings early last year, we had an annual volume of a little over EUR 30 million. This market is stopped, which means that these sales are disappearing from our books. Last year, already in the second half of the year, EUR 10 million. This year, we also expected to be EUR 10 million decrease, we expect that the full effect will be gone. In the first half of the year, we lost EUR 14 million in sales. We expect to lose another EUR 8 million-EUR 10 million in the second half of the year.
Of course, if we compare the quarters, we have to take into account the calendar effect of the shift in Easter. Of course, on the first half of the year, that is a net effect of zero. Which means we have one line left, which is what we call other organic and what we think is representing market development, or at least our development best. We see there that in the first quarter, we had a 1.3% sale increase and a 2.9% increase in the second quarter. Circumstances for us are improving, especially if we take into account that the comparables for Q2 were the highest sales development last year in a five-year period. We think that a plus of 2.9% is a confidence booster for the quarters to come.
If we look at the breakdown of the non-organic increase, we see that Heineken is of course the big impact, EUR 86 million, which is nicely in line with the effect. We can immediately see that there are big seasonalities in the development of the Heineken-related turnover, with EUR 36 million in the first quarter and EUR 50 million in the second. ISPC is now fully in the comparables. These are the first four months of the year, EUR 25 million, which were added non-organic, and Tintelingen is only a small part, is now also fully in the organic sales as of July. We move on to the next sheet, we see the developments in the Netherlands and Belgium. The split up in countries. Similar type of overview. Bottom line, we see that the other organic growth in the Netherlands was 1.9% in the first half and in Belgium, 5%.
In the Netherlands, we are below market on organic sales. In Belgium, we think we are clearly above market sales with a 5% growth in the activities. We move to the next sheet on gross margin, sheet number five, we see that the margin as a percentage of net sales has increased significantly. The majority of that effect is caused by the consolidation of the acquisitions. Both Heineken but also ISPC have high gross margin, but also higher cost as a percentage of sales, higher expenses as a percentage of sales. In the presentation year, that causes quite a shift in the percentages. Also underlying margins, gross margins in cash and carry and delivery are increasing, and that's the result of increased promotional margins and monetization of data through our Sligro Insights program.
I will touch upon that a little bit later on in the presentation. Going into the expenses on sheet number six, we see in line with the effect in gross margin that consolidation is of course causing quite a shift. Big increase in the cost of 2.2% of the net sales. There, the result of the consolidation of the acquisitions. We also see that we have startup costs in Belgium, which are increasing compared to last year as we are running up to the opening of our store in Antwerp later this year. Also costs for IT transition program, IT2020 are coming into effect. Still rather limited in the first half of the year.
If we compare it to last year, where we also had both startup costs for Belgium, and on the other hand, some advisory costs for acquisition, then the exceptional item more or less the same as in previous year. That means that we conclude for ourselves that we have not been as effective as we would have liked to be in the first half of the year in reducing cost or at least banking on economies of scale in that sense. Also for ourselves, somewhat disappointing, the developments on the cost level. We do have quite a number of programs up and running that will have effect in the second half of the year, but we expected a little bit more in the first half. Especially, our challenges are on the cost side of the profit and loss account.
On the next sheet number seven, some more details, specifically on amortization. There's the software, which is more on the recurring CapEx side. That is the continuous investment in software and software development. Customer contracts is part of the commercial agreements that we have with our customers. The acquisition-related amortization that is related to non-recurring acquisition prices that we paid, and we amortize through the P&L. With the big acquisition of Heineken last year, but also ISPC and Tintelingen, that part is increasing significantly compared to last year. It is something we have to take into account, and is a part of the EBIT that we need to show. If we move on to overall conclusion on EBIT. On the continued operation, EBIT is EUR 2 million down.
We started off with a weak first quarter, and we were not able to compensate that in full in the second quarter of the year, although that was already better. We see that the acquisitions are already contributing, but still marginally. We took over in the asset situation, and it requires further levels of integration before we can bank on cost efficiencies. Also the loss of the export volumes is depressing results. We do have the cost savings programs, but they will have an impact at a later stage, and I already explained about the exceptional items. If we go to net profit on the next sheet number nine for the group, then we also have the profit of the discontinued operations.
As these activities are classified as discontinued, we don't have any depreciation or amortization, which is boosting the net profit for this part of the business. That's why we see an increase from EUR 2 to EUR 4. If we take out these technical effects, and also last year had some comparables in book profits, then the underlying result development in the retail activity has been more or less similar to last year. Overall for the group, a small increase in profit for the half year from EUR 28 million to EUR 29 million. Looking at the balance sheet of the group, which is still strong, and this result development has led us to propose an interim dividend for the first half of 2018, which will be payable on October 1st, and it's in line with our dividend policy at EUR 0.55 per share.
We then look at the cash flow statement, we see some shifts compared to last year. There is some seasonality in the cash flow caused by working capital positions. We do not expect on an annual basis, a big shift in the working capital, even some improvement in working capital as a result of the last stage of the supply chain finance program. This is mid-year, more or less technical effect. In the investments last year, we had EUR 9 million of proceeds from the sale of store locations of EMTÉ, which we do not have this year. These two items combined explain the decline in free cash flow that we have seen. I then move on to the discontinued operations, I skip one slide and go to slide 12. There we have some more qualitative analysis on the results of EMTÉ.
This is the last time we will comment on the EMTÉ developments. We've seen that like-for-like sales are further down by 3%. After the announcement of the sale of EMTÉ, that's a very difficult position to be in, both for the staff as the operations to keep up the performance. We are proud of our employees that they've done a good job in that respect. We were already in declining sales mode, and announcing that you will stop with the format and that you sold the format is not helpful in that respect. Again, further a bit of decline in sales. We were able to compensate that in reducing costs. I already explained that there was no depreciation amortization. The underlying results of EMTÉ over the first half year were in line with last year.
What is very important, and that's the last remark on this slide, that the transfer to the buyers has gone very well with few disruptions of the business. That's good for us because we want to have a nice and decent handover. Also, of course, for the buyer, which have a future with this business. They don't want any disruptions, of course, in their operations. So far, things are running smoothly in that respect. I then move on to the next sheet, we can see the financial impact of the results. The deal with EMTÉ finally closed on July 2nd, with a retrospective effect of July 1st. From an economic perspective, net profit in the first half year was EUR 4 million, but the whole transaction is accounted for in the second half of our book year. Given the fact that it's so close to this moment, we already disclose the numbers.
The book profit on the sale of EMTÉ Holding shares will be EUR 215 million. The book profit on the sale of the related real estate is EUR 18 million. We have the consultancy and non-recurring separation costs of EUR 11 million, the tax effect. The book profit on the sale of the shares is non-taxed. The book profit on the sale of the retail is taxed. That gives us a net profit impact from the deal forecasted at roughly EUR 219 million. The overall impact of the discontinued operations on the profit for the year will be EUR 223 million. We have assessed what to do with the proceeds from this deal, the EUR 275 million for the shares and the EUR 60 million for the real estate.
Given our solid financial position, given the investments that we need to do, also if we want to have some opportunities in acquisitions in the coming years, we think that our balance sheet is strong enough, it gives us plenty of room to do those things. We don't need to hold on to financial buffers to be able to do that. We decided that we would pay out the full proceeds of this deal to the shareholders, we will do that in the form of a special dividend, which is the exact amount, EUR 7.57 per share, which is the EUR 335 divided by the number of shares outstanding, that's already payable on July 31st, 2018. We do that rather fast because in this market, with the current interest rates, we have to pay interest on the amounts we have on the bank account.
Every month that we wait will cost us EUR 150,000 of interest, which we think is a shame. We'd rather distribute as soon as possible to the shareholders. On sheet number 14, important to realize, I think, is that we think done a good deal on the sale of EMTÉ. Of course, it was an integrated part of our business. With the carve-out of these activities, we will have some dis-synergy effect on the remaining part of the business. Initially, we estimated and communicated this to be EUR 15 million-EUR 20 million per year. We did some compensating factors in the deal, which means that we have a service period, which is called the TSA period, with the buyers of EMTÉ, that we will service them on a number of activities. For instance, HR, finance, IT, a number of other related activities.
We get compensated for that on top of the price that we got for the deal. Which means that for the time being, the staff in the central headquarters of Sligro still have a job to do on behalf of the buyers. Smeding, which is our partner for fruit and vegetables for the whole of the group, depended for 40% on retail. We managed to make a deal for them to continue the volumes for at least a period of three years and also the profit levels on these volumes. It means we don't expect any dis-synergy effect for them. Of course, we had the La Place contract with the Jumbo that we started delivering in week 26. One week in advance of closing. These elements will compensate. In part that's temporary.
The service fee that we get for the TSA period, of course, will stop to exist, then the employees of Sligro are out of work. That's something we need to remedy. That's why we are starting a program to rightsize the organization, not only in numbers, but also in quality, because it's not just the carve out of EMTÉ, but also preparing ourselves for the future in food service and more on international context. It also means we need different competencies and quality of people. We have a very detailed plan. It's not a reorganization as such. We're also very careful not to use that wording, because we are really going to do a very precise exercise. That also means that the cost of reducing the number of staff is quite significant.
A one-off of EUR 16 million, which will be fully accounted for in the results for 2018. To give an order of magnitude, this relates to a reduction of roughly 200 people in the central headquarters of Sligro. This program will be finalized, we expect, by the end of 2019. As mentioned before, the costs are fully incurred in 2018. The other big effect is on the terms and conditions for foodservice. Of course, we did combined purchasing in the past. We know that as a result of the loss of the volumes of EMTÉ in the second half of the year, we won't meet the required levels of purchasing to get all the bonus levels that we agreed. We will lose them most certainly in this year.
Of course, in negotiating the conditions and terms for next year, we already can take into account the loss of the volume, so we will make other agreements. We expect that in one or two years, the dis-synergy from the terms and conditions will be gone. Going into some of the analysis of Sligro Food Group, I will try to speed up a little bit so we have sufficient time for questions. If we look to the market in the Netherlands, compared to last year, the market is a little bit slower, where we anticipated that it would pick up or at least be stable. In that sense, it's a little behind on what we expected with 3.3% growth over the first six periods of this year. In total, in the Netherlands, we increased our sales by 8.8%, of course, on the back of the Heineken deal.
We again gained market share in the Netherlands. If we look at the underlying development, which was +1.9% in the Netherlands, organically, we are not outperforming the market. We're behind the market. Of course, that's not the ambition for Sligro Food Group, but we expect that we can make up in the second half of the year to quite a big extent. If we go to the next sheet number 17, we see that we have growth in the Netherlands and in Belgium, both gaining market share in these areas. The integration of Heineken activities is running according to plan. Of course, we are now running in the as-is situation. I'll explain a little bit later on.
Of course, we are preparing for the physical integration of all the locations, because from that moment onwards, we can start banking on the envisaged benefits in supply chain and also start generating upsell to our customers. In the meantime, we are at 19 outlets in the new format. We opened up two more in the first half of the year in the 3.0 format and two more to follow in the second half. Our online platform, almost all our customers are now on the new web-based ordering platform. We did a quite big number of improvements on the website, which reduced the number of incidents significantly, but stability, we would still like to improve further, and the performance is improving also slightly, but that's continuous development to make sure that our customers have the best experience on our ordering platform.
We see the building activities on sheet 18 for this year. I will skip that and move on to sheet 19. A little bit more background on Heineken. As mentioned before, we took over operations as is, which means that the people that used to work for Heineken are still operating their activities today. They will do so until December 1st of this year. That's what we agreed with Heineken. We can start changing the staff and also integrating the activities in our own warehousing environment. We expect that from that moment onwards, we can start banking on some of the advantages in the supply chain. In the meantime, all the Heineken distribution center are already transferred to the Sligro IT system, the current IT system, which means that we have more control over the process over there.
Our initial focus to date has been on customer retention and convincing them that we will have continuity of delivery at the same or improved quality. We've been quite successful in doing that means that there has not been a lot of focus on generating upsell as of yet. We are preparing for further physical integration, which you can see on the next sheet. If we move to the next sheet, we see eventually the new landscape of the Sligro distribution platform with the 10 locations. We see 11 on the sheet. The one in 's-Hertogenbosch, the one in yellow on the left-hand side, we will convert that to an EDC slow mover distribution center. That will not be a specific customer delivery center as it is today. All the ones in green are either being remodeled or are new locations.
For the Breda, Deventer, and Maastricht area, we have already bought or have options on the premises where we will realize the new distribution center. In the province of Utrecht, it is a little bit more difficult, we don't have premises yet. In all the other areas along the coastal line up to Drachten in the north, we are already remodeling and rebuilding the distribution capacity so we can start integration before the summer of 2019. The building activity will be completed in the second half of 2018. That's the phase 1. We will use it and integrate the activities in these distribution centers in the geographies before the summer of 2019. Phase 2, the other centers will be done after the summer, because in the midst of the summer, that's the peak of the season. We don't want to disrupt operations with building activities.
If we move to sheet 21, there we have Belgium. Also there, we are trying to integrate as much as possible. That's mainly the services in the back end and also some combined purchasing. True breakthrough will come when we have physical integration to the Sligro ISPC format, and we can only do that after the IT transition, which we are planning for 2019 in Belgium. We will open Sligro Antwerp before the Christmas season in this year. We have started preparations for the permit process in Bruges, and also starting up for some other areas in Belgium. A few sheets on the Sligro Insights. I will not treat each individual of them, but it's a very important step in improving the relationship with suppliers and also customers on the one hand, but also financial improvement in gross margin.
We are partnering with IRI in this respect because they supply the technology, they sell the technology of the tool to suppliers, but we remain in ownership of the data, we sell the data to these suppliers. Of course, we can make money on selling the data, but more importantly, in combining efforts with our suppliers based on our data, we can have better and more profitable propositions for our customers, and have better performance over all of the categories where we cooperate with our suppliers. That means this is a boost for gross margin on the short term, but also on the longer term, where a better performance of specific product categories should also translate in better sales with better gross margin and higher concentration levels at our customers.
I will go to the outlook for the remainder of this year and the periods to come. We expect that the market growth will end up somewhere between 2.5%-3.5%. That is a little bit slower than last year, but still, we think we are in the high end of the cycle of our business. Still a good market development, we think, and visibility is a little bit off because we started very weak in the first quarter. We had a recovery in the second one. We will see in the next quarters what happens. We think we will still see an upswing in the market development. We already discussed about Antwerp and Heineken, and I will come back a little bit later on the IT transition program, which we plan to start in the fourth quarter of this year.
More to the figures in the outlook on sheet number 27. Of course, this is a very transitional year for Sligro Food Group, where we are changing from a food player in retail and foodservice to one in foodservice, specifically with the international ambition. We have the integration of Heineken, we have the sale and carve out of EMTÉ, we have an IT program, we have Belgium. A lot to do. That means that also has some effect, of course, on the results development. Twofold, we expected to do a little bit better, to be honest, but also all the attention to the major programs has had some effect, and we started out quite weak in the first quarter.
If we then have a look through for the remainder of the year, we expect that we will end up at an EBIT for EUR 55 million for the continued operations, the foodservice operations. Of course, two major elements to take into account. That is on the one hand, the dis-synergy of the carve out of EMTÉ of EUR 12 million and the EUR 16 million one-off cost for changing the organization. Also if we correct for that, we end up at EUR 83 million EBIT for 2018 compared to EUR 88 million comparable last year. We see in this graph or this waterfall diagram what causes the decrease in results. The first four elements there, the acquisition, export volume, start-up cost Belgium, and IT program are more or less as expected. The growth and improvement from operations with EUR 5 million.
We started out the year with a little bit higher ambition. We think this is a realistic number. Of course, we are working hard to try and improve that further. This is at this moment with the knowledge of today, our best estimate of the number. We decided to give this insight because we saw that many of our followers, analysts, and investors were really struggling with all the moving parts. We hope that this way of presenting it helps at least in structuring the thoughts around it. Combined with this EBIT level on foodservice and of course, book profit on the sale of EMTÉ, we anticipate that we will have a net profit for this year, 2018, of EUR 270 million for the group as a whole. A short note on the CapEx on sheet 28.
We've always communicated and still remain confident that our longer term average percentage of sales in CapEx is around 2.5%. We've changed the way we made the deal with the IT suppliers in our IT transition program, which means that the CapEx is more front loaded. Also in relation to the distribution center infrastructure, we see that we have some more cost than anticipated. We initially thought a net CapEx level around EUR 20 million-EUR 25 million. We think at this moment it will be around EUR 35 million, and it's also something for the next few years. That means that we will have an investment peak of approximately EUR 90 million-EUR 95 million in 2018 and 2019. Still overall, over the next five to six years, the average of these five to six years will be around 2.5% of sales.
That means that after this peak in 2018 and 2019, CapEx will go down quite significantly in the years thereafter, given the plans that we have today. One last remark that's on the IT on sheet number 29. I have to explain a little bit about the graph, because what we see in this graph is how the total EUR 60 million that we announced as one-off cost for the IT transition will affect the P&L. These are the orange bars combined over a period of eight years. The orange bars represent basically the operational expenses on the one hand, but also the amortization on the CapEx that we do in the next couple of years. The amortization of the CapEx and the operational expenses combined, that will be EUR 60 million in the next few years, in the division as we see it in the orange bars.
That's different than the CapEx, because the CapEx, which is EUR 40 million out of the EUR 60 million, that is front-loaded as explained already. That's the way we set up the contract with the software suppliers. We pay initially a significant amount and the development cost will be significant in year two and three. These are all accounted for as CapEx. We will start amortization when we start using the software, which is by the end of 2019 in Belgium and by the end of 2020 in the Netherlands. That gives the orange picture of the total EUR 60 million. Nothing has changed on the total amount. EUR 60 million for the one-off transition, which is divided in EUR 40 million CapEx and EUR 20 million OpEx. The division and the impact on the P&L is represented in the orange bars.
We are well underway in preparation for the program. The internal organization is set up and ready to go right after the summer. We've entered into the contract with SAP around the mid-year, we selected PwC as our business partner for the change that we need to do in the organization. We are in the last phase of selecting the system integrator partner, which is the party that will actually build the SAP modules to be able to perform in a Sligro situation. We expect to launch the program at the beginning of the fourth quarter, end of the third quarter, and it will have a throughput time of roughly three, maybe four years from now on. That concludes my presentation. Let's use the remainder of the time for question and answers if there are any.
Ladies and gentlemen, as said, we will start the question and answer session now. If you have a question or remark, please press star one. Star one for your question or remark. Go ahead, please. There's a question coming from Mr. Stephan Weil, Allianz Global Investors. Go ahead, please.
Hi, Rob. Hope you're doing well.
Yes, I am. Hi.
Two questions actually on the growth rate you reported. Within Netherlands, can you please explain a bit more detail how this miss or underperformance to market comes? 1.9, you kind of report against 3.3. Why is that? Eventually, due to competitive reactions of you doing the Heineken distribution deal, how does this affect the overall competitive situation there? Secondly, on Belgium, 5% growth, how sustainable is that? What do you think this number might look like going forward? Thank you.
Okay. To answer your questions, I think the first and the second question have something to do with each other. What we see as a main reason is that we've used up most of the external sales force to visit all the customers that we acquired in the Heineken transaction. It means you have to give these customers comfort that they will have security of supply and continuity of their business and delivery with us. Which means that the prime focus of our sales force has been on customer retention instead of new customer acquisition. We think that that is one of the major reasons why our first half year performance is below market at this stage.
Then to further on your second question in Heineken, of course, once you announce a deal like this, your competition starts to hunt your customer base that you just acquired because they know there's a period of uncertainty. That's also why we put the focus on customer retention first, because we know this happens in this way. That's the experience we have in the market. Overall, we see that we've been quite successful in retaining the customers on the Heineken portfolio. You can also see it in the sales figure. We anticipated a net effect of EUR 170 million per year. We are now at EUR 86 million, so that's roughly half of it. Also accounting for the seasonality, we are nicely on track to retain the levels that we acquired.
We also think and feel that the time is right now to use the second half of the year to be more on customer acquisition in the second half. That's why we think that we can close the gap to the market development to quite some of an extent going forward. Then your last question on Belgium. Well, we think and we anticipate that this level should be sustainable and should even increase, because opening up new store in Antwerp in the second half of the year means that we have a broader basis for customer acquisition in Belgium, which is an all organic. We would be very disappointed if the number going forward is lower than 5%. This is the performance of the current business that we've bought. This is JAVA and ISPC combined.
They run more or less standalone from a commercial perspective. We are very happy to see that their combined efforts are leading to this outperformance of the market. We think it will increase on the back of our expansion in the number of outlets in Belgium.
Good. Thank you.
Ladies and gentlemen, for any further or additional questions, please press star one. Star one for your question or remark. There's an additional question coming from Mr. Steven Vale. Go ahead, please.
Hi, Rob. As I have the opportunity, just on Belgium still.
Yes.
With respect to the number of sales reps you have there, can you give us some better feeling how many people there are on the ground, and also how aggressively you invested your new personnel there?
Yes. On the Sligro activity that we did, basically from the Dutch base into Belgium, we have set up a team which is currently around eight sales representatives. Now they have joined forces with the ISPC sales representatives, of course, that came to the acquisition. We have a team of, I think, around 12 people on the road in Belgium. The JAVA have their own sales force, which is, I think, around eight people. I think in Belgium, we are around 20 people in the sales force today. Of course, we also need to have the infrastructure in place to be able to service the customers to really give a push in that sense.
We are pre-investing in preparing the market and make sure that, for instance, if we open up Antwerp, that we already have a portfolio of customers that we can immediately transfer to successfully start up these locations.
Thanks.
Ladies and gentlemen, for any further questions, please press star one. Mr. Van der Sluijs, there seems to be no further questions.
I will wrap up. Would like to thank you all for joining in on this call. Contrary to what we've done before is we've given more details and insights on the results development and expectation for the remainder of the year. We hope this provides a little bit more clarity because we also understand that with all the moving parts, visibility was a little bit lower than usual. If you have any further questions or would like to have some specific comments, feel free from a technical perspective to send me an email and ask questions, and I will get back to you as soon as possible. For the time being, I would like to thank you and hope you enjoy your holidays, which is starting now for most of us, I think.
I hope to speak to you again next time when we present our annual results. Thank you very much, and speak to you again. Bye-bye.
Ladies and gentlemen, this will conclude the Sligro Food Group event call. You may now disconnect your line. Have a nice day.