Annual Report • Mar 7, 2013
Annual Report
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1
Our strategy to reshape retail is helping us to meet the changing demands of consumers and accelerate the growth of our company.
Through this strategy, we are creating growth by increasing customer loyalty, broadening our offering and expanding our geographic reach; and enabling this growth through responsible retailing, simplifying our business and developing our people.
We are reshaping the shopping experience and what we offer our customers so that our brands are their first choice, every day.
and working to get better every day.
In this section:
+ Company profile
+ Financial highlights
+ Where and how we operate
+ Message from Dick Boer, Ahold CEO
+ Our management
We are an international retailing group based in the Netherlands, with strong local consumer brands in Europe and the United States.
Our foundation is selling great food – and supermarkets are our core business. We also operate other formats and channels so that our customers can shop whenever and wherever is most convenient for them. We provide our customers with the best possible value, assortment and shopping experience.
We are able to do this because we have great employees who love what they do and are good at it. The relationships they build with our customers are an important part of why they keep coming back to shop with us.
Serving a trade area of around
Financial highlights
Underlying operating margin (2011: 4.5%)
| 2008 | 25,648 | |||
|---|---|---|---|---|
| 2009 | 27,925 | |||
| 2010 | 29,530 | |||
| 2011 | 30,271 | |||
| 2012 | 32,841 |
Income from continuing operations per common share (basic) (2011: €0.93)
As part of our dividend policy we adjust income from continuing operations for significant non-recurring items. Adjusted income from continuing operations per share was €1.00 in 2012 (2011: €0.91).
Underlying operating income (€ million)
| 2008 | 1,204 | ||
|---|---|---|---|
| 2009 | 1,351 | ||
| 2010 | 1,373 | ||
| 2011 | 1,375 | ||
| 2012 | 1,414 |
Dividend per common share (2012 includes proposed dividend) (€)
Where and how we operate
We operate strong local brands in Europe and the United States that are well-known and popular with customers – and many of which are leaders in their markets.
In Europe we serve a trading area of more than 40 million people in five countries, with the greater part of our business in the Netherlands and the Czech Republic. The food sector in the Netherlands showed limited growth in 2012, but also significant consolidation in the supermarket industry. Despite strong competition, Albert Heijn continued to gain market share in 20121 . In the Czech Republic the food market is divided into several different channels: small traditional trade stores and hypermarkets, which are declining; and discount, compact hypermarkets and supermarkets, all of which are growing. We operate supermarkets and compact hypers in the Czech Republic. The competitive environment in the country remained intense in 2012. Our Czech business succeeded in maintaining a share comparable to last year in this competitive market1 .
In the United States, we serve a trading area of 38 million people. Though the grocery channel still represents nearly two-thirds of the food market in the United States, food is being sold in an increasing range of retail formats as more and more U.S. retailers use it to drive traffic. For this reason, we measure our businesses in the United States against the performance of not only the supermarket channel but the all-outlets channel, which includes other retailers who also sell food.
Our U.S. businesses were able to gain market share – both in the supermarket channel but also in the all-outlets channel – over the past year, despite tough competition2 .
| The Netherlands | ||||
|---|---|---|---|---|
| The Netherlands |
Belgium | Germany | ||
| Our brands | Our online brands | |||
| Key facts: | ||||
| 1,996 stores | ||||
| 93,000 employees | ||||
| €11,054 million net sales | ||||
Contribution to underlying operating income 43.0%
Contribution to net sales 33.7%
1 Based on Nielsen Scanning data 2 Based on Nielsen ScanTrack
Ahold Annual Report 2012 5
Ahold at a glance Our strategy Our performance Governance Financials Investors
Ahold Annual Report 2012 6
Where and how we operate (continued)
Our strong local brands enable us to stay close to our customers and communities, and build customer loyalty. Everything we do is based on our brand promise in each market. Our value proposition, formats, targeted assortment of products and services, and the way we communicate with our customers are all a reflection of our local brands.
Supermarkets are the core of our business. However, we operate a range of other formats and continue to expand our online options to serve the needs of different communities and to give customers more shopping alternatives.
| Format | Geography | Store size | Offering |
|---|---|---|---|
| Supermarkets | Netherlands, Belgium, Czech Republic, Slovakia, United States |
400-8,400 sq. m. | Full range of food and selected non-food products. Emphasis on fresh products |
| Convenience stores | Netherlands, Germany | 40-200 sq. m. | Quick food solutions for on-the-go customers |
| Compact hypers | Czech Republic, Slovakia | 2,000-3,600 sq.m. | Full range of food and selected non-food products. Emphasis on fresh products |
| Specialty stores | Netherlands | 50-500 sq. m. | One chain offers health and beauty care products; another offers wine and liquor |
| Online food delivery | Netherlands, United States | n/a | Full range of food and selected non-food products |
| Online non-food delivery | Netherlands, Belgium | n/a | Wide non-food range |
| Pick-up points | Netherlands, United States | n/a | Full range of food and selected non-food products. Customers order online for pick up at designated locations |
| Gasoline stations | Czech Republic, Slovakia, United States |
10-350 sq. m. | Gasoline and, in some locations, a small range of convenience products |
As an international food retailer operating businesses that are deeply rooted in their local communities, we have a wide range ofstakeholders who impact or are impacted by our businesses in various ways. Our stakeholders include our customers, employees, suppliers, the communities where we operate, governments, NGOs, academic and research institutes, industry bodies, and our shareholders. We engage with our stakeholders in order both to gain insight into their expectations, and to share our progress with them. This enables us to better meet their needs over time.
As an organization, we have identified five main stakeholder groups, and the ways in which we engage with them:
We regularly ask our customers what they think of our stores, assortment and service, including their perception of Ahold as a healthy retailer. We receive feedback via third-party surveys, proprietary tracking studies and consumer panels as well as directly from customers in stores.
We have an open and honest company culture, and carry out regular employee satisfaction surveys. In 2012, we carried out employee satisfaction surveys in all our operating companies, with nearly 140,000 employees around the world participating.
Our suppliers are very important to us, and with many we have long-term relationships. We therefore held supplier events in both Europe and the United States to discuss various important topics, including company strategy, sustainability, supplier diversity, and food safety, with them. We also work through the Albert Heijn Foundation in Africa to improve the quality of life for our suppliers and their communities, as well as to secure our long-term supply chain.
Our companies are committed to being active and participating members of their communities. We do this through initiatives, events and charitable contributions that help to improve the communities and neighborhoods in which we operate.
We meet with investors on a regular basis, and work to broaden the investment community's understanding of our company by providing accurate and timely information on Ahold's performance and prospects.
Message from Dick Boer, Ahold CEO
The retail environment we operate in is incredibly dynamic, and our customers' needs are changing faster than ever. Their lives are hectic – they want convenience, and they expect a personalized shopping experience. At the same time, they are looking to fit more quality time with family and friends into their busy schedules – and food often plays an important role. There is a growing focus on healthy eating, and people expect to find the right choices and information to support and inspire them when they shop. And they want all of these things at a price they can afford. This new reality demands ever greater creativity, innovation and value creation from retailers like us.
In 2012, we marked our 125 year anniversary. We've made it to this milestone because our people have always put the customer first – and have had the vision to transform our offering to evolve with shoppers' changing needs.
With 20 consecutive quarters of identical sales growth, steady marketshare growth in our main markets over the past five years, and consistently strong cash generation, we have a robust and successful business. Furthermore, our reshaping retail strategy is ensuring that we continue our heritage in innovation to bring new value to our customers of today and tomorrow.
In 2012, we delivered another year of good financial performance. We grew net sales by 8.5% in 2012, to €32.8 billion. At constant exchange rates, our net sales were up 3.5%. We had €1.2 billion in operating income and our underlying operating margin was 4.3%, despite challenging market conditions. Consumer confidence remained low and retailers had to work hard to drive sales in this environment. In the face of these challenges, we were nevertheless able to gain market share once again in all of our major markets.
If we look back over the past five years, we've shown strong performance in relation to our sector. We have been outperforming our peers in sales growth in the food category in the Netherlands and the United States year-over-year and have delivered above average margin performance. Specifically, we have increased sales by €7.2 billion to €32.8 billion over a five year period – an annual average growth of more than 5%, mainly from our existing businesses. We have delivered best-in-class cash generation, going from €0.6 billion in 2008 to €1.2 billion free cash flow in 2012.
In our view, creating shareholder value requires a balanced approach of investing in growth while at the same time providing attractive returns. We continue to achieve top quartile return on capital and total shareholder return, relative to the group of food peers we compare ourselves to. Our performance has enabled us to consistently deliver attractive returns to our shareholders.
Strong cash generation made it possible for us to successfully complete two share buy-back programs of €1.5 billion in total, return €1.4 billion to shareholders in dividend payments, and reduce our debt by €2 billion.
In 2012, adjusted earnings per share rose to €1.00, which enabled usto further increase our dividend to €0.44 and increase the payout ratio to 44%, which is within the range of 40-50% of adjusted net income from continuing operations. Our solid balance sheet and strong free cash flow generation enables us to launch a new 12-month €500 million share buyback program.
€1.00 Adjusted earnings per share
Last year we launched our strategy to reshape retail, and in 2012 began to reap the benefits. This strategy is helping us leverage the consumer trends we see in our markets into growth opportunities for our businesses.
Customers today expect more for less, and we are broadening our offering to give them more of what they want. Our U.S. businesses are improving their own-brand product lines to give customers more choices at different price points to fit their budgets. We are on track to build own-brand penetration to our target of 40%.
Advances in technology are enabling people to research and buy anything they want, at any time of day, anywhere they happen to be. We're building our online offering on both continents to give customers more shopping alternatives, and we achieved double-digit online sales growth in 2012.
Customers appreciate the convenience of the pick-up points we opened during the year, including the first Peapod pick-up points in the United States, and our first pick-up points in the Netherlands. Results have exceeded our expectations and we will roll this service out further in 2013.
Our acquisition of online retailer bol.com is enabling us to provide Dutch and Belgian customers with a far wider selection of non-food products, so they can come to us for more of what they need every day.
We expanded our geographic reach during the year, to serve customers we couldn't reach before, adding 15 Genuardi's stores at Giant Carlisle in the United States, and agreeing with Jumbo on the transfer of 82 new stores in the Netherlands, to be converted to the Albert Heijn format. We also opened nine more supermarkets in Belgium and our first three Albert Heijn to go convenience stores in Germany.
On February 11, 2013, we announced that we reached an agreement with Hakon Invest of Sweden to sell our 60% stake in joint venture ICA AB, as we aim to focus on our growth strategy and on the businesses we control. The transaction is expected to be completed in the middle of 2013.
You can find more detail about our strategic progress in 2012 in the Our strategy section of this report.
Customers were focused on getting the most for their money in 2012 without compromising on quality. During the year, we were able to simplify our business in order to save costs so that we could invest more into offering great value to shoppers. In fact, we increased the target for our 2012-2014 cost reduction program from €350 million to €600 million. This is an aggressive but achievable goal to further drive our efforts to simplify our business where we see opportunities – such as optimizing our commercial processes and systems and driving own-brand profit through improved sourcing.
In 2012, we launched our promises to get better every day for our customers, employees and communities. Of course as retailers, we've always been acutely focused on our relationship with customers and how we can offer them something remarkable. But our businesses and our employees have also operated at the heart of our communities over the years – whether it is by investing in job creation, improving the quality and safety of our neighborhoods by operating clean, modern and efficient stores, or giving substantial funds and countless hours to support good causes – such as ending child hunger – that help create a healthier society. As a better neighbor we also work on reducing our environmental impact and ensuring our products are sourced with respect for people, animals and the environment. The well-being of our employees and of those touched by our businesses is fundamental to earning our customers' trust and loyalty.
Our promises to get better every day describe specifically how we want to be a better place to shop, a better place to work, and a better neighbor. By articulating them so clearly, we want to make transparent what we stand for – both within our company, but also outside of it. We're confident this transparency will help us be a better retailer for years to come. You can read more about our promises in the Ourstrategy section of this report.
Our commitment to being a responsible retailer runs through all three of our promises, because without it we cannot achieve our ambition to get better every day. In 2012, we made considerable progress on our responsible retailing targets in our five priority areas of making healthy living choices easy, contributing to community well-being, sourcing responsible products, caring for the environment and our people. You can read more about our achievements in our 2012 Responsible Retailing Report.
Retailing is fundamentally about people. Our success over the past 125 years is a tribute to our employees, and their passion for the business. We believe that we can only meet our customers' expectations and be good neighbors if our employees feel appreciated and fulfilled in their jobs.
We have incredible employees in all our businesses who are deeply committed to serving our customers and our communities. They drive our local charitable efforts and they create strong and lasting relationships with our customers. When Hurricane Sandy struck several of our markets in 2012, our U.S. colleagues showed the lengths they will go to for our customers, when, even in the face of their own personal challenges, they worked hard to keep our stores open and operating.
We're committed to providing employees with good working conditions, competitive wages and benefits, fair treatment and respect, and opportunities for professional growth. We work to foster a positive work environment and an engaged team of employees whose ideas, knowledge and skills are valued and respected.
In the past several years, we've been strengthening our leadership across all our businesses, to ensure we have the capabilities we need to carry out our reshaping retail strategy. We have a leadership culture based on trust, transparency, openness and diverse viewpoints and experiences – and we have a team of leaders whose skills complement each other well.
We made some key leadership changes in 2012. We announced that Carl Schlicker would be retiring as of February 2013, after 25 years with Ahold. I would like to thank Carl for the tremendous contribution he has made to our company, particularly in positioning our U.S. businesses for the future. We were very pleased to find Carl's replacement within the Ahold family. James McCann, formerly Chief Commercial & Development Officer, has taken over as head of our U.S. businesses, bringing years of international retail experience to this role.
We also made changes to the structure of our European leadership team, to put the Albert Heijn business in a more central position for the future growth of Ahold in Europe. These changes included appointing Sander van der Laan as CEO of Albert Heijn, in addition to his role as COO Ahold Europe.
We remain cautious in our outlook but are committed to deliver on our Reshaping Retail strategy. We will keep working to simplify our business to reduce costs so that we can invest in our offering and further improve the value we provide to our customers. We will continue to focus on keeping our day-to-day business strong by living up to our promises, and on building our competitiveness for the future by delivering on our six strategic pillars.
None of this would be possible without the efforts of employees across our stores, offices and distribution centers. We have some of the most hard working, dedicated, customer-focused people in the business, and I want to thank them for all they do each day to make the shopping experience special for our customers. I would also like to thank our customers for their loyalty to our brands – and you, our shareholders, for your confidence and support over the past year.
Sincerely,
Dick Boer Chief Executive Officer February 27, 2013
We operate our businesses from two continental platforms, Ahold Europe and Ahold USA. The Ahold group is led by the Corporate Executive Board, and each continental organization is led by a Chief Operating Officer (COO) reporting to Ahold's CEO.
Member of the Corporate Executive Board responsible for ensuring the proper functioning of the Board as a whole and for the overall strategy of the company. In addition, the President and CEO is directly responsible for the company's communications, human resources and internal audit functions, and the managing director of bol.com reports directly to him.
Member of the Corporate Executive Board specifically in charge of the company's financial affairs. The CFO is also directly responsible for the company's information technology function.
Member of the Corporate Executive Board responsible for the legal, corporate governance and mergers and acquisitions functions at Ahold, as well as the company's approach to responsible retailing, including its scope, ambitions and targets.
Responsible for the oversight of our Ahold USA businesses, as well as implementing our strategy within the continent. Ahold USA is organized into four retail divisions: Giant Carlisle, Giant Landover, Stop & Shop New England, and Stop & Shop New York Metro. Each of these has a division president reporting to Ahold USA's Executive Vice President of Operations, who in turn reports to the COO. The Peapod online business is also part of Ahold USA. James McCann took on this role on February 1, 2013, succeeding Carl Schlicker, and is a member of Ahold's Corporate Executive Board.
Chief Executive Officer, Albert Heijn
Responsible for oversight of our Ahold Europe businesses, as well as implementing our strategy within the continent. Ahold Europe comprises Albert Heijn in the Netherlands, Belgium and Germany; Etos, Gall & Gall, and albert.nl in the Netherlands; and Albert / Hypernova in the Czech Republic and Slovakia. Sander is also CEO Albert Heijn. Etos, Gall & Gall, albert.nl and Albert / Hypernova each have a general manager, reporting to Sander.
Our Reshaping Retail framework
Our Reshaping Retail framework defines our strategic ambitions, how we operate and what we want to be as a company.
Ahold Annual Report 2012 13
We have a successful business model, strong brands, and a clear ambition to grow through our strategy to reshape retail. We have a vision for the future and a common set of values across all our businesses. We work to get better every day through our shared promises. We have built a solid foundation to support our growth plans – with a long heritage in the retail business, powerful local banners, an aligned organization, great people and a strong financial position.
Our vision and values
Our vision is to offer better choice, better value, and a better life to all of our stakeholders – our customers, employees, suppliers, shareholders, and the communities we serve – every day.
This vision describes our ambition to provide the right choices and great value that support a better life not only for our customers but also for our other stakeholders. We work to get better in each of these areas, every day.
All of our companies share five common values that define who we are, what's important to us, and how we do things:
As retailers, our relationship with customers has always been at the center of everything we do. But in today's world, being a good retailer is also about creating a working environment where employees can be at their best and about ensuring we are always deeply connected with our communities.
In 2012, we launched our promises to be a better place to shop, a better place to work and a better neighbor everywhere we operate. These promises define how we will get better every day for our customers, our employees and our communities. All three promises are interlinked – we need satisfied employees and a connection with the wider world our business impacts in order to build strong relationships with our customers. Our promises run across all our businesses, but are applied locally at each of our banners according to their needs and priorities.
Delivering on our promises will help us drive success, perform better against the competition and create greater value for our company and for society.
Our business model
Our successful company-wide business model is at the heart of our strategy. The model is a virtuous circle in which we continuously work to lower our cost base in order to invest in price, value, and the products and services we offer. This allows us to drive sales, win new customers, and allocate capital to further grow our business.
We continually work to lower our cost base and operate in the simplest, most efficient and costcompetitive way. Through the simplicity pillar of our strategy we continue to leverage our capabilities and resources as an international company and work on better, more aligned processes and systems. In 2012, we expanded our company-wide simplicity program beyond operational areas and overhead management to additional areas such as maximizing the efficiency of our commercial spend and improving our sourcing, including own brands. At the end of 2012, we announced an increase to our existing cost savings program from €350 million to €600 million for 2012-2014, to fuel further investments in creating a better offering and value for customers.
Our business is built on strong, local consumer brands. We reinvest our cost savings into our offering, to give customers more of what they want and increase loyalty to our brands. We monitor our price positioning regularly in order to maintain the right value proposition. We use our best-in-class consumer insights capabilities to continually adjust our offering and provide the best shopping experience. We are also broadening our offering and working to give our customers more ways to shop with us, by developing our formats and growing our online business. We are making our assortment more relevant and our promotions more personal and targeted to individual customers. Providing our customers with more of what they want helps us drive identical sales.
The investments we have made to build our strong consumer brands have enabled us to drive identical sales growth, increase volumes and to gain market share, in many cases outperforming our peers in the food category in both Europe and the United States
SALES GROWTH
DRIVE IDENTICAL
ALLOCATE CAPITAL TO NEW GROWTH
CONSUMER BRANDS
BUILD STRONG
LOWER COST BASE
The capital we generate is used to drive new growth, to get the right returns and invest in the business for the long term. We are investing in new products and services based on our customers' changing needs. This includes developing our formats, expanding our online business, and introducing new and innovative own-brand products. We are also expanding our geographic reach by investing in new stores in our current, adjacent and new markets. Our aim is to allocate 3-3.5% of sales to capital expenditure to maintain and grow our network of attractive stores and successful online businesses. All of these things enable us to drive sales growth and grow market share.
Our strategic pillars
Our six strategic pillars outline how we will accelerate the growth of our company. These pillars will ensure we leverage rapidly changing customer behavior and retail trends so that we will stay competitive and successful, and be our customers' favorite place to shop, every day.
Ambition: Add 1-2% to sales growth through our customer initiatives.
Ambition: Triple online food sales to €1.5 billion and drive profitability, increase ownbrand penetration to approximately 40% in our U.S. businesses, and open a minimum of 150 convenience stores in Europe by 2016.
Ambition: Continue to focus on current markets and surrounding markets and evaluate new geographies; open 50 supermarkets in Belgium by 2016.
4 Simplicity
Ambition: Reduce costs by €600 million from 2012-2014.
Ambition: We measure our performance across nine targets, covering five areas: healthy living, community well-being, responsible products, care for the environment and our people.
Ambition: We measure our performance across five areas: respect for each other, good working conditions, development opportunities, support from managers and recognition for performance.
We want our businesses to be our customers' favorite place to shop. We want them to enjoy our brands, our stores, our people and our products so much that they do most of their shopping with us and recommend us to others.
In today's world, consumers have more choice than ever before. They also have growing expectations of retailers. To gain their loyalty, we have to understand them better than anyone else so that we can offer them the products and services they want, the quality and value they expect, and a shopping experience that makes their daily lives a little easier.
We have developed the ability to analyze the data we collect when customers shop with us and turn it into valuable insights about what they want. We are acting on these insights in all areas of our business to continually become a better place to shop. In addition, we operate local brands that are close to their communities, to help ensure our offering is relevant in every market we serve.
We are working to build more personal relationships with our customers so that they will want to keep coming back to shop with us. Our employees are key to this – the friendly and helpful service they provide builds our customers' loyalty and trust. We are also using our insights and innovative technologies to develop personalized communications and offers to customers on the products and services they need and want.
At the core, it's about putting the customer first in everything we do, every day.
Teams from Ahold USA and Ahold Europe have been working closely together over the past year to share knowledge and further develop the way we build customer loyalty and offer our customers more of what they want and need. One important focus area in 2012 was the transfer of best practices in applying customer insights from our U.S. businesses to Ahold Europe.
In addition to meeting regularly to share knowledge with U.S. counterparts, in 2012 our European customer loyalty team started working with the same analytics partner that has helped Ahold USA develop best-in-class methods for analyzing customer data and turning it into insights. They are building segmentations that help them analyze shopping behavior and better tailor their offering to customers. The European team is able to rapidly implement tools that use insights to help category management teams make decisions about pricing, promotions and assortment, using knowledge from their U.S. colleagues. In 2012, they performed detailed analyses on categories including fruits and vegetables, deli cheese and wine, to find out how customers shop in these areas and develop strategies to meet customer needs.
The ability to work together across continents is helping us to continue to provide our customers with a better, more relevant offering and value proposition, everywhere we operate.
For more information on this topic, watch a video case study
The world around us is changing fast – and so are our customers' needs. They expect more from retailers every day – better value, more convenience and solutions that help them save time. Technology has given consumers almost limitless choices when it comes to what to buy, how to buy it, and how much to pay for it – and they are taking advantage of it in increasing numbers.
We are broadening our offering by growing our online businesses, developing our store formats and improving our assortment – to give our customers shopping alternatives that meet their changing needs.
We are accelerating the growth of our online businesses so our customers can shop when, where and how they want – either in our stores or online, for delivery or pick up. We are building an even better, more relevant assortment, with a broader range of products and services, including new and innovative own-brand products and a growing assortment of non-food products. We continue to strengthen our successful supermarket formats, while developing additional formats to better serve our customers' needs.
For more information on this topic, watch a video case study
Europe, to give customers another way to shop with us.
During the year, Albert Heijn opened its first pick-up points in Europe,
Expanding our geographic reach
We are expanding our footprint in order to serve customers we have not reached before – both in and around our current markets and in new markets.
Acquiring stores in our current markets enables us to make the most of our existing operations and better leverage our scale. We are also looking for opportunities to move into markets that are adjacent to where we operate, so we can apply our skills and build ourscale even further.
Ahold Annual Report 2012 23
Expanding our geographic reach (continued)
Over a period of three weeks, Giant Carlisle converted 15 Genuardi's stores it had acquired in the greater Philadelphia area into its Giant banner. To minimize the disruption to customers, Giant closed each store for only about one week. During that time, whole store interiors needed to be torn down and rebuilt – shelves and coolers replaced, merchandise swapped out, IT systems updated, to name just a few – and hundreds of new employees had to be trained and brought on board. The result was an improved offering for customers: bright, clean and refreshed stores, with all the amenities that Giant's shoppers want and expect. The acquisition was the latest in Giant's process of growth through fill-in acquisitions, and helps Giant to fill in areas in the greater Philadelphia region it
For more information on this topic, watch a video case study
We want to operate in the simplest, most efficient and cost-competitive way, so that we can invest more in value for our customers.
We are leveraging our capabilities and resources as an international company and working on better processes and systems across our businesses.
We have increased the target of our €350 million cost-savings program underway for 2012-2014 to €600 million, to enable us to create more value for our customers.
The savings we unlock with simplicity will be reinvested into our offering for customers to drive our successful business model.
Our businesses in Ahold Europe are working to optimize the way they transport products from our distribution centers to our stores in order to save costs – to be reinvested back into our customer offering – and reduce our carbon footprint. They are doing this through better route planning and increasing the density of the truck load – in other words, finding ways of loading more products on every truck that leaves our distribution centers. All of these initiatives resulted in 10% savings on our total annual transportation costs in Europe. The load factor of Albert Heijn's trucks was 79% in 2012 – an increase of 3% compared to 2011. The fuel usage per kilometer in 2012 was down 3% compared to 2011. The load factor of Albert's trucks was over 85% in 2012. This contributed to an overall CO2 reduction of 5.6%.
We are working to optimize the value chain for our own-brand product lines across all our businesses. One way to do this is by making our own-brand consumer packaging and the way we package products for transport better, cheaper and more sustainable. We're finding ways to reduce the cardboard content of cases and lower the plastic content of bottles, for example. This is helping us lower costs to reinvest in our customer proposition, create packaging that is attractive to customers, reduce fuel consumption and waste, and improve our carbon footprint.
In Europe, work on packaging optimization is already well underway, and our companies here are gaining significant savings. For example, Albert Heijn changed the packaging of its own-brand olive oil from glass to plastic, a move that was popular with customers, saved over €500,000, and was beneficial to the environment because the bottle was lighter and more efficient to transport. Ahold USA began to put more focus on packaging optimization in 2012. They are starting to include it in supplier negotiations and review their portfolio of products. One initiative already underway is a switch from transporting certain products in cardboard boxes to displayready trays that use less cardboard and save labor in the stores.
Responsible retailing is about how we run our businesses, live our values and do what's right. As a food retailer, we operate at the heart of our communities. We believe we have a unique responsibility – and opportunity – to positively impact the lives of everyone our businesstouches.
We support the health and well-being of our customers, employees and communities; we source our products responsibly and care about the environment. Employees – throughout our businesses – are engaged in putting responsible retailing into practice, every day.
We have five priority areas under our responsible retailing pillar: healthy living choices made easy, contribution to community well-being, responsibly sourced products, care for the environment and our people. In 2010, we set a series of clear, measurable targets to 2015 for these priority areas, which we have now been reporting on for two years. We will continue to report on these, and have set various new targets where the initial ones have been reached.
Ahold USA's divisions wanted to do more to redirect safe, consumable food from the waste stream to regional food bank partners, so they set up a Consumable Food Taskforce to identify and establish standardized food donation procedures from stores across the divisions. As a result of both the efforts of the taskforce and better tracking and reporting of donations, our 2012 product donations to food banks increased by 50% – a welcome cannot be donated is diverted from landfill by being re-used, either as livestock feed or for composting. In 2012, a composting program was rolled out to 285 more U.S. stores, bringing the total to 509.
For more information on this topic, watch a video case study
All Ahold's operating companies have healthy living programs in place to encourage children to eat and live more healthily. In 2012, we reached over half a million children in the markets where we operate. Here, we focus on the activities of our healthy kids programs
In October 2012, Albert Heijn introduced a week-long classroom initiative known as "Pauzehap Week" to encourage elementary school students throughout the Netherlands to discover healthy snacks; 194,044 children took part. Each day, fun and informative learning assignments were carried out, and educational video clips were shown. This free classroom initiative was part of "Ik eet het beter" (I eat better): an umbrella educational program about healthy eating from Albert Heijn, which focuses on children aged 8-12 in the Netherlands. During 2012, 374,283 children participated in the overall program.
In the same month, Albert in the Czech Republic re-launched its Healthy 5 educational program for the new school year led by the Albert Charity Foundation. Inspired by Albert Heijn's "Ik eet het beter," the Healthy 5 program centers around the idea of eating five portions of fruit and vegetables per day. Children can get involved in interactive activities. The Healthy 5 program has been proving that healthy food can be fun to children since the project started in 2004. During 2012, 96,588 children got involved, as the program is being expanded to students in higher grades of primary schools.
Our businesses are all about people. We have great people who love what they do and are good at it. We want our businesses to be places they feel good about working at, so they pass on that good feeling to our customers.
We are continuously investing in and developing employees. At the same time, we are hiring new people with new skills, so that we have the capabilities we need to grow – and sharing these capabilities across our businesses.
We will continue to build diverse workforces – in terms of both personal background and professional experience – to better serve our diverse customer bases and help us successfully cross cultures and borders. We want to be a better place to work for our employees, and provide good working conditions, development opportunities, managerial support, recognition for performance, and an atmosphere of mutual respect.
We have been working to build a strong leadership culture across Ahold that is based on trust, openness and transparency. It is our belief that having diverse teams of leaders who complement each other's strengths, and who share the same vision, is essential for achieving our strategy. In 2012 we took the next steps in our leadership journey, opening it up to a wider group of leaders throughout Ahold.
In the retail industry, managers from different companies sometimes come together in "share groups" to discuss common issues and exchange knowledge, to learn from each other and to find out about practices that have worked well in another company. In that same spirit, Ahold USA held a District Director Academy in July 2012 that brought together store operations management from all four of the U.S. local retail divisions for the first time ever. The three-day meeting gave participants an opportunity to share best practices in the pursuit of operational excellence, and focused on the critical role district directors play in bringing their company strategy to life.
In preparation for the academy, HR teams surveyed district directors on where they see gaps and challenges in their day-to-day work and translated these into high priority focus areas. During the three days, district directors discussed initiatives that worked well in their divisions in each of these areas – and where they felt they could learn from each other. Together with their Regional Vice Presidents, they developed their own regional action plans to apply the practices they identified as best suited to their local businesses.
The academy included sessions on how to lead teams and build talent. These addressed how to create a culture where people feel accountable; techniques for listening, giving feedback and coaching employees to improve performance; and useful strategies for district directors to support the talent and bench strength in their districts and stores.
As a result of the academy, district directors in several divisions have already rolled out new initiatives to develop more efficient store processes and to identify and implement best practices within and across regions. These include holding regular meetings between store department heads and divisional leadership, and instituting weekly calls between regional leadership and their teams in the field.
Albert Heijn has been working on a project with a leading Dutch university to study the relationship between leadership and business results. As part of it, the company has offered all 750 of its store managers the opportunity to have 360-degree assessments, which are an important tool for furthering their career and personal development. First results of the overall study provide scientific evidence that shows how employee engagement leads to a better store experience for customers, positively impacting financial results.
We made good progress on our growth strategy and realized significant cost savings that we invested in great value for our customers.
| Results | 2012 € million |
2011 € million |
Change versus prior year |
% change constant rates |
|---|---|---|---|---|
| Net sales | 32,841 | 30,271 | 8.5% | 3.5% |
| Underlying operating income | 1,414 | 1,375 | 2.8% | (1.3)% |
| Underlying operating margin | 4.3% | 4.5% | (0.2)% pt | |
| Operating income | 1,187 | 1,347 | (11.9)% | (15.4)% |
| Income from continuing operations | 830 | 1,032 | (19.6)% | (22.5)% |
| Net income | 827 | 1,017 | (18.7)% | (21.6)% |
Leverage and liquidity 2012 2011 Change versus prior year Liquidity (€ billion) 2.9 3.6 (19.4%) Net debt (€ million) 1,360 1,088 25.0% Debt leverage (times)1 1.8 1.8 – Free cash flow (€ million) 1,188 965 23.1%
| Shareholders | 2012 € |
2011 € |
Change versus prior year |
|---|---|---|---|
| Net income per common share (basic) | 0.80 | 0.92 | (13.0)% |
| Adjusted income from continuing operations per share2 |
1.00 | 0.91 | 9.9% |
| Dividend payout ratio3 | 44% | 41% | 3% pt |
| Dividend per common share | 0.44 | 0.40 | 10.0% |
| Total shareholders return | 13.8% | (5.4)% | 19.2% pt |
| Other information | 2012 | 2011 | Change versus prior year |
|---|---|---|---|
| Number of stores (including franchise stores) |
3,074 | 3,008 | 2.2% |
| Capital expenditures (excluding acquisitions) | 930 | 808 | 15.1% |
| Number of employees | 225,000 | 218,000 | 3.2% |
| Credit rating (Standard & Poor's / Moody's) | BBB / Baa3 | BBB / Baa3 | – |
Certain key performance indicators contain non-GAAP measures. The definition of these non-GAAP measures are described on page 51 of this Annual Report.
1 The debt leverage ratio of the net lease adjusted debt divided by EBITDAR is defined in the Non-GAAP measures section.
2 For more information on adjusted income from continuing operations, see Our performance section.
3 Dividend payout ratio is based on adjusted income from continuing operations, see Our performance section for more information.
€32,841m Net sales
Free cash flow
In 2012, customers continued to focus on value while expecting quality, leading to a heightened focus on price and promotion in all of our markets. The overall uncertain economic climate, high unemployment and continued inflation resulted in lower consumer confidence and cautious spending. We continued to successfully adapt to these market conditions, investing to maintain an attractive proposition for our customers, while managing the balance between sales and margins. Overall, we grew market share and delivered another year of positive identical sales growth in the United States and the Netherlands.
Net sales in 2012 were €32.8 billion, up 8.5% compared to 2011. At constant exchange rates, net sales grew 3.5%. Our underlying operating margin was 4.3%. Operating income was €1.2 billion, negatively impacted by significant non-recurring charges, which included the net additional pension costs and the write-down of capitalized software development costs.
We were able to invest in our offering and deliver better value to customers, while also reducing pressure on margins, as a result of our rigorous approach to cost control. To further fuel these investments, we increased the target for our three-year (2012-2014) cost savings program from €350 million to €600 million, including sourcing and commercial efficiency as additional focus areas.
Our business continued to achieve strong cash generation and, in 2012, we delivered a record free cash flow of €1.2 billion. Strong operating cash flows enable us to invest in growth by further developing and rolling out our successful store formats, building our online business and expanding our geographic reach.
During 2012 we invested cash for business acquisitions of €0.7 billion and made payments for regular capital expenditures of €0.9 billion.
During the year, we increased our total number of stores by 66 to 3,074 and added 2.4% to our sales area. In the Netherlands, we made an agreement with Jumbo to transfer 82 stores, enhancing Albert Heijn's market position and ability to serve towns and cities where we were not present before. We also expanded our Albert Heijn business further into Belgium, a market we entered in 2011, by opening an additional nine supermarkets, for a total of 11 at year end. Our performance in this market so far is encouraging. Albert Heijn to go, our convenience format, was introduced in Germany with three new stores. By 2016, we plan to operate at least 50 supermarkets in Belgium and to open 150 new convenience stores in Europe.
In the Czech Republic, the enhanced commercial proposition, combined with cost control, led to improved performance. We continued to remodel our Czech hypermarkets to a new compact hyper format as part of our ambition to remodel 50 of our large stores by 2016.
Ahold USA further expanded its reach with the acquisition of 15 Genuardi's stores in the Giant Carlisle market area. All of the locations were converted to the Giant banner through a smooth transition process and we see positive initial results from these new stores.
Continuing to broaden our offering for customers and expanding further into the online domain, we acquired the largest non-food online retailer in the Netherlands, bol.com. In 2012, our overall online home delivery grocery business continued to enjoy double-digit growth. To expand this sales channel even more, we accelerated our testing of pick-up points in 2012, opening our first stand-alone pick-up points in the Netherlands and in the United States. In the coming years, we plan to strongly drive the roll-out of additional pick-up points, to offer this convenient shopping alternative to more of our customers. We will continue to look for innovative ways of broadening our online assortment and improving our overall offering across channels.
In 2012, we progressed in making our capital structure more efficient by further reducing our cash balance. While we continue to consistently generate strong free cash flow, we take a balanced approach to allocating capital. Last year, we invested in growth, repaid maturing debt and returned cash to shareholders through the completion of our €1 billion share buyback program and a 38% increase in our dividend. We also delivered on the guidance that we gave for 2012 on capital expenditures, increase in sales area, and net interest, and had a lower effective tax rate.
We remain cautious in our outlook for 2013, and do not expect market conditions to change significantly from last year. We will stay focused on simplifying our business to reduce costs so that we can invest in our offering and further improve the value we provide to our customers. We will continue to drive growth and work to offer our customers a better shopping experience every day, both in our stores and online. Reflecting the confidence we have in our strategy and our ability to generate cash, we propose a 10% increase in our dividend to €0.44 per common share. This represents a payout of 44% of adjusted income from continuing operations that amounted to €1,044 million or €1.00 per share in 2012. Our strong balance sheet enables us to launch a new 12-month €500 million share buyback program while continuing to actively pursue our growth strategy and taking advantage of opportunities as they arise.
At current exchange rates, we expect net interest expense for 2013 to be in the range of €200 million to €220 million, excluding €24 million notional interest related to pensions, following the implementation of the amendments to IAS 19. Capital expenditures, excluding acquisitions, are expected to be around €0.9 billion. Our ambition for return on capital employed is to stay in the top quartile of the food retail sector.
Ahold's 2012 and 2011 consolidated income statements are summarized as follows:
| 2012 € million |
% of net sales |
2011 € million |
% of net sales |
|
|---|---|---|---|---|
| Net sales | 32,841 | 100.0% | 30,271 | 100.0% |
| Gross profit | 8,524 | 26.0% | 7,921 | 26.2% |
| Underlying operating expenses | (7,110) | (21.7)% | (6,546) | (21.7)% |
| Underlying operating income | 1,414 | 4.3% | 1,375 | 4.5% |
| Impairments | (55) | (25) | ||
| Gains on the sale of assets | 21 | 12 | ||
| Restructuring and related charges | (193) | (15) | ||
| Operating income | 1,187 | 3.6% | 1,347 | 4.4% |
| Net financial expense | (227) | (316) | ||
| Income taxes | (211) | (140) | ||
| Share in income of joint ventures | 81 | 141 | ||
| Income from continuing operations | 830 | 2.5% | 1,032 | 3.4% |
| Loss from discontinued operations | (3) | (15) | ||
| Net income | 827 | 2.5% | 1,017 | 3.4% |
Net sales in 2012 were €32.8 billion, up 8.5% compared to 2011. At constant exchange rates, net sales growth in 2012 was 3.5%. We delivered solid sales performance in the United States and the Netherlands, despite market conditions that remained challenging. Net sales growth was positively impacted by identical sales growth; store remodeling and expansion; the acquisition of bol.com; and new stores openings, including the acquisition of 15 Genuardi's and two Fresh & Green's stores in the United States and 15 stores in the Netherlands that were converted after the agreement to transfer 82 stores from Jumbo. You can read more about our operating companies' net sales in Performance by segment.
Our net sales consist of sales to consumers and to franchise stores. Franchise stores typically operate under the same format as Aholdoperated stores. Franchisees generally purchase merchandise from Ahold, pay a franchise fee and receive support services, including management training, field support and marketing and administrative assistance.
In 2012, operating income was €1.2 billion, down €160 million or 11.9% compared to 2011. Underlying operating income (which excludes impairments, gains on the sale of assets, and restructuring and related charges listed below and totaling €227 million in 2012) was up 2.8% to €1.4 billion. Underlying operating margin, at 4.3% of net sales in 2012, was 0.2 percentage points lower compared to 2011 due to investments in value and growth in our main markets.
Underlying Corporate Center costs were €82 million, up €2 million compared to 2011. Excluding the impact of our self-insurance activities, underlying Corporate Center costs were also €82 million, €12 million higher than last year.
You can read more about our operating companies' results in Performance by segment.
| In € million | 2012 | |
|---|---|---|
| Ahold USA The Netherlands Other Europe |
831 644 21 |
56% 43% 1% |
| Total (before Corporate Center costs) |
1,496 | 100% |
Ahold recorded the following impairments and reversals of impairments of assets (primarily related to stores) in 2012 and 2011:
| € million | 2012 | 2011 |
|---|---|---|
| Ahold USA | (36) | (23) |
| The Netherlands | (1) | – |
| Other Europe | (18) | (2) |
| Total | (55) | (25) |
Ahold recorded the following gains on the sale of non-current assets in 2012 and 2011:
| € million | 2012 | 2011 |
|---|---|---|
| Ahold USA | 4 | 3 |
| The Netherlands | 7 | 9 |
| Other Europe | – | – |
| Corporate Center | 10 | – |
| Total | 21 | 12 |
Restructuring and related charges in 2012 and 2011 were as follows:
| € million | 2012 | 2011 |
|---|---|---|
| Ahold USA | (180) | (15) |
| The Netherlands | 26 | – |
| Other Europe | – | – |
| Corporate Center | (39) | – |
| Total | (193) | (15) |
Restructuring and related charges at Ahold USA were connected with the settlement of the U.S. frozen pension plan (€90 million). Out of thistotal settlement (€121 million), a portion was also recorded in Corporate Center (€31 million), along with acquisition costs (€6 million) related to the acquisition of bol.com.
Additionally in 2012, we wrote down €88 million (\$116 million) of capitalized software development costs at Ahold USA. Ahold has been conducting parallel implementations of a suite of retail applications in both the United States and Europe. Following a review of our systems development strategy we have decided to focus our resources on the development of the retail suite in Europe where we already have several elements successfully implemented. In the U.S. we will focus on areas likely to provide the greatest benefits, such as customer loyalty, point of sale and e-commerce.
In the Netherlands, restructuring and related charges resulted from a gain on pension curtailment (€31 million).
In 2011, restructuring and related charges at Ahold USA mainly resulted from the transition of certain logistics activities.
Net financial expense, at €227 million, decreased by €89 million compared to 2011. Last year, net financial expense included a financial guarantee provision of €92 million, which was the estimated impact of a judgment rendered in the Stop & Shop Bradlees lease litigation with Vornado (as further described in Note 9 to the consolidated financial statements).
Interest expense, at €236 million, was down €9 million mainly following debt reductions in 2012 of €0.4 billion, partly offset by a stronger U.S. dollar against the euro in 2012. Net interest expense of €226 million was at the lower end of our guidance of €220-€240 million.
In 2012, income tax expense was €211 million, up €71 million compared to last year. This was mainly due to a €109 million tax benefit resulting from the release of an income tax contingency reserve included in 2011 (as further described in Note 10 to the consolidated financial statements). The effective tax rate, calculated as a percentage of income before income taxes, was 22.0% (2011: 13.6% or 24.2% when excluding the above-mentioned release).
Ahold's share in income of joint ventures, which primarily relates to our 60% shareholding in ICA and our 49% shareholding in JMR, was €81 million in 2012, down by €60 million compared to last year. ICA's results were negatively impacted by a tax provision recognized by ICA following an adverse court ruling (the impact on Ahold's results was €90 million).
On September 4, 2012, in line with its aim to focus the execution of its reshaping retail growth strategy on businesses the company controls, Ahold announced that it was exploring strategic options regarding its holding in ICA and had initiated a review that was expected to take 6-12 months. On February 11, 2013, we announced that we reached an agreement with Hakon Invest of Sweden to sell our 60% stake for SEK 21.2 billion in cash (which includes ICA's 2012 dividend of SEK 1.2 billion). The transaction, subject to regulatory approvals as well as approval by the ICA's Retailers Association (ICA Forbundet) for the financing of the transaction, is expected to be completed in the middle of 2013. You can read more about ICA's and JMR's results in Performance by segment.
In 2012 and 2011, results from discontinued operations were impacted by various adjustments to the results of prior years' divestments (primarily U.S. Foodservice and Tops), as a consequence of warranties and indemnifications provided in the relevant sales agreements.
For further information about discontinued operations, see Note 5 to the consolidated financial statements.
Basic income from continuing operations per common share was €0.80, a decrease of €0.13 or 14% compared to 2011. This deterioration was primarily driven by impairments and restructuring and related charges (in connection with the write-down of capitalized software) as well as lower share in income from joint ventures.
The average number of outstanding common shares decreased as a result of the shares repurchased under the €1 billion share buyback program that we commenced in March 2011 and completed in March 2012. The value of shares repurchased in 2012 amounted to €277 million. The decrease in the average number of outstanding common shares was marginally offset by shares that were issued under employee share-based compensation programs. €0.80 Dividend per common share (2012 includes proposed dividend) (€)
As part of our dividend policy we adjust income from continuing operations for significant non-recurring items. Adjusted income from continuing operations amounted to €1,044 million and €1,009 million in 2012 and 2011, respectively, and was determined as follows:
| 1,009 | |
|---|---|
| – | 86 |
| – | (109) |
| 90 | – |
| 52 | – |
| 72 | – |
| 830 | 1,032 |
| 2012 | 2011 |
| 1,044 |
We reinstated our annual dividend in 2007 and announced that we intended to increase future annual dividends while meeting the capital needs of the business and maintaining an efficient investment grade capital structure. €0.44
| 2008 | 0.18 | ||
|---|---|---|---|
| 2009 | 0.23 | ||
| 2010 | 0.29 | ||
| 2011 | 0.40 | ||
| 2012 | 0.44 |
We propose a common stock dividend of €0.44 for the financial year 2012, up €0.04 or 10% from last year. It represents a payout ratio of 44%, which is in line with our dividend policy to target a payout ratio in the range of 40-50% of adjusted income from continuing operations.
Additionally, our solid balance sheet and strong free cash flow generation enables us to launch a new 12-month €500 million share buyback program.
Ahold's consolidated balance sheets as of December 30, 2012, and January 1, 2012, are summarized as follows:
| € million | December 30, 2012 |
January 1, 2012 |
|---|---|---|
| Property, plant and equipment | 6,038 | 5,984 |
| Intangible assets | 1,569 | 836 |
| Other non-current assets | 3,059 | 2,967 |
| Cash, cash equivalents and short-term deposits |
1,886 | 2,592 |
| Inventories | 1,492 | 1,466 |
| Other current assets | 1,038 | 1,135 |
| Total assets | 15,082 | 14,980 |
| Equity | 5,995 | 5,877 |
| Non-current portion of long-term debt | 3,107 | 3,144 |
| Other non-current liabilities | 1,553 | 1,345 |
| Short-term borrowings and current portion of long-term debt |
139 | 536 |
| Payables | 2,667 | 2,436 |
| Other current liabilities | 1,621 | 1,642 |
| Total equity and liabilities | 15,082 | 14,980 |
Property, plant and equipment increased by €54 million as capital expenditures were mostly offset by depreciation, impairments and the weakening of the U.S. dollar against the euro. The increase in intangible assets primarily relates to the 2012 acquisitions.
For the total Group, our defined benefit plans, excluding unrecognized actuarial losses, showed a deficit of €654 million at year end 2012 compared to a surplus of €255 million at year end 2011. This deterioration was due to lower interest rates in both the Netherlands and the United States, and partially offset by positive investment results on the plan assets and cash contributions made to the plans.
A significant number of union employees in the United States are covered by multi-employer plans. With the help of external actuaries, we have updated the most recent available information that these plans have provided (generally as of December 31, 2011) for market trends and conditions through the end of 2012. We estimate our proportionate share of the total net deficit to be \$967 million (€732 million) at year end 2012 (2011: \$943 million or €729 million). These amounts are not recognized on our balance sheet. While this is our best estimate based on the information available to us, it is imprecise and not necessarily reliable. For more information see Note 23 to the consolidated financial statements.
Equity increased by €118 million, mainly as a result of the addition of the current year's net income, partially offset by the dividend payment related to 2011 and the €1 billion share buyback program we completed in March 2012.
The decrease in short-term borrowings and current portion of long-term debt results from a redemption of the €407 million notes due in March 2012. These notes have been swapped to \$362 million and the fair value of the underlying hedge (€141 million) was included in other current assets as of January 1, 2012, and subsequently settled on maturity.
In 2012, gross debt decreased by €434 million to €3.2 billion, primarily as a result of the redemption of €407 million notes and the weakening of the U.S. dollar against the euro. Ahold's net debt of €1,360 million as of December 30, 2012, was up €272 million compared to last year. Net debt does not include our commitments under operating lease contracts, which, on an undiscounted basis, amount to €5.7 billion.
These off-balance sheet commitments impact our capital structure. The present value of these commitments is added to net debt to measure our leverage against EBITDAR (i.e. underlying operating income before depreciation, amortization and gross rent expense). The ratio of net lease-adjusted debt to EBITDAR stood at 1.8 times at year end 2012, unchanged from last year, as the impact of cash spent was neutralized by the increase of EBITDAR (driven by exchange rates). Under normal conditions we expect to operate at around 2 times, which is consistent with our commitment to maintaining an investment grade credit rating.
Ahold relies on cash provided by operating activities as a primary source of liquidity, in addition to debt and equity issuances in the capital markets, credit facilities and available cash balances. Based on our current operating performance and liquidity position, we believe that cash provided by operating activities and available cash balances (including short-term deposits) will be sufficient for working capital, capital expenditures, dividend payments, interest payments, and scheduled debt repayment requirements for the next 12 months and the foreseeable future. A total of €22 million in loans will mature in 2013, €0.4 billion in 2014 through 2017 and €1.0 billion after 2017.
Our strategy over the past several years has positively impacted the credit ratings assigned to Ahold by Standard & Poor's (S&P) and Moody's. S&P upgraded Ahold's corporate credit rating to BBB with a stable outlook in June 2009 and, since then, this rating has remained unchanged. In March 2011, Moody's affirmed Ahold's Baa3 issuer credit rating with a stable outlook. Maintaining investment grade credit ratings is a cornerstone of our strategy as they serve to lower the cost of funds and to facilitate access to a variety of lenders and markets.
In June 2011, Ahold completed the refinancing of its five-year €1.2 billion committed credit facility originally maturing in August 2012. The new €1.2 billion committed, unsecured, multi-currency and syndicated credit facility has a base term of five years and includes the possibility of 12-month extensions in each of the first two years. In May 2012, we applied for a 12-month extension period and subsequently agreed with the majority of the participating banks on the extension of the facility in the amount of €1.0 billion from June 2016 to June 2017. The second extension option will be assessed in 2013.
The facility may be used for working capital and for general corporate purposes and provides for the issuance of \$550 million (€416 million) in letters of credit. As of December 30, 2012, there were no outstanding borrowings under the credit facility other than letters of credit to an aggregate amount of \$244 million (€184 million).
As of year end 2012, liquidity amounted to €2.9 billion, defined as cash (including cash equivalents and short-term deposits) of €1.9 billion and the undrawn portion of the committed credit facility of €1.0 billion. Under normal conditions we expect to operate with liquidity of around €2.0 billion, evenly split between cash and the undrawn portion of our committed credit facilities. It is our intention to move to this level of liquidity as we continue to invest in growth, reduce our debt and return cash to shareholders, resulting in a more efficient capital structure.
| Cash flow | 2012 € million |
2011 € million |
|---|---|---|
| Operating cash flows from continuing operations |
2,116 | 1,786 |
| Purchase of non-current assets | (911) | (755) |
| Divestment of assets / disposal groups held for sale |
51 | 23 |
| Dividends from joint ventures | 157 | 130 |
| Interest received | 11 | 27 |
| Interest paid | (236) | (246) |
| Free cash flow | 1,188 | 965 |
| Repayments of loans and finance lease liabilities |
(534) | (77) |
| Dividends paid on common shares | (415) | (328) |
| Share buyback | (277) | (837) |
| Acquisition of businesses, net of cash acquired | (701) | (30) |
| Changes in short-term deposits | 155 | 71 |
| Other | 73 | 10 |
| Net cash from operating, investing and financing activities |
(511) | (226) |
Free cash flow, at €1,188 million, increased by €223 million compared to 2011. Cash generated from operations was up €330 million, primarily as a result of lower working capital requirements, lower taxes paid, as well as a higher dividend received from ICA and the positive impact of a stronger U.S. dollar against the euro in 2012. This was partially offset by higher levels of capital expenditures.
Capital expenditures, which include new finance leases, amounted to €1.9 billion in 2012 and €0.9 billion in 2011 and were primarily related to the construction, remodeling and expansion of stores and supply chain and IT infrastructure improvements. In 2012, capital expenditures also included the assets acquired with acquisition of bol.com and 15 Genuardi's stores, and the transfer of 82 stores from Jumbo, including subsequent remodeling costs. Excluding acquisitions, capital expenditures in 2012 were €0.9 billion, in line with our guidance.
At the end of 2012, we operated 3,074 stores, a net increase of 66 stores. Total sales area increased by 2.4% to 4.7 million square meters. This includes franchise stores and excludes the stores operated by our joint ventures ICA and JMR.
| January 1, 2012 |
Opened / acquired |
Closed / sold |
December 30, 2012 |
|
|---|---|---|---|---|
| Ahold USA | 756 | 23 | (7) | 772 |
| The Netherlands1 | 1,946 | 69 | (19) | 1,996 |
| Other Europe | 306 | 2 | (2) | 306 |
| Total | 3,008 | 94 | (28) | 3,074 |
1 The number of stores as of December 30, 2012, includes 1,105 specialty stores (Etos and Gall & Gall).
Franchisees operated 809 Albert Heijn, Etos and Gall & Gall stores, 491 of which were either owned by the franchisees or leased independently from Ahold.
| Ahold | Franchisees | Total | |
|---|---|---|---|
| Number of stores leased or owned |
2,583 | 491 | 3,074 |
| Number of stores subleased to franchisees |
(318) | 318 | 0 |
| Number of stores operated | 2,265 | 809 | 3,074 |
Ahold's stores range in size from 20 to 10,000 square meters. The average sales area of our stores in the United States is approximately 3,800 square meters and in Europe approximately 1,300 square meters (excluding Etos and Gall & Gall, which operate much smaller stores).
In 2012, we opened six stand-alone pick-up points which, when added to the total number of stores owned or leased by Ahold, brings the company's total number of retail locations to 2,589.
| We also operated the following other properties as of | |
|---|---|
| December 30, 2012: |
| Warehouses / distribution centers / production facilities / offices |
87 |
|---|---|
| Properties under construction / development | 38 |
| Investment properties | 735 |
| Total | 860 |
The 735 investment properties consist of buildings and land. Virtually all these properties were subleased to third parties. The majority were shopping centers containing one or more Ahold stores and third-party retail units generating rental income.
The following table breaks down the ownership structure of our 2,589 retail locations and 860 other properties as of December 30, 2012:
| % of total | Retail locations |
Other properties |
|---|---|---|
| Company-owned | 21% | 37% |
| Leased | 79% | 63% |
| of which | ||
| Finance leases | 13% | 7% |
| Operating leases | 66% | 56% |
Our leased properties have terms of up to 25 years, with renewal options for additional periods. Store rentals are normally payable on a monthly basis at a stated amount or, in a limited number of cases, at a guaranteed minimum amount plus a percentage of sales over a defined base.
Performance by segment
| Financial results | ||
|---|---|---|
| 2012 | 2011 |
|---|---|
| 11,054 | 10,506 |
| 5.2% | 4.2% |
| 1.0% | 2.8% |
| 676 | 675 |
| 644 | 666 |
| 5.8% | 6.3% |
| 93 | 89 |
| 30 | 29 |
| 33.7% | 34.7% |
| 45.8% | |
| 43.0% |
1 Before Corporate Center costs
Net sales amounted to €11 billion in 2012, an increase of 5.2% compared to last year. Albert Heijn supermarkets achieved identical sales growth of 1.1%. Along with store openings, this enabled Albert Heijn to increase its market share in the Netherlands to 33.7%. This year, Albert Heijn also ran successful new consumer campaigns, including its "Route 99" promotion that offered 99 products for 99 eurocents, as one way to provide better value to its customers. Other factors that positively impacted sales growth were the acquisition of bol.com, opening additional supermarkets in Belgium, and opening the company's first three convenience stores in Germany. Online delivery service albert.nl also achieved double-digit sales growth.
The Netherlands reported an operating income of €676 million, unchanged from last year. The lower year-over-year underlying margin was impacted by price investments, intensified promotional activity, and an increase in hourly wages. 2012 operating income included €32 million of favorable unusual items, including a €31 million curtailment gain for the Dutch pension plan.
Albert Heijn reached an agreement with competitor Jumbo on the transfer of 82 stores in 2012 that enables it to serve markets and customers it has not reached before. The company has remodeled 15 of these stores to the Albert Heijn banner so far and plans to convert most of the rest in 2013.
| Store portfolio development | 2012 | 2011 |
|---|---|---|
| Stores at the beginning of the year | 1,946 | 1,914 |
| New and acquired stores | 69 | 46 |
| Closed and divested stores | (19) | (14) |
| Number of stores at year end | 1,996 | 1,946 |
| Stores remodeled / expanded / | ||
|---|---|---|
| relocated / reconstructed | 170 | 171 |
| Number of stores | 2012 | 2011 |
|---|---|---|
| Albert Heijn: the Netherlands | 818 | 799 |
| Albert Heijn: Belgium | 11 | 2 |
| Albert Heijn to go: the Netherlands | 59 | 55 |
| Albert Heijn to go: Germany | 3 | – |
| Etos | 538 | 536 |
| Gall & Gall | 567 | 554 |
| Total the Netherlands | 1,996 | 1,946 |
Sales area of own-operated stores (in thousands of square meters) 915 885 In the Netherlands we remodeled, expanded, relocated or reconstructed 170 stores as part of our continuous focus on keeping our stores fresh and up-to-date. Total investments in the Netherlands amounted to around 3% of sales and ranged from opening new stores to investing in IT, distribution centers, and minor construction work in the stores.
The total number of stores in the Netherlands increased by 50. This number includes 15 of the 82 transferred stores from competitor Jumbo and nine stores acquired by Gall & Gall from competitor Mitra. In Belgium, Albert Heijn opened nine supermarkets and opened its first three convenience stores in Germany.
Ahold also acquired bol.com in 2012, to strengthen our online business and customer offering in non-food. Bol.com is the number one online retailer in the Netherlands, with more than three million customers and 10% of the online market, and has a fast growing presence in Belgium. It offers non-food products in a large variety of categories (such as books, games, toys and health & beauty care), delivered directly to people's homes. Additionally, Albert Heijn opened three pick-up points, and offered bol.com pick-up points in 59 Albert Heijn stores.
Ahold acquired non-food internet retailer bol.com in May, in order to grow our online business and offer customers more choice, greater convenience and better value. Bol.com offers customers in the Netherlands and Belgium a very broad range of products in many non-food categories including books, entertainment, electronics and toys.
The company achieved a great deal in 2012. It launched three new categories of products: baby, kitchen and dining, and health and beauty care. The health and beauty care store is the largest in the Netherlands. The company opened its webstore to other retailers through its bol.com plaza, to further expand the range of products customers can find. It began offering free shipping on orders over €20, to remove an important barrier to customers doing more of their shopping online. Bol.com also doubled its business in Belgium and opened pick-up points in 59 Albert Heijn stores in the Netherlands.
50 Increased store portfolio by 50 new stores
The leading food retailer in the Netherlands and one of the countries best-known brands.
Stores 891
Supermarkets, convenience stores and online shopping in food and non-food
Etos is one of the largest drugstore chains in the Netherlands.
538 Store formats:
Drugstores and online shopping
The Netherlands
Gall & Gall is the leading wine and liquor retailer in the Netherlands.
Stores 567
The Netherlands
Store formats: Wine and liquor stores and online shopping
www.ahold.com/Etos www.ahold.com/Gall&Gall
Albert.nl is the leading online food delivery service in the Netherlands. It works in partnership with Albert Heijn, Etos and Gall & Gall.
Online daily needs ordering and delivery
bol.com is the number one online retailer in the Netherlands.
(2.2)%
Identical sales growth (excluding gasoline sales) 1.3% Underlying operating margin
Operating profit margin continues to improve
| Financial results | |
|---|---|
| 2012 | 2011 | |
|---|---|---|
| Net sales (€ millions) | 1,675 | 1,739 |
| Net sales growth | (3.7)% | 4.8% |
| Identical sales growth | (2.3)% | 2.2% |
| Identical sales growth (excluding gasoline sales) |
(2.2)% | 1.8% |
| Operating income (€ millions) | 3 | 18 |
| Underlying operating income (€ millions) | 21 | 20 |
| Underlying operating margin | 1.3% | 1.2% |
| Number of employees / headcount (at year end in thousands) |
11 | 12 |
| Number of employees / FTEs (at year end in thousands) |
10 | 10 |
| Contribution to Ahold sales | 5.1% | 5.7% |
| Contribution to Ahold underlying operating income1 |
1.4% | 1.4% |
1 Before Corporate Center costs
Net sales amounted to €1.7 billion in 2012, a decrease of 3.7%, or 1.8% at constant exchange rates. Albert again ran successful consumer campaigns, for example, one promotion tied to the Ice Age 3 movie and another offering collectible animal cards. Identical sales excluding gasoline decreased 2.2% as the market was under pressure, significantly impacted by an increase in the main value-added tax (VAT) rate from 10% to 14%, which decreased consumer buying power. Albert performed well compared with its competitors and succeeded in maintaining market share, despite its share of stores declining. In Slovakia, sales growth decreased significantly as a result of the closing of two stores and the negative impact of competitive store openings on identical store sales.
Albert / Hypernova reported an operating profit of €3 million, a decrease of €15 million over last year. The operating profit included €18 million of impairment charges mainly related to stores in Slovakia. Underlying operating margin improved and the company was able to offset pressure on gross margins from product cost inflation and a competitive, promotion-driven market through a focus on operational improvements and simplification.
| Store portfolio development | 2012 | 2011 |
|---|---|---|
| Stores at the beginning of the year | 306 | 305 |
| New and acquired stores | 2 | 1 |
| Closed and divested stores | (2) | – |
| Number of stores at year end | 306 | 306 |
| Stores remodeled / expanded / relocated / reconstructed |
17 | 27 |
| Number of stores | 2012 | 2011 |
| Czech Republic | 282 | 280 |
| Slovakia | 24 | 26 |
| Sales area of own-operated stores (in thousands of square meters) |
453 | 453 |
|---|---|---|
Total Other Europe 306 306
In 2012, Albert's main focus areas were the project started in 2011 to remodel all its hypermarkets to a new compact hyper format and the opening of new and improved delis in all its supermarkets. Albert continued the rollout of the new compact hyper format in 2012, bringing the total new compact hypers to nine stores at year end. At the end of 2012, Albert / Hypernova operated 282 stores in the Czech Republic, 13 of which were hypermarkets, 42 compact hypers, and 227 supermarkets. The company also operated 24 stores in Slovakia, four of which were supermarkets and 20 hypermarkets.
Albert in the Czech Republic has been rolling out a new generation of compact hypers that puts the fresh proposition front and center as a way to differentiate it in a very competitive Czech market.
In 2012, Albert opened one new compact hyper and remodeled seven to the new format. All of the company's compact hypers will be renovated to the format over the course of the next three years.
So far they have received positive feedback on the new format from customers, who found the overall store experience improved. Third party research found that, in particular, customers appreciated the freshness and quality of products and the availability and range of dry groceries. The price image improved, thanks to better promotions, and the new format is perceived to be a better place for families with children to shop. IGD Retail Analysis has stated that the new format is an important step forward for the company, creates a point of differentiation from the competition, and should help support sales growth in the longer term.
Albert and Hypernova are among the best-known food retail brands in the Czech Republic and Slovakia.
Stores 306
Compact hypers and supermarkets
www.ahold.com/Hypernova
Albert remodeled seven former hypermarkets to successful new compact hypers
7
Identical sales growth (excluding gasoline sales)
Underlying operating margin
| 2012 | 2011 | |
|---|---|---|
| Net sales (€ millions) | 20,112 | 18,026 |
| Net sales (\$ millions) | 25,845 | 25,072 |
| Net sales growth | 3.1% | 6.6% |
| Identical sales growth | 1.4% | 4.9% |
| Identical sales growth (excluding gasoline sales) |
0.5% | 2.9% |
| Operating income (€ millions) | 619 | 734 |
| Operating income (\$ millions) | 792 | 1,021 |
| Underlying operating income (€ millions) | 831 | 769 |
| Underlying operating margin | 4.1% | 4.3% |
| Number of employees / headcount (at year end in thousands) |
121 | 117 |
| Number of employees / FTEs (at year end in thousands) |
85 | 82 |
| Contribution to Ahold sales | 61.2% | 59.6% |
| Contribution to Ahold underlying operating income1 |
55.6% | 52.8% |
1 Before Corporate Center costs
Net sales, at \$26 billion, increased by 3.1% in 2012. Identical sales, excluding gasoline, increased by 0.5%. In challenging market conditions, all four Ahold USA divisions achieved market share gains in the supermarket channel. Sales growth benefited from successful promotions, acquired and new stores, and effective loyalty programs. Online business Peapod continued to deliver double-digit sales growth in its existing market area, launched virtual grocery stores and opened eight pick-up points where customers can drive by and conveniently pick up their online orders.
Ahold USA achieved an operating income of \$792 million, which was \$229 million lower than last year. Operating profit included \$118 million of pension costs related to the settlement of the U.S. frozen pension plan and \$116 million write-down of capitalized software development costs. Underlying operating profit, at 4.1%, decreased as pressure on gross margins continued, due to product cost inflation and a competitive, promotion-driven market. The divisions were able to compensate for this, to a large extent, through a more competitive cost base, and by continuing to focus on operational improvements and simplification.
Market share continued to grow
Having outstanding Fresh departments is key to building customer loyalty. The U.S. divisions are working to be "Best in Fresh" among key competitors in all their markets – as defined by customers through intensive research. They are creating a "Fresh-centered" company culture, testing and reformulating own-brand products to be freshest in the marketplace and creating more powerful and aligned communications to customers about their Fresh offering.
| Store portfolio development | 2012 | 2011 |
|---|---|---|
| Stores at the beginning of the year | 756 | 751 |
| New and acquired stores | 23 | 17 |
| Closed and divested stores | (7) | (12) |
| Number of stores at year end | 772 | 756 |
| Stores remodeled / expanded / relocated / reconstructed |
64 | 58 |
| Number of stores | 2012 | 2011 |
| Stop & Shop New England | 219 | 217 |
| Stop & Shop New York Metro | 184 | 183 |
| Giant Landover | 171 | 173 |
| Giant Carlisle | 198 | 183 |
| Total Ahold USA | 772 | 756 |
Sales area of own-operated stores (in thousands of square meters) 2,955 2,893
In 2012, the Ahold USA divisions remodeled, expanded, relocated or reconstructed 64 stores as part of their continuous focus on keeping stores fresh and up-to-date. Total investments at Ahold USA amounted to around 3% of sales and ranged from new stores to investments in IT, distribution centers, and minor construction work in the stores.
Ahold USA increased its number of stores by 16, net of seven closings. The new stores included 15 Genuardi's stores in the greater Philadelphia area acquired by Giant Carlisle and converted to its banner; and two Fresh & Green's stores in Baltimore acquired and converted by Giant Landover. Peapod opened its first eight pick-up points in 2012.
At the end of 2012, Ahold USA operated 211 fuel stations, an increase of 20 stations over last year, the majority of which are located in the Stop & Shop New England and Giant Carlisle market areas.
16 Increased store portfolio by 16 new stores
Our U.S. divisions continue to develop how they use customer insights to make decisions about their customer offering and ensure that customers find the products that they want. This is helping them make better decisions – and get better results.
In 2012, the U.S. divisions introduced a new assortment tool that enables them to analyze customer card data and rank products in the stores by their importance to their best customers. This insight can then be used by merchandising teams to adjust the assortment to fit customers' needs. Using this new process, they reset 130 categories and subcategories throughout the stores in all divisions – representing close to half of their sales. Early results are encouraging, with sales trends improving in many of the reset categories. They also used their knowledge about the shopping behavior of value-conscious "dollar stretcher" customers to reformulate their Guaranteed Value own-brand product line. They eliminated dozens of items that were not relevant to these shoppers and introduced new products that were more appealing. Results have been very positive, with Guaranteed Value sales up 19%.
Stop & Shop is a leading supermarket brand in the northeastern United States.
Connecticut (except South Western Connecticut), Massachusetts, New Hampshire, and Rhode Island, in the United States
Store formats: Supermarkets and super stores
Stop & Shop is a leading supermarket brand in the northeastern United States.
Connecticut (South Western Connecticut), New York and New Jersey, in the United States
USA
Store formats: Supermarkets and super stores
Giant Landover is a leading supermarket brand in the mid-Atlantic United States.
Virginia, Maryland, Delaware, and the District of Columbia, in the United States
Store formats: Supermarkets and super stores
www.ahold.com/Martins
Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Virginia and Wisconsin, in the United States
Peapod is the leading online grocery service in the United States. It works in partnership with Stop & Shop, Giant
Connecticut, District of Columbia, Illinois, Indiana, Maryland,
Format: Online grocery service
Landover and Giant Carlisle.
Market area:
www.ahold.com/Peapod
| ICA | JMR | |
|---|---|---|
| Number of stores at year end 2012 | 2,209 | 374 |
| Percentage shares held by Ahold at year end 2012 |
60% | 49% |
| On 100% stake basis: | ||
| Net sales ( € million) | 11,125 | 3,295 |
| Net income (€ million) | 118 | 10 |
ICA is a food retail group headquartered in Stockholm, Sweden. As of year-end 2012, ICA served 2,209 retailer-owned and companyoperated retail stores in Sweden, Norway and the Baltic States. The company also provides consumer financial services in Sweden through its bank.
Ahold owns a 60% stake in ICA AB, which in turn owns the ICA group. The other 40% stake in ICA is held by Hakon Invest AB, a Swedish company listed on the Stockholm Stock Exchange.
Ahold and Hakon Invest AB share equal voting power in ICA AB. In 2012, ICA reached an agreement with Lagopus Eiendomsutvikling AS, a consortium of four companies, regarding the transfer of lease agreements and properties in Norway. As part of this agreement, ICA will close all of its ICA Maxi stores in Norway. This agreement follows ICA's announcement in 2011 that it would divest its Norwegian ICA Maxi stores and their properties.
On September 4, 2012, in line with its aim to focus the execution of its reshaping retail growth strategy on businesses the company controls, Ahold announced that it was exploring strategic options regarding its holding in ICA and had initiated a review that was expected to take 6-12 months. On February 11, 2013, we announced that we reached an agreement with Hakon Invest of Sweden to sell our 60% stake for SEK 21.2 billion in cash (which includes ICA's 2012 dividend of SEK 1.2 billion). The transaction, subject to regulatory approvals as well as approval by the ICA's Retailers Association (ICA Forbundet) for the financing of the transaction, is expected to be completed in the middle of 2013.
In 2012, net sales were €11.1 billion, an increase of 2.0% at constant exchange rates. The increase was due to a solid performance in Sweden and the Baltic States, as well as higher revenues by ICA Bank. Net sales in Norway decreased compared to last year.
Operating income increased by €45 million to €383 million at an operating margin of 3.4%. At constant exchange rates, operating profit increased €30 million, mainly due to an improved performance in Sweden and in the Baltic States.
In 2012, net income decreased by €86 million to €118 million. ICA's results were negatively impacted by a tax provision recognized by the company following an adverse court ruling (the impact on Ahold's results was €90 million).
www.ahold.com/ICA
In 1992, Ahold partnered with Jerónimo Martins, SGPS, S.A. in the joint venture JMR, which is headquartered in Lisbon, Portugal. Ahold holds 49% of the shares in JMR and shares equal voting power on JMR's board of directors with Jerónimo Martins, SGPS, S.A. At the end of 2012, JMR owned and operated 374 stores in Portugal under the brand name Pingo Doce, three more than in 2011.
In 2012, net sales increased by 2.9% to €3.3 billion, driven by sales from new stores. Sales growth was impacted by lower overall consumption in Portugal, due to the euro crisis and government measures. Halfway through 2012, JMR started an aggressive and successful promotional campaign that helped it to remain competitive and gain customers.
In 2012, operating income decreased by €36 million to €56 million, resulting in an operating margin of 1.7%. Intense promotional pressure and the buying behavior of value-focused customers negatively impacted operating margin.
In 2012, net income decreased by €22 million to €10 million, mainly as a result of lower operating income.
www.ahold.com/Pingo-Doce
Income from continuing operations adjusted for significant nonrecurring items. This measure is a component of Ahold's dividend policy, whereby the dividend payout ratio has been set to be 40-50% of adjusted income from continuing operations.
Identical sales plus net sales from replacement stores in local currency. Comparable sales are only reported for Ahold USA.
Corporate Center costs relate to the responsibilities of the Corporate Center, including Corporate Finance, Corporate Strategy, Internal Audit, Legal, Compliance, Human Resources, Information Technology, Insurance, Communications, Corporate Responsibility, and the Corporate Executive Board. Corporate costs also include results from other activities coordinated centrally but not allocated to any operating company. Underlying Corporate Center costs exclude impairments of non-current assets, gains and losses on the sale of assets, and restructuring and related charges, including business acquisition transaction costs.
Operating cash flows from continuing operations minus net capital expenditures minus net interest paid, plus dividends received. Ahold's management believes this measure is useful because it provides insight into the cash flow available to, among other things, reduce debt and pay dividends.
Gross rent comprises all of the rent that Ahold is required to pay to third parties and is not corrected for rent income Ahold receives from other third parties.
Net sales from exactly the same stores and online sales in existing market areas, in local currency for the comparable period.
Because gasoline prices have experienced greater volatility than food prices, Ahold's management believes that by excluding gasoline net sales, this measure provides a better insight into the growth of its identical store sales.
Cash and cash equivalents, short-term deposits, and undrawn funds available under the committed credit facility. Ahold's management believes this measure is useful because it provides insight into funds available to manage the company.
Net debt is the difference between (i) the sum of loans, finance lease liabilities, cumulative preferred financing shares and short-term debt (i.e. gross debt) and (ii) cash, cash equivalents, and short-term deposits. In management's view, because cash, cash equivalents, and short-term deposits can be used, among other things, to repay indebtedness, netting this against gross debt is a useful measure for investors to judge Ahold's leverage. Net debt may include certain cash items that are not readily available for repaying debt.
Net debt increased by the present value of future operating lease commitments over underlying operating income before depreciation, amortization and gross rent expense. Ahold's management believes this measure is useful because it provides insight into Ahold's leverage, adjusted for the impact of operating leases that count for a significant part of Ahold's capital structure.
Net sales at constant exchange rates exclude the impact of using different currency exchange rates to translate the financial information of Ahold subsidiaries or joint ventures to euros. Ahold's management believes this measure provides a better insight into the operating performance of Ahold's foreign subsidiaries or joint ventures.
In certain instances, net sales are presented in local currency. Ahold's management believes this measure provides a better insight into the operating performance of Ahold's foreign subsidiaries.
In certain instances operating income is presented in local currency. Ahold's management believes this measure provides better insight into the operating performance of Ahold's foreign subsidiaries.
Return on capital employed (ROCE) is calculated as the sum of underlying operating income and the 50% gross rent add back, divided by the annual rolling average of the sum of property, plant and equipment, intangible assets, working capital components, and gross rent expense multiplied by eight.
Total Shareholder Return (TSR) is the sum of share price growth and dividends paid. In this report, we disclose TSR as defined for the purposes of Ahold's Global Reward Opportunity (GRO) program. A daily TSR index obtained from Thomson Reuters is averaged over a six-month period preceding the year end (average TSR index). Annual TSR is an increase in the average TSR index compared to the average TSR index in the previous year.
Total operating income, adjusted for impairments of non-current assets, gains and losses on the sale of assets, and restructuring and related charges, including business acquisition transaction costs. Ahold's management believes this measure provides better insight into the underlying operating performance of Ahold's operations.
Management believes that these non-GAAP financial measures allow for a better understanding of Ahold's operating and financial performance. These non-GAAP financial measures should be considered in addition to, but not as substitutes for, the most directly comparable IFRS measures.
In this section:
We are committed to a corporate governance structure that best supports our business and meets the needs of our stakeholders.
Having a structured and consistent approach to managing risks and uncertainties is key to being able to fulfill our stakeholders' expectations.
Ahold's risk management and control systems are designed to provide reasonable assurance that the Company's business objectives are achieved.
Ahold's enterprise risk management program is designed to provide executive management with an understanding of the Company's key business risks and associated risk management practices. At each operating company, management identifies the principal risks to the achievement of important business objectives and the actions needed to mitigate these risks. Committees comprised of senior executives at each operating company periodically review these risks and the related mitigation practices. The findings are consolidated into an enterprise risk management report that is presented to the Corporate Executive Board and the Supervisory Board. Executive management at each operating company is required to review the principal risks and risk management practices with the Corporate Executive Board as a regular part of the business planning and performance cycle. In turn, the Corporate Executive Board provides complementary insights into existing and emerging risks that are subsequently included in the program. The outcome of the Company's enterprise risk management program influences the formation of controls and procedures, the scope of internal audit activities and the focus of the business planning and performance process.
We maintain the Ahold Business Control Framework (ABC Framework), which incorporates risk assessment, control activities and monitoring into our business practices at entity-wide and functional levels. The aim of the ABC Framework is to provide reasonable assurance that risks to achieving important objectives are identified and mitigated. The ABC Framework is based on the recommendations of the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have developed uniform governance and control standards in areas such as ethical conduct, agreements and accounting policies. These and other Corporate Executive Board-approved policies and procedures are incorporated into the ABC Framework as mandatory guidelines for all of Ahold's consolidated entities. Within this framework, local management is responsible for business operations, including risk mitigation and compliance with laws and regulations. Authority limits have been established to ensure that all expenditures and decisions are approved by the appropriate levels of management.
Our key control requirements are documented in Ahold Control Memoranda (ACMs). Compliance with the ACMs is mandatory for all of Ahold's fully-owned entities. The ACMs cover controls relating to financial reporting and various other business processes. They include the requirement for management to assess the operating effectiveness of all key controls.
Our Global Code of Conduct (the "Code") was revised in 2011, and became effective in early 2012. The Code focuses on Ahold's core value "Doing what's right" and establishes Group-wide principles and rules with regard to employee conduct. It is intended to help each employee understand and follow relevant compliance and integrity rules and know when and where to ask for advice or report a breach of the Code. The principles of the Code apply to all employees of Ahold and its operating companies, as well as to third parties hired by or acting for and on behalf of Ahold. Employees of defined grade levels have been trained and acknowledge compliance with the Code on an annual basis. The full Code is available in the corporate governance section of Ahold's public website at www.ahold.com.
We use a comprehensive business planning and performance review process to monitor the Company's performance. This process covers the adoption of strategy, budgeting and the reporting of current and projected results. We assess business performance according to both financial and non-financial targets. In order to meet business needs and the requirements of the Dutch Corporate Governance Code, we have a Group-wide management certification process in place, which requires that the executive management team members at each of our reporting entities send letters of representation to the Corporate Executive Board on a quarterly basis. These letters confirm whether they are in compliance with Ahold's global Code of Conduct, policies on fraud prevention and detection, accounting and internal control standards, and disclosure requirements. Compliance with Ahold's responsible retailing standards is confirmed through bi-annual letters of representation. Both our Internal Control and Internal Audit functions help to ensure that we maintain and improve the integrity and effectiveness of our system of risk management and internal control. Internal Audit undertakes regular risk-based, objective and critical audits. The function also monitors the effectiveness of corrective actions undertaken by management, including significant audit findings.
The Governance, Risk and Compliance (GRC) Committee oversees governance, risk and compliance activities within the Ahold group and reviews relevant reports that are submitted to the Corporate Executive Board, the Supervisory Board and the Audit Committee. During 2012, the GRC Committee met quarterly. Ahold's Chief Corporate Governance Counsel (chair) and Chief Financial Officer sit on the GRC Committee, as do other members of management responsible for key governance, risk and compliance functions.
Ahold supports the Dutch Corporate Governance Code and makes the following declaration in accordance with best practice provision II.1.5:
The Corporate Executive Board is responsible for establishing and maintaining adequate internal risk management and control systems. Such systems are designed to manage rather than eliminate the risk of failure to achieve important business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss.
With respect to financial reporting, management has assessed whether the risk management and control systems provide reasonable assurance that the 2012 financial statements do not contain any material misstatements. This assessment was based on the criteria set out in COSO: Internal Control – Integrated Framework. It included tests of the design and operating effectiveness of entity level controls, transactional controls at significant locations, and relevant general computer controls. Any control weaknesses not fully remediated at year end were evaluated. Based on this assessment, management determined that the Company's financial reporting systems are adequately designed and operated effectively in 2012.
The principal risk factors that may impede the achievement of Ahold's objectives with respect to strategy, operations, financial and compliance matters are described in the following section. The enterprise risk management system, the governance and control standards incorporated into our ABC Framework, and the monitoring systems described above are the principal means by which we manage these risks. Management is not aware of any important failings in these systems as of year end 2012.
The following discussion of risks relating to Ahold should be read carefully when evaluating the Company's business, its prospects and the forward-looking statements contained in this Annual Report. Any of the following risks could have a material adverse effect on Ahold's financial position, results of operations and liquidity or could cause actual results to differ materially from the results contemplated in the forward-looking statements contained in this Annual Report.
We recognize different strategic, operational, financial, and compliance and regulatory risk categories. The risks described below are not the only risks the Company faces. There may be additional risks that we are currently unaware of or risks that management believes are immaterial or otherwise common to most companies, but which may in the future have a material adverse effect on Ahold's financial position, results of operations, liquidity and the actual outcome of matters referred to in the forward-looking statements contained in this Annual Report. For additional information regarding forward-looking statements, see the Cautionary notice.
We are continuing with our strategy to reshape the way we do business and drive growth. Our six priority areas focus on increasing customer loyalty, broadening our offering, expanding our geographic reach, driving simplicity, being a responsible retailer, and engaging and attracting the best talent. Our promises focus on what we will do to be a better place to shop, a better place to work and a better neighbor everywhere we operate. You can read more about our strategy and ambitions in the Our strategy section of this Annual Report.
Ahold is subject to a variety of risks related to our pillar strategies, our promises and the achievement of our ambitions, including execution, macro-economic and competitive risks. If we are unable to execute our plans or meet our ambitions or the expectations of our customers, communities, employees or shareholders, our sales and earnings growth could be adversely affected.
The challenging global economic circumstances in recent years have impacted all of the economies and markets in which we operate – and a recovery is slow to materialize. High unemployment, reduced consumer confidence and disposable incomes, and food and fuel price volatility can negatively affect customer demand. The economic conditions, including the euro crisis, have restricted the availability of credit in our markets and are limiting governments' abilities to implement further fiscal stimuli. This may result in sustained sluggish growth in customer demand as shoppers remain price sensitive, and could cause the failure of key suppliers, or otherwise disrupt oursupply chains, impacting the cost and availability of goods. Inflationary forces impacting cost of goods sold might be difficult to pass on to consumers.
A collapse of the European banking system as a result of a euro break-up could disrupt our ability to channel liquidity to our employees and suppliers. We established a project group that has analyzed the potential effects of the euro crisis for Ahold and defined mitigating actions to manage the risks associated.
As a result of the current economic climate, our competitors continue to take aggressive actions. The competitive landscape is changing as a result of the entry of new competitors into our markets; consolidation, as weaker competitors are acquired by stronger players; and the emergence of new business models. These factors or other unforeseen effects of the current economic climate could impair the effectiveness of Ahold's strategy and reduce the anticipated benefits of its price repositioning and cost savings programs or other strategic initiatives, and may have a material adverse effect on the Company's financial position, results of operations and liquidity.
In order to achieve Ahold's strategic agenda and as a result of the way the Company is currently organized, activities are increasingly undertaken in the form of projects. The progress of the projects is monitored closely. If Ahold is not able to deliver on the objectives of its underlying strategic projects, the realization of key elements of its strategy may be at risk. This could have a material adverse effect on Ahold's financial position, results of operations and liquidity.
A significant portion of the employees of Ahold's businesses are represented by unions under collective bargaining agreements. Asthese collective bargaining agreements expire, Ahold's businesses might not be able to negotiate extensions or replacements on acceptable terms. Although we consider the relations between Ahold's businesses and the relevant trade unions to be stable and our businesses have human resource functions to support such union relations and collective bargaining negotiations, any failure to effectively renegotiate these agreements could result in work stoppages or other organized labor actions. Ahold's businesses may not be able to resolve any issues in a timely manner and contingency plans may not be sufficient to avoid an impact on the business. A work stoppage due to the failure of one or more of Ahold's businesses to renegotiate a collective bargaining agreement, or otherwise, could have a material adverse effect on the Company's results of operations and financial position.
Ahold's business operations generate and maintain confidential commercial and personal information concerning customers, employees, suppliers and the Company. Our information security policy mandates that we implement and maintain controls, processes and tools that ensure confidentiality, privacy and integrity of confidential and sensitive information. We also manage and monitor compliance with our policy and with the various legal and regulatory requirements. In 2012, we updated both our strategic guidelines for global information security and our global information security policy. However, disclosure of confidential information to unintended third parties may negatively impact Ahold's corporate reputation and competitive position or result in litigation or regulatory action. This could have a material adverse effect on Ahold's financial position.
A number of Ahold's critical business processes and functions are concentrated in a limited number of centralized facilities and / or are dependent on IT systems and infrastructure, key personnel, outsourcing providers and other key suppliers for which limited or no comparable back-up is available. If any of these critical business processes or functions suffer a severe disruption that renders such facilities, critical IT systems or infrastructure, key suppliers or key personnel unavailable, Ahold could experience disruption to its supply chain, store and administrative operations. We continue to maintain and invest in business continuity management plans and security initiatives for those facilities and technology systems that support critical business processes and take steps to mitigate the dependency risks associated with our key strategic suppliers. However, these measures cannot fully prevent business interruptions that could have a material adverse effect on Ahold's revenues, customer perception and reputation.
The growing internationalization of the supply chain; the increasing sale of own-brand products in Ahold's stores, which include vegetables and other non-branded products; along with increased regulation, continue to make food and non-food safety and social compliance important business risks. We have food and non-food product safety and social compliance policies and practices in place for our own-brand products, including regular reporting and auditing of continental performance and third-party certification. However, Ahold may face product safety or social compliance problems, including disruptions to the supply chain caused by food-borne illnesses and negative consumer reaction to incidents, which may have a material adverse effect on the Company's reputation, results of operations and financial position.
Increased regulatory demands, stakeholder awareness and the growing sentiment that large retailers must address sustainability issues across the entire supply chain mean that Ahold's brands and reputation may suffer if it does not adequately address relevant corporate responsibility issues affecting the food retail industry. Furthermore, if we fail to effectively increase the fuel and energy efficiency of our operations or fail to reduce waste, our operational and cost competitiveness may be adversely affected. We continue to develop a broad range of coordinated and focused programs, as an integrated part of our reshaping retail strategy, to address issues such as climate change, energy efficiency, waste reduction, social accountability, healthy living, community engagement and corporate responsibility reporting. If these programs are not successful or are otherwise inadequate, the reputation and competitive position of Ahold and the Ahold brands could suffer. See Ahold's Responsible Retailing Report 2012 for additional information about our policies and programs in this area.
Social media may be used by individuals or groups to recommend or to comment on our company or products. The use of social media amplifies and speeds up the dissemination of news and information. This can enable individuals and groups to generate public support for issues, campaigns or boycotts more quickly and on a much larger scale. At the same time, online communications are becoming more important for our business and social media is increasingly being used to support our customer loyalty initiatives. We have prepared social media guidelines and are monitoring social media activity relating to the Company's banners and products.
Ahold manages its insurable risks through a combination of selfinsurance and commercial insurance coverage. Our U.S. operations are self-insured for workers' compensation, general liability, vehicle accident and certain health care-related claims. Self-insurance liabilities are estimated based on actuarial valuations. While we believe that the actuarial estimates are reasonable, they are subject to changes caused by claim reporting patterns, claim settlement patterns, regulatory economic conditions and adverse litigation results. It is possible that the final resolution of some claims may require us to make significant expenditures in excess of our existing reserves. In addition, third-party insurance companies that provide the fronting insurance that is part of our self-insurance programs require us to provide certain collateral. We take measures to assess and monitor the financial strength and credit-worthiness of the commercial insurers from which we purchase insurance. However, we remain exposed to a degree of counterparty credit risk with respect to such insurers. If conditions of economic distress were to cause the liquidity or solvency of our counterparties to deteriorate, we may not be able to recover collateral funds or be indemnified from the insurer in accordance with the terms and conditions of our policies.
Ahold has a number of defined benefit pension plans covering a large number of its employees in the Netherlands and in the United States. A decrease in equity returns or interest rates may negatively affect the funding ratios of Ahold's pension funds, which could lead to higher pension charges and contributions payable. In addition, a significant number of union employees in the United States are covered by multi-employer plans. The unfunded portion of the liabilities of these plans may result in increased future payments by Ahold and the other participating employers. Ahold's risk of such increased contributions may be greater if any of the participating employers in an underfunded multi-employer plan withdraws from the plan due to insolvency and is not able to contribute an amount sufficient to fund the unfunded liabilities associated with its participants of the plan. For additional information, see Note 23 to the consolidated financial statements. If Ahold is unable at any time to meet any required funding obligations for some of its U.S. pension plans, or if the Pension Benefit Guaranty Corporation (the PBGC), as the insurer of certain U.S. plan benefits, concludes that its risk may increase unreasonably if the plans continue, the PBGC could terminate the plans and place liens on material amounts of the Company's assets, under the U.S. Employee Retirement Income Security Act of 1974 (ERISA).
Ahold's pension plans covering its Dutch operations are regulated by Dutch pension law. The pension fund is under the supervision of the Dutch Central Bank (De Nederlandsche Bank or DNB) and the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten or AFM). According to the law and / or contractually agreed funding arrangements, Ahold may be required to make additional contributions to its pension plans in case minimum funding requirements are not met.
In addition, U.S. healthcare costs have risen significantly in recent years and this trend may continue. Ahold may be required to pay significantly higher amounts to fund U.S. employee healthcare plans in the future. Significant increases in healthcare and pension funding requirements could have a material adverse effect on the Company's financial position, results of operations and liquidity.
For further information relating to these financial risks, see Note 30 and Note 34 to the consolidated financial statements, which are incorporated and repeated here by reference.
Because Ahold operates in a number of countries, its income is subject to taxation in differing jurisdictions and at differing tax rates. Significant judgment is required in determining the consolidated income tax position. We seek to organize our affairs in a tax-efficient and balanced manner, taking into account the applicable regulations of the jurisdictions in which we operate. As a result of Ahold's multijurisdictional operations, it is exposed to a number of different tax risks including, but not limited to, changes in tax laws or interpretations of such tax laws. The tax authorities in the jurisdictions where Ahold operates may audit the Company's tax returns and may disagree with the positions taken in those returns. An adverse outcome resulting from any settlement or future examination of the Company's tax returns may result in additional tax liabilities and may adversely affect its effective tax rate, which could have a material adverse effect on Ahold's financial position, results of operations and liquidity. In addition, any examination by the tax authorities could cause Ahold to incur significant legal expenses and divert management's attention from the operation of its business.
Ahold and its businesses are subject to various federal, regional, state and local laws and regulations in each country in which they operate, relating to, among other areas: zoning; land use; antitrust restrictions; work place safety; public health including food and non-food safety; environmental protection; alcoholic beverage, tobacco and pharmaceutical sales; and information security. Ahold and its businesses are also subject to a variety of laws governing the relationship with employees, including but not limited to minimum wage, overtime, working conditions, health care, disabled access and work permit requirements. The cost of compliance with, or changes in, any of these laws could impact the operations and reduce the profitability of Ahold or its businesses and thus could affect Ahold's financial condition or results of operations. Ahold and its businesses are also subject to a variety of antitrust and similar laws and regulations in the jurisdictions in which they operate, which may impact or limit Ahold's ability to realize certain acquisitions, divestments, partnerships or mergers.
From time to time, Ahold and its businesses are parties to legal and regulatory proceedings in a number of countries, including the United States. Based on the prevailing regulatory environment or economic conditions in the markets in which Ahold businesses operate, litigation may increase in frequency and materiality. These legal and regulatory proceedings may include matters involving personnel and employment issues, personal injury, antitrust claims, contract claims and other matters. We estimate our exposure to these legal proceedings and establish accruals for the estimated liabilities where it is reasonably possible to estimate and where the potential realization of a loss contingency is more likely than not. The assessment of exposures and ultimate outcomes of legal and regulatory proceedings involves uncertainties. Adverse outcomes of these legal proceedings, or changes in our assessments of proceedings, could potentially result in material adverse effects on our financial results. For further information, see Note 34 to the consolidated financial statements.
Dick Boer (August 31, 1957) is a Dutch national. On September 29, 2010, the Supervisory Board appointed him Chief Executive Officer of Ahold, effective March 1, 2011. Prior to that date, Dick served as Chief Operating Officer Ahold Europe, to which he was appointed on November 6, 2006.
Dick joined Ahold in 1998 as CEO of Ahold Czech Republic and was appointed President and CEO of Albert Heijn in 2000. In 2003, he became President and CEO of Ahold's Dutch operating companies. Ahold's shareholders appointed him to the Corporate Executive Board on May 3, 2007.
Prior to joining Ahold, Dick spent more than 17 years in various retail positions for SHV Holdings in the Netherlands and abroad and for Unigro N.V.
Dick is vice co-chair of The Consumer Goods Forum and a member of the executive board of The Confederation of Netherlands Industry and Employers (VNO-NCW). He is also a member of the advisory board of G-star.
Jeff Carr (September 17, 1961) is a British national. Ahold's shareholders appointed him to the Corporate Executive Board on April 17, 2012. Jeff joined Ahold in November 2011, when he assumed his responsibilities as acting member of the Corporate Executive Board and Chief Financial Officer (CFO).
Before joining Ahold, Jeff was group finance director and a member of the board at UK-based FirstGroup, the leading transport operator in the United Kingdom and North America. He began his career at Unilever, and held senior roles in finance at easyJet, Associated British Foods, Reckitt Benckiser and Grand Metropolitan. Jeff has served as CFO of listed companies since 2005, and has worked and lived in Europe and the United States.
Lodewijk Hijmans van den Bergh (September 16, 1963) is a Dutch national. Ahold's shareholders appointed him to the Corporate Executive Board on April 13, 2010. Lodewijk joined the Company on December 1, 2009, when he assumed his responsibilities as acting member of the Corporate Executive Board and Chief Corporate Governance Counsel.
Prior to joining Ahold, Lodewijk was a partner of Amsterdam-based law firm De Brauw Blackstone Westbroek.
Lodewijk is the deputy chairman of the board of the Royal Concertgebouw Orchestra and a member of the Supervisory Board of the Air Traffic Control the Netherlands. He is also a member of the advisory boards of the Rotterdam School of Management, Erasmus University and Champs on Stage.
James McCann (October 4, 1969) is a British national. Ahold's shareholders appointed him to the Corporate Executive Board on April 17, 2012. James joined Ahold on September 1, 2011, when he assumed his responsibilities as acting member of the Corporate Executive Board and Chief Commercial & Development Officer. On February 1, 2013, he became Chief Operating Officer Ahold USA.
Before joining Ahold, James was Executive Director for Carrefour France and a member of Carrefour's Group Executive Board. During the previous seven years, he held leading roles in various countries for Tesco plc. Prior to that, he worked for Sainsbury's, Mars and Shell.
René Dahan (August 26, 1941) is a Dutch national. He was first appointed to the Supervisory Board on June 2, 2004, and his term runs until 2016. René is former Executive Vice President and Director of Exxon Mobil Corporation. He is a member of the international advisory board of the Instituto de Empresa, Madrid, Spain.
Tom de Swaan (March 4, 1946) is a Dutch national. He was first appointed to the Supervisory Board on May 3, 2007, and his term runs until 2015. Tom is former CFO of ABN AMRO Bank N.V. He also held various executive positions at the Dutch Central Bank and was a non-executive director of the Financial Services Authority in London. Tom is a member of the board of GlaxoSmithKline Plc and vice-chairman of the board of directors of Zurich Insurance Group. He is chairman of the supervisory board of Van Lanschot Bankiers N.V., a member of the supervisory board of Royal DSM and chairman of its audit committee and a member of the Public Interest Committee of KPMG ELLP. In addition, Tom is chairman of the advisory board of the Rotterdam School of Management, Erasmus University and chairman of the Board of Trustees of The Netherlands Cancer Institute-Antoni van Leeuwenhoek Hospital.
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Derk Doijer (October 9, 1949) is a Dutch national. He was first appointed to the Supervisory Board on May 18, 2005, and his term runs until 2013. Derk is a former member of the executive board of directors of SHV Holdings N.V. and, prior to that, held
several executive positions in the Netherlands and South America. He is chairman of the supervisory boards of Corio N.V. and Lucas Bols Holdings B.V. Derk is a member of the supervisory board of ZBG Group.
Stephanie Shern (January 7, 1948) is a U.S. national. She was first appointed to the Supervisory Board on May 18, 2005, and her term runs until 2013. Stephanie was with Ernst & Young for over 30 years, most recently as vice chairman and global director of retail and consumer products and a member of Ernst & Young's U.S. Management Committee. She is a member of the boards and chair of the audit committees of GameStop and Scotts MiracleGro. Stephanie is also a member of the advisory board of Pennsylvania State University's accounting major program and a founding member of the Lead Director Network and of the Southwest Region of the United States Audit Committee Network, both organized by Tapestry Networks in the United States.
Judith Sprieser (August 3, 1953) is a U.S. national. She was first appointed to the Supervisory Board on May 18, 2006, and her term runs until 2014. Judith is former CEO of Transora, Inc, which she founded in 2000. Prior to this, she was executive vice president and CFO of Sara Lee Corporation. She is a director of Allstate Corporation, Reckitt Benckiser plc, Intercontinental Exchange, Inc. and Experian Plc.
Mark McGrath (August 10, 1946) is a U.S. national. He was appointed to the Supervisory Board on April 23, 2008, and his term runs until 2016. Mark is a director emeritus of McKinsey & Company. He led the firm's Americas' Consumer Goods Practice from 1998 until 2004 when he retired from the company. Mark is a director of GATX. He is chairman of the advisory board
of the University of Notre Dame's Kellogg Institute of International Studies, a member of the advisory councils of the University of Chicago Booth Graduate School of Business and Notre Dame's Kroc International Peace Studies Institute and a member of the Executive Committee of the Chicago Symphony Orchestra Association. Mark is a senior advisor with Gleacher & Company.
Ben Noteboom (July 4, 1958) is a Dutch national. He was appointed to the Supervisory Board on April 28, 2009, and his term runs until 2013. Ben currently holds the position of CEO and chairman of the executive board of Randstad Holding N.V., to which he was appointed in March 2003. He joined Randstad in 1993 and since then has held various senior management positions within the company. Ben joined the executive board of Randstad in 2001. Ben is a member of the boards of the Holland Festival Foundation and the Cancer Center Amsterdam.
Rob van den Bergh (April 10, 1950) is a Dutch national. He was appointed to the Supervisory Board on April 20, 2011, and his term runs until 2015. Rob is former CEO of VNU N.V. Prior to that, he held various other executive positions within VNU and was a member of the executive board from 1992 until his appointment as CEO in 2000. Rob is currently chairman of the supervisory board of N.V. Deli Maatschappij and a member of the supervisory boards of TomTom N.V., Royal Wagenborg B.V., Holding Nationale Goede Doelen Loterijen N.V. and Pon Holdings B.V. He is also chairman of the supervisory board of Isala Klinieken Foundation, a member of the investment committee of NPM Capital N.V. and a member of the advisory board of CVC Capital Partners.
Ahold is committed to a corporate governance structure that best supports its business and meets the needs of its stakeholders and that complies with relevant rules and regulations.
This section contains an overview of Ahold's corporate governance structure and includes information required under the Dutch Corporate Governance Code.
Koninklijke Ahold N.V. (the Company) is a public company under Dutch law with a two-tier board structure. Ahold is managed by a Corporate Executive Board, which is supervised and advised by a Supervisory Board. The two boards are accountable to the General Meeting of Shareholders.
The Company is structured to effectively execute its strategy and to balance local, continental and global decision-making. It is comprised of a Corporate Center and two continental platforms, Ahold Europe and Ahold USA, each of which contains a number of companies.
The following diagram shows the governance structure of Ahold and its companies. A list of subsidiaries, joint ventures and associates is included in Note 36 to the consolidated financial statements.
The Corporate Executive Board is responsible for the management and the general affairs of Ahold. For a more detailed description of the responsibilities of the Corporate Executive Board, please refer to its charter in the corporate governance section of Ahold's public website at www.ahold.com.
According to Ahold's Articles of Association, the Corporate Executive Board must consist of at least three members. The current members of the Corporate Executive Board are: Dick Boer, President and Chief Executive Officer; Jeff Carr, Executive Vice President and Chief Financial Officer; Lodewijk Hijmans van den Bergh, Executive Vice President and Chief Corporate Governance Counsel; and James McCann, Executive Vice President and Chief Operating Officer Ahold USA. The size and composition of the Corporate Executive Board and the combined experience and expertise of its members should reflect the best fit for the profile and strategy of the Company. This aim for the best fit, in combination with the availability of qualifying candidates, has resulted in Ahold currently having a Corporate Executive Board in which all four members are male. In order to increase gender diversity on the Corporate Executive Board, in accordance with article 2:276 section 2 of the Dutch Civil Code, the Company pays close attention to gender diversity in the process of recruiting and appointing new Corporate Executive Board members. In addition, the Company continues to encourage the professional development of female employees, which has already led to the appointment of several women to key leadership positions.
The General Meeting of Shareholders can appoint, suspend, or dismiss a Corporate Executive Board member by an absolute majority of votes cast, upon a proposal made by the Supervisory Board. If another party makes the proposal, an absolute majority of votes cast, representing at least one-third of the issued share capital, is required. If this qualified majority is not achieved, but a majority of the votes exercised was in favor of the proposal, then a second meeting may be held. In the second meeting, only a majority of votes exercised, regardless of the number of shares represented at the meeting, isrequired to adopt the proposal.
Corporate Executive Board members are appointed for four-year terms and may be reappointed for additional terms not exceeding four years. The Supervisory Board may at any time suspend a Corporate Executive Board member.
On May 18, 2006, Ahold's General Meeting of Shareholders adopted its current remuneration policy for Corporate Executive Board members. You can find details of this policy in Remuneration. For detailed information on the individual remuneration of Corporate Executive Board members, see Notes 31 and 32 to the consolidated financial statements.
| Name | Date of birth | Date of first appointment |
Date of possible reappointment |
|---|---|---|---|
| Dick Boer | August 31, 1957 | May 3, 2007 | 2015 |
| Jeff Carr | September 17, 1961 |
April 17, 2012 | 2016 |
| Lodewijk Hijmans van den Bergh |
September 16, 1963 |
April 13, 2010 | 2014 |
| James McCann | October 4, 1969 | April 17, 2012 | 2016 |
The Supervisory Board is responsible for supervising and advising Ahold's Corporate Executive Board and for overseeing the general course of affairs of the Company. The Supervisory Board is guided in its duties by Ahold's interests, taking into consideration the overall good of the enterprise and the relevant interests of all its stakeholders.
The Supervisory Board is responsible for monitoring and assessing its own performance.
Ahold's Articles of Association require the approval of the Supervisory Board for certain major resolutions proposed to be taken by the Corporate Executive Board, including:
The General Meeting of Shareholders can appoint, suspend or dismiss a Supervisory Board member by an absolute majority of votes cast, upon a proposal made by the Supervisory Board. If another party makes the proposal, an absolute majority of votes cast, representing at least one-third of the issued share capital, is required. If this qualified majority is not achieved but a majority of the votes exercised was in favor of the proposal, then a second meeting may be held. In the second meeting, only a majority of votes exercised, regardless of the number of shares represented at the meeting, is required. A Supervisory Board member is appointed for a four-year term and is eligible for reappointment. However, a Supervisory Board member may not serve for more than 12 years.
You can find more detailed information on the Supervisory Board in the Supervisory Board report. The following charters can be found in the corporate governance section of Ahold's website at www.ahold.com: the Supervisory Board Charter, the Audit Committee Charter, the Remuneration Committee Charter and the Selection and Appointment Committee Charter. The composition of the Supervisory Board, including its members' combined experience and expertise, independence, and diversity of age and gender, should reflect the best fit for the profile and strategy of the Company. This aim for the best fit, in combination with the availability of qualifying candidates, has resulted in Ahold currently having a Supervisory Board in which two members are female and six members are male. In order to increase gender diversity in the Supervisory Board in accordance with article 2:276 section 2 of the Dutch Civil Code, the Company pays close attention to gender diversity in the process of recruiting and appointing new Supervisory Board candidates.
Each member of the Corporate Executive Board is required to immediately report any potential conflict of interest to the Chairman of the Supervisory Board and to the other members of the Corporate Executive Board and provide them with all relevant information. Each Supervisory Board member is required to immediately report any potential conflict of interest to the Chairman of the Supervisory Board and provide him or her with all relevant information. The Chairman determines whether there is a conflict of interest. If a member of the Supervisory Board or a member of the Corporate Executive Board has a conflict of interest with the Company, the member may not participate in the discussions and / or decision-making process on subjects or transactions relating to the conflict of interest. The Chairman of the Supervisory Board will arrange for such transactions to be disclosed in the Annual Report. During 2012, Rob van den Bergh did not participate in the discussions and / or decision-making process on the acquisition of Bol.com B.V. in view of the potential conflict of interest related to the transaction. No other such transaction occurred in 2012. In accordance with best practice provision III.6.4 of the Dutch Corporate Governance Code, Ahold reports that no transactions between the Company and legal or natural persons who hold at least 10% of the shares in the Company occurred in 2012.
Ahold shareholders exercise their rights through annual and extraordinary General Meetings of Shareholders. Ahold is required to convene an annual General Meeting of Shareholders in the Netherlands each year, no later than six months after the end of the Company's financial year. Additional extraordinary General Meetings of Shareholders may be convened at any time by the Supervisory Board, the Corporate Executive Board, or by one or more shareholders representing at least 10% of the issued share capital. The agenda for the annual General Meeting of Shareholders must contain certain matters as specified in Ahold's Articles of Association and under Dutch law, including the adoption of Ahold's annual financial statements. Shareholders are entitled to propose items for the agenda of the General Meeting of Shareholders provided that they hold at least 1% of the issued share capital or the shares that they hold represent a market value of at least €50 million. The adoption of such a proposal requires a majority of votes cast at the General Meeting of Shareholders representing at least one-third of the issued shares. If this qualified majority is not achieved but a majority of the votes exercised was in favor of the proposal, then a second meeting may be held. In the second meeting, only a majority of votes exercised is required to adopt the proposal, regardless of the number of shares represented at the meeting (unless the law or Articles of Association provide otherwise). Proposals for agenda items for the General Meeting of Shareholders must be submitted at least 60 days prior to the date of the meeting. The General Meeting of Shareholders is also entitled to vote on important decisions regarding the identity or the character of Ahold, including major acquisitions and divestments.
Dutch law prescribes a record date to be set 28 days prior to the date of the General Meeting of Shareholders to determine whether a person may attend and exercise the rights relating to the General Meeting of Shareholders. Shareholders registered at that date are entitled to attend and to exercise their rights as shareholders in relation to the General Meeting of Shareholders, regardless of a sale of shares after the record date. Shareholders may be represented by written proxy.
Ahold encourages participation in General Meetings of Shareholders. Ahold uses Citibank, the Depositary for the Company's ADR facility, to enable ADR holders to exercise their voting rights, which are represented by the common shares underlying the ADRs.
Each common share entitles its holder to cast one vote. Subject to certain exceptions provided by Dutch law or Ahold's Articles of Association, resolutions are passed by a majority of votes cast. A resolution to amend the Articles of Association that would change the rights vested in the holders of a particular class of shares requires the prior approval of a meeting of that particular class. A resolution to dissolve the Company may be adopted by the General Meeting of Shareholders following a proposal of the Corporate Executive Board made with the approval of the Supervisory Board. Any proposed resolution to wind up the Company must be disclosed in the notice calling the General Meeting of Shareholders at which that proposal is to be considered.
Neither Ahold nor any of its subsidiaries may cast a vote on any share they hold in the Company. These shares are not taken into account for the purpose of determining how many shareholders are represented or how much of the share capital is represented at the General Meeting of Shareholders.
Holders of depositary receipts of cumulative preferred financing shares may attend the General Meeting of Shareholders. The voting rights on the underlying shares may be exercised by the Stichting Administratiekantoor Preferente Financierings Aandelen Ahold (SAPFAA), a foundation organized under the laws of the Netherlands.
All outstanding cumulative preferred financing shares have been issued to SAPFAA. Holders of depositary receipts can obtain proxies from SAPFAA. In accordance with its articles, the board of SAPFAA consists of three members: one A member, one B member and one C member. The A member is appointed by the general meeting of depositary receipt holders, the B member is appointed by the Company and the C member is appointed by a joint resolution of the A member and the B member. As of February 27, 2013, the members of the board of SAPFAA are:
| Member A: | J.L. van der Giessen |
|---|---|
| Member B: | C.W. de Monchy |
| Member C: | H.J. Baeten, Chairman |
Ahold pays a mandatory annual dividend on cumulative preferred financing shares, which is calculated in accordance with the provisions of article 39.4 of the Company's Articles of Association. For further details on cumulative preferred financing shares and the related voting rights, see Note 22 to the consolidated financial statements.
No cumulative preferred shares are currently outstanding. Ahold entered into an option agreement with the Dutch foundation Stichting Ahold Continuïteit (SAC) designed to exercise influence in the event of a potential change of control over the Company, to safeguard the interests of the Company and all stakeholders in the Company and to resist, to the best of its ability, influences that might conflict with those interests by affecting the Company's continuity, independence or identity. The purpose of SAC, according to its articles of association, isto safeguard the interests of the Company and all stakeholders in the Company and to resist, to the best of its ability, influences that might conflict with those interests by affecting the Company's continuity, independence or identity.
| As of February 27, 2013, the members of the board of SAC are: | ||
|---|---|---|
| --------------------------------------------------------------- | -- | -- |
| Name | Principal or former occupation |
|---|---|
| N.J. Westdijk, Chairman | Former CEO of Royal Pakhoed N.V. |
| G.H.N.L. van Woerkom | President & CEO of ANWB |
| W.G. van Hassel | Former lawyer and former chairman Dutch Bar Association |
| J. van den Belt | Former CEO Océ |
SAC is independent from the Company. For details on Ahold's cumulative preferred shares, see Note 20 to the consolidated financial statements.
Shares may be issued following a resolution by the General Meeting of Shareholders on a proposal of the Corporate Executive Board made with the approval of the Supervisory Board. The General Meeting of Shareholders may resolve to delegate this authority to the Corporate Executive Board for a period of time not exceeding five years. A resolution of the General Meeting of Shareholders to issue shares, or to authorize the Corporate Executive Board to do so, is also subject to the approval of each class of shares whose rights would be adversely affected by the proposed issuance or delegation. The General Meeting of Shareholders approved a delegation of this authority to the Corporate Executive Board, relating to the issuance and / or granting of rights to acquire common shares up to a maximum of 10% of the issued common shares through October 17, 2013, and subject to the approval of the Supervisory Board.
Upon the issuance of new common shares, holders of Ahold's common shares have a pre-emptive right to subscribe to common shares in proportion to the total amount of their existing holdings of Ahold's common shares. According to the Company's Articles of Association, this pre-emptive right does not apply to any issuance of shares to employees of Ahold. The General Meeting of Shareholders may decide to restrict or exclude pre-emptive rights. The General Meeting of Shareholders may also resolve to designate the Corporate Executive Board as the corporate body authorized to restrict or exclude pre-emptive rights for a period not exceeding five years. The General Meeting of Shareholders has delegated to the Corporate Executive Board, subject to approval of the Supervisory Board, the authority to restrict or exclude the pre-emptive rights of holders of common shares upon the issuance of common shares and / or upon the granting of rights to subscribe for common shares through October 17, 2013.
Ahold may only acquire fully paid shares of any class in its capital for a consideration following authorization by the General Meeting of Shareholders and subject to certain provisions of Dutch law and the Company's Articles of Association, if:
The Corporate Executive Board has been authorized to acquire a number of common shares in the Company or depository receipts forshares, as permitted within the limits of the law and the Articles of Association and subject to the approval of the Supervisory Board. Such acquisition of shares, at the stock exchange or otherwise, will take place at a price between par value and 110% of the opening price of the shares at Euronext Amsterdam by NYSE Euronext on the date of their acquisition. The authorization takes into account the possibility to cancel the repurchased shares. This authorization is valid through October 17, 2013. Ahold may acquire shares in its capital for no consideration or for the purpose of transferring these shares to employees through share plans or option plans, without such authorization.
Ahold is not directly or indirectly owned or controlled by another corporation or by any government. The Company does not know of any arrangements that may, at a subsequent date, result in a change of control, except as described under "Cumulative preferred shares" above.
According to the Dutch Financial Markets Supervision Act, any person or legal entity who, directly or indirectly, acquires or disposes of an interest in Ahold's capital or voting rights must immediately give written notice to the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten or AFM) if the acquisition or disposal causes the percentage of outstanding capital interest or voting rights held by that person or legal entity to reach, exceed or fall below any of the following thresholds:
5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% and 95%.
The obligation to notify the AFM also applies when the percentage of capital interest or voting rights referred to above changes as a result of a change in the total outstanding capital or voting rights of Ahold. In addition, local rules may apply to investors.
The following table lists the shareholders on record in the AFM register on February 27, 2013, that hold an interest of 5% or more in the share capital of the Company.
| Shareholder | Date of disclosure |
Capital interest2 |
Voting rights2 |
|---|---|---|---|
| Stichting Administratiekantoor Preferente Financieringsaandelen Ahold1 |
July 13, 2012 |
20.19% | 6.55% |
| ING Groep N.V. | April 8, 2008 |
9.26% | 4.92% |
| DeltaFort Beleggingen B.V. | August 23, 2007 |
11.23% | 3.82% |
1 All of the outstanding cumulative preferred financing shares are held by SAPFAA, for which SAPFAA issued corresponding depositary receipts to investors that were filed under ING Groep N.V. and DeltaFort Beleggingen B.V.
2 In accordance with the filing requirements the percentages shown include both direct and indirect capital interests and voting rights and both real and potential capital interests and voting rights. Further details can be found at www.afm.nl.
For details on the number of outstanding shares, see Note 20 to the consolidated financial statements. For details on capital structure, listings, share performance and dividend policy in relation to Ahold's common shares, see Investors.
Ahold's Articles of Association outline certain of the Company's basic principles relating to corporate governance and organization. The current text of the Articles of Association is available at the Trade Register of the Chamber of Commerce and Industry for Amsterdam and on Ahold's public website at www.ahold.com.
The Articles of Association may be amended by the General Meeting of Shareholders. A resolution to amend the Articles of Association may be adopted by an absolute majority of the votes cast upon a proposal of the Corporate Executive Board. If another party makes the proposal, an absolute majority of votes cast representing at least one-third of the issued share capital, is required. If this qualified majority is not achieved but a majority of the votes is in favor of the proposal, then a second meeting may be held. In the second meeting, only a majority of votes, regardless of the number of shares represented at the meeting, is required. The prior approval of a meeting of holders of a particular class of shares is required for a proposal to amend the Articles of Association that makes any change in the rights that vest in the holders of shares of that particular class.
The General Meeting of Shareholders appoints the external auditor. The Audit Committee recommends to the Supervisory Board the external auditor to be proposed for (re)appointment by the General Meeting of Shareholders. In addition, the Audit Committee evaluates and, where appropriate, recommends the replacement of the external auditors. On April 17, 2012, the General Meeting of Shareholders appointed Deloitte Accountants B.V. as external auditor for the Company for the financial year 2012. On April 17, 2013, the Supervisory Board will recommend to the General Meeting of Shareholders to appoint PricewaterhouseCoopers Accountants N.V. as external auditor for the Company for the financial year 2013.
According to the Decree Article 10 EU Takeover Directive, Ahold has to report on, among other things, its capital structure, restrictions on voting rights and the transfer of securities, significant shareholdings in Ahold, the rules governing the appointment and dismissal of members of the Corporate Executive Board and the Supervisory Board and the amendment of the Articles of Association, the powers of the Corporate Executive Board (in particular the power to issue shares or to repurchase shares), significant agreements to which Ahold is a party and which are put into effect, changed or dissolved upon a change of control of Ahold following a takeover bid, and any agreements between Ahold and the members of the Corporate Executive Board or employees providing for compensation if their employment ceases because of a takeover bid.
The information required by the Decree Article 10 EU Takeover Directive is included in this Corporate governance section and under Investors, and the notes referred to in these sections or included in the description of any relevant contract.
Ahold applies the relevant principles and best practices of the Dutch Corporate Governance Code applicable to the Company, to the Corporate Executive Board and to the Supervisory Board, in the manner set out in the Governance section, as long as it does not entail disclosure of commercially sensitive information, as accepted under the code. The Dutch Corporate Governance Code was last amended on December 10, 2008, and can be found at www.commissiecorporategovernance.nl.
Ahold's shareholders consented to apply the Dutch Corporate Governance Code during the Extraordinary General Meeting of Shareholders on March 3, 2004. Ahold continues to seek ways to improve its corporate governance by measuring itself against international best practice.
This is a statement concerning corporate governance as referred to in article 2a of the decree on additional requirements for annual reports "Vaststellingsbesluit nadere voorschriften inhoud jaarverslag" last amended on January 1, 2010 (the Decree). The information required to be included in this corporate governance statement as described in articles 3, 3a and 3b of the Decree, which are incorporated and repeated here by reference, can be found in the following sections of this Annual Report:
The Supervisory Board is an independent corporate body responsible for supervising and advising Ahold's Corporate Executive Board and overseeing the general course of affairs and strategy of the Company.
The Supervisory Board is guided in its duties by Ahold's interests, taking into consideration the overall good of the enterprise and the relevant interests of all its stakeholders.
Ahold's Supervisory Board determines the number of its members. The Supervisory Board profile is published on Ahold's public website at www.ahold.com. The composition of the Supervisory Board should match this profile in terms of combined experience and expertise, independence, and variety of ages and genders. The Supervisory Board is of the opinion that its composition is currently in accordance with the profile.
The Supervisory Board Charter states that if a member is concurrently a member of another company's Supervisory Board, the main duties arising from and / or the number and nature of any other supervisory board memberships must not conflict or interfere with that person's duties as a member of Ahold's Supervisory Board. On April 17, 2012, the General Meeting of Shareholders reappointed René Dahan for a third term and Mark McGrath for a second term. On April 17, 2013, Derk Doijer, Stephanie Shern and Ben Noteboom will be nominated for reappointment.
Ongoing education is an important part of good governance. New members of the Supervisory Board attend a full-day induction program at Ahold's Corporate Center in Amsterdam at which they are briefed on their responsibilities as members of the Supervisory Board and informed by senior management on the financial, social, corporate responsibility, human resources, legal and reporting affairs of the Company and its businesses. Throughout the year, all members of the Supervisory Board visit several operating companies and other parts of the business to gain greater familiarity with senior management and to develop deeper knowledge of local operations, opportunities and challenges.
| Name | Date of birth | American | European | Retail | Food industry | Finance | employment Social / |
CR | communication Disclosure / |
Marketing | Management experience Active |
management | Gender |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| René Dahan | August 26, 1941 | • | • | • | • | • | m | ||||||
| Derk Doijer | October 9, 1949 | • | • | • | • | m | |||||||
| Stephanie Shern | January 7, 1948 | • | • | • | • | • | f | ||||||
| Judith Sprieser | August 3, 1953 | • | • | • | • | • | • | • | f | ||||
| Tom de Swaan | March 4, 1946 | • | • | • | • | • | m | ||||||
| Mark McGrath | August 10, 1946 | • | • | • | • | • | m | ||||||
| Ben Noteboom | July 4, 1958 | • | • | • | • | • | • | • | m | ||||
| Rob van den Bergh | April 10, 1950 | • | • | • | m |
| Name | Date of initial appointment | Date of reappointment | Date of possible reappointment |
|---|---|---|---|
| René Dahan | June 2, 2004 | April 17, 2012 | |
| Derk Doijer | May 18, 2005 | April 28, 2009 | 2013 |
| Stephanie Shern | May 18, 2005 | April 28, 2009 | 2013 |
| Judith Sprieser | May 18, 2006 | April 13, 2010 | 2014 |
| Tom de Swaan | May 3, 2007 | April 20, 2011 | 2015 |
| Mark McGrath | April 23, 2008 | April 17, 2012 | 2016 |
| Ben Noteboom | April 28, 2009 | 2013 | |
| Rob van den Bergh | April 20, 2011 | 2015 | |
In 2012, the Supervisory Board held six meetings in person and two meetings by conference call. The members of the Corporate Executive Board attended the meetings and other members of senior corporate, continental and local management were regularly invited to present. The Supervisory Board held three private meetings without other attendees to independently review certain issues and to discuss matters related to the functioning of the Corporate Executive and Supervisory Boards. The external auditor attended the meeting on February 28 and 29, 2012, at which the 2011 Annual Report and financial statements were recommended for adoption by the annual General Meeting of Shareholders. In a separate private meeting attended by the CEO, the Supervisory Board assessed its own performance, that of its committees and its individual members, as well as the performance of the Corporate Executive Board and its individual members. The Supervisory Board was positive, overall, about its own performance as well as the performance of its committees and the Corporate Executive Board. Recommendations were made with regard to knowledgesharing. The members of the Supervisory Board have regular contact with the members of the Corporate Executive Board and other Company management outside of the scheduled meetings of the Supervisory Board. These informal consultations ensure that the Supervisory Board remains well-informed about the running of the Company's operations.
During 2012, the Supervisory Board reviewed matters related to all aspects of Ahold's activities, results, strategies and management, including:
• The Company's long-term strategy with particular emphasis on strategic growth options
The Supervisory Board is confident that the strategic choices made in 2012 will contribute to the realization of the Company's strategy and has closely monitored the execution of this strategy. The Supervisory Board approved the acquisition of bol.com B.V. after determining that it fits within Ahold's strategy to broaden its offering by growing its online business.
With the assistance of the Audit Committee, the Supervisory Board:
No Supervisory Board member was frequently absent from the meetings held in 2012 and all Supervisory Board members made adequate time available to give sufficient attention to the concerns of Ahold. The overall attendance rate was 96%. The Supervisory Board confirms that as of February 27, 2013, all Supervisory Board members are independent within the meaning of provision III.2.2 of the Dutch Corporate Governance Code.
The annual remuneration of the members of the Supervisory Board was determined by the General Meeting of Shareholders on April 17, 2012. Remuneration is subject to a yearly review by the Supervisory Board.
| Chairman Supervisory Board | €80,000 |
|---|---|
| Vice Chairman Supervisory Board | €60,000 |
| Member Supervisory Board | €50,000 |
| Chairman Audit Committee | €17,500 |
| Member Audit Committee | €12,000 |
| Chairman Remuneration Committee | €12,000 |
| Member Remuneration Committee | €9,000 |
| Chairman Selection and Appointment Committee | €12,000 |
| Member Selection and Appointment Committee | €9,000 |
| Travel compensation1 intercontinental |
€5,000 |
| Travel compensation1 continental |
€1,500 |
1 Travel compensation per round trip air travel.
The Supervisory Board has three permanent committees to which certain tasks are assigned. The committees provide the Supervisory Board with regular updates of their meetings. The composition of each committee is detailed in the following table.
| Audit Committee |
Remuneration Committee |
Selection and Appointment Committee |
|
|---|---|---|---|
| René Dahan, Chairman | Chairman | ||
| Tom de Swaan, Vice Chairman |
Chairman | ||
| Derk Doijer | Chairman | Member | |
| Stephanie Shern | Member | Member | |
| Judith Sprieser | Member | Member | |
| Mark McGrath | Member | Member | |
| Ben Noteboom | Member | Member | |
| Rob van den Bergh | Member | Member |
The Audit Committee assists the Supervisory Board in its responsibility to oversee Ahold's financing, financial statements, financial reporting process and system of internal business controls and risk management. The Chief Executive Officer, Chief Financial Officer, Chief Corporate Governance Counsel, Senior Vice President Internal Audit and representatives of the external auditor are invited to the Audit Committee meetings. Other members of senior staff are invited when the Audit Committee deems it necessary or appropriate. The Audit Committee determines how the external auditor should be involved in the content and publication of financial reports other than the financial statements. The Corporate Executive Board and the Audit Committee report to the Supervisory Board annually on their dealings with the external auditor, including the auditor's independence. The Supervisory Board takes these reports into account when deciding on the nomination for the appointment of an external auditor that is submitted to the General Meeting of Shareholders.
In 2012, the Audit Committee held four meetings in person and two conference calls to review the publication of quarterly results.
Throughout the year, the Audit Committee closely monitored the financial closing process. Updates on internal controls were provided during all Audit Committee meetings. The Audit Committee was informed regularly on litigation and related exposure and reviewed and received regular updates on Ahold's whistleblower program. The Audit Committee was closely involved in the evaluation of Ahold's external auditor, in accordance with provision V.2.3 of the Dutch Corporate Governance Code, and in the competitive tender process for the selection of the Ahold's external auditor that the Company conducted in line with its views on good corporate governance.
The Audit Committee further discussed items including:
• Treasury
• Capital investment reappraisals
• Tax
The Audit Committee and the chairman of the Audit Committee also held private individual meetings with the Chief Executive Officer, Chief Financial Officer, Senior Vice President Internal Audit and external auditor.
In a separate private meeting, the Audit Committee carried out a self-evaluation on the basis of written questionnaires, which provided the framework for discussions on its own functioning as well as that of its individual members. This review concluded that the Audit Committee's composition, its work processes, the scope and depth of its activities, its interfaces with the Corporate Executive Board and the Supervisory Board, and the personal contribution of each individual committee member are satisfactory and adequately serve the Company's needs. Furthermore, the review concluded that the Audit Committee wanted to intensify its contact with second level financial management. Following this conclusion, the Audit Committee held meetings with financial management.
The Supervisory Board has determined that Tom de Swaan and Stephanie Shern are "Audit Committee Financial Experts" within the meaning of the Dutch Corporate Governance Code.
In 2012, the Selection and Appointment Committee held five meetings. The Chief Executive Officer was invited to most of these meetings. Its main areas of focus were long-term succession planning for the Supervisory Board and management development. It was also involved in organizational and management changes at Ahold Europe and Ahold USA and discussed overall succession and management development processes at Ahold.
In 2012, the Remuneration Committee held five meetings in person. The Chief Executive Officer was invited to most of these meetings. For a report on remuneration and the activities of the Remuneration Committee, see Remuneration.
The Supervisory Board is of the opinion that during the year 2012, its composition, mix and depth of available expertise; working processes; level and frequency of engagement in all critical Company activities; and access to all necessary and relevant information and the Company's management and staff were fully satisfactory and enabled it to adequately and completely carry out its duties towards all the Company's stakeholders.
The Supervisory Board would like to thank Ahold's shareholders for the trust they have put in the Company and its management. The Supervisory Board also wishes to express its appreciation for the continued dedication and efforts of the Corporate Executive Board and all Ahold's employees.
Supervisory Board Amsterdam, the Netherlands February 27, 2013
Ahold at a glance Our strategy Our performance Governance Financials Investors
Ahold's remuneration policy is prepared in accordance with the Dutch Corporate Governance Code and was adopted at the General Meeting of Shareholders on May 18, 2006.
Further details on the Corporate Executive Board members' employment agreements, individual remuneration, pension, shares and other interests in the Company are outlined in Notes 31 and 32 to the consolidated financial statements.
The main responsibilities of the Remuneration Committee include:
The Remuneration Committee uses internal and external advisors for market data and recent developments. In 2012, external advisors were hired to provide advice regarding market practices and developments relating to the remuneration policy and short- and long-term incentive plans. Ultimately, the Supervisory Board determines the level and composition of the remuneration components for the individual members of the Corporate Executive Board.
The current members of the Remuneration Committee are Supervisory Board members Derk Doijer (Chairman), Stephanie Shern, Judith Sprieser, Mark McGrath and Ben Noteboom. In 2012, the Remuneration Committee met five times.
Ahold's remuneration policy is focused on Total Direct Compensation, which is benchmarked against a pre-defined peer group.
The basic elements of the Total Direct Compensation provided to Ahold's Corporate Executive Board members are (1) a base salary, (2) an annual cash incentive and (3) a long-term, equity-based program. An important component of the overall remuneration package is the pension benefit, which is not regarded as a component of Total Direct Compensation.
The peer group used to assess the competitiveness of the overall remuneration provided to the Corporate Executive Board is the same as that used to benchmark the performance of the Company. This peer group reflects Ahold's geographic operating areas and the markets most relevant in relation to the recruitment and retention of top management. In addition, market practice in the Netherlands is considered, and peer group companies are selected based on relevant size, public listing and liquidity of shares.
| Wal-Mart Stores, Inc. Costco Wholesale | Corporation | SuperValu Inc. |
|---|---|---|
| Carrefour S.A. | The Kroger Co. | Delhaize Brothers and Co. |
| Metro A.G. | Target Corporation | (Delhaize Group) |
| Tesco PLC | Safeway Inc. | Staples, Inc. |
To anticipate changes to the peer group, a short list of substitutes has been defined. In selecting the most appropriate replacement, the Supervisory Board uses the same criteria as were used to select the companies in the current peer group.
The composition (risk profile) of the existing Total Direct Compensation levels is taken into account when benchmarking base salary levels. The target Total Direct Compensation level is typically around the 50th percentile.
The Corporate Executive Board's annual cash incentive plan uses three equally weighted measures: net sales growth, operating margin and Return on Net Assets (RoNA). The at-target payout as a percentage of base salary is 100%, contingent on full achievement of the individual's objectives, with a cap at 125% of the base salary. Ahold does not disclose the required performance levels of the measures, as this is considered commercially sensitive information. A claw back provision is embedded in the rules of the Annual Incentive Plan.
Under the Global Reward Opportunity (GRO) program, conditional shares are granted through three-year (with a performance hurdle at grant) and five-year (with a performance hurdle at grant and vesting) programs. In principle, plan rules will not be altered during the term of the plan.
The Supervisory Board has set the target value to be granted under GRO for the members of the Corporate Executive Board at 150% of base pay. The number of conditional shares to be granted is determined by the at-target value of the grant, the annual cash incentive plan multiplier of the preceding year and the average share price during the six months preceding the date of grant. For example, assuming an at-target grant value of €100,000 and an annual incentive multiplier for the preceding year of 0.8, the value to be granted would be 0.8 x €100,000 = €80,000. Assuming, furthermore, a six-month average share price preceding the date of grant of €8.00, the number of shares to be conditionally granted would be 10,000. Of these 10,000 shares, 5,000 would be granted through the three-year component and 5,000 through the five-year Total Shareholder Return (TSR)-related component. If the annual incentive multiplier is zero, 50% of the grant value at target would be granted through the five-year program only.
As a result of the two above-mentioned factors (the relation between the annual cash incentive and the GRO program, and the fact that the maximum annual cash incentive multiplier is capped at 1.25), the maximum grant value is 187.5% of base salary.
Scenario analyses are prepared regularly to estimate possible future payout levels. These analyses are included in the annual evaluation of the remuneration policy, each of its components and the mix of these components (the risk profile of the package).
The shares conditionally granted (with a performance hurdle at grant) under this component vest after three years of continued employment. The performance hurdle at grant is the multiplier of the Annual Incentive Plan of the preceding year, which is used to determine the number of shares to be conditionally granted. Corporate Executive Board members must retain these shares for a period of five years from the grant date. They are allowed to sell part of the shares to finance tax due at the date of vesting.
The shares conditionally granted (with a performance hurdle at both grant and vesting) under this component vest at the end of the performance period of five years. Performance at vesting is measured using TSR (share price growth and dividends paid over the performance period) as benchmarked against the TSR performance of the peer group. The number of shares that vest depends on Ahold's ranking within the peer group. No shares will vest if Ahold ranks below the seventh position of the peer group, which consists of 12 companies (including Ahold). The table below indicates the percentage of conditional shares that could vest based on Ahold's ranking within the peer group.
| Rank | % Rank | % Rank | % Rank | % | |||
|---|---|---|---|---|---|---|---|
| 1 | 150% | 4 | 90% | 7 | 25% | 10 | 0% |
| 2 | 130% | 5 | 70% | 8 | 0% | 11 | 0% |
| 3 | 110% | 6 | 50% | 9 | 0% | 12 | 0% |
An independent external advisor determines the ranking against the peer group based on TSR performance.
The pension plan for Corporate Executive Board members is identical to that of all other Ahold employees in the Netherlands and is referred to as a career average pension plan. The normal retirement age is 65. Under this plan, each Corporate Executive Board member pays a pension premium contribution of approximately 1% of his or her pension-bearing salary.
During 2012, the Ahold Pension Fund plan was amended. The plan amendments will become effective in two phases: the first on January 1, 2013, and the second on January 1, 2014. The pension accrual will be based on an increased age (accrual of future benefits lowered from 2.25% to 2% from January 1, 2014), contributions from participants will be gradually increased and the income offset component will be gradually lowered. The employer contribution as well as the conditional additional funding rules will remain the same.
Ahold does not provide loans or advances to members of the Corporate Executive Board or the Supervisory Board. There are no loans or advances outstanding. Ahold does not issue guarantees to the benefit of members of the Corporate Executive Board or the Supervisory Board. There have been no such guarantees issued.
In addition to the remuneration allocated to Corporate Executive Board members, a number of additional arrangements apply. These include expense allowances, medical insurance and accident insurance, and are in line with standard practice in the Netherlands.
The term of appointment for all Corporate Executive Board members is set at four years, while the term of employment is indefinite. If the Company terminates the employment agreement of any member of the Corporate Executive Board, the severance payment is limited to one year's base salary. The same applies if an initial employment agreement for four years is not continued because the Corporate Executive Board member is not reappointed. The employment agreements may be terminated by Ahold with a notice period of 12 months and by the Corporate Executive Board member with a notice period of six months.
The Remuneration Committee monitors the effectiveness of the remuneration policy and its implementation. The Committee advises the Supervisory Board on target-setting and monitors the (individual) achievement of the targets by members of the Corporate Executive Board. As a principle, targets are aspirational, though realistic, and should be based on historical performance and operational and strategic objectives. They should also contribute to the realization of long-term objectives, taking into account the Company's risk profile.
The details of (individual) remuneration to members of the Corporate Executive Board are outlined in Notes 31 and 32 to the consolidated financial statements and are in accordance with accounting standards.
During 2012 the members of the Corporate Executive Board did not receive any severance pay or other special remuneration. Overall, in 2012, the remuneration to the members of the Corporate Executive Board was in line with the policy.
On April 18, 2013, a maximum of 0.1 million conditional shares granted in 2010 to members of the Corporate Executive Board under the three-year component of the GRO plan and 0.1 million performance shares granted in 2008 to members of the Corporate Executive Board under the five-year component of the GRO plan are expected to vest; some of the Board members whose shares are vesting have retired since the grant dates, and some are continuing members of the Corporate Executive Board. Except to finance tax due on the vesting date, members of the Corporate Executive Board cannot sell the conditional shares for a period of at least five years following the grant date, or until the end of their employment, if this period is shorter.
For Ahold employees, on March 1, 2013, a maximum of 1.3 million conditional shares granted in 2010 under the three-year component of the Global Reward Opportunity (GRO) equity-based long-term incentive plan, 2.1 million performance shares granted in 2008 to Ahold employees under the five-year component of the GRO plan, and 0.1 million matching shares granted in 2008 to Ahold employees under the three-year component of the GRO plan are expected to vest. Vesting is subject to the participant being employed by the Company on the applicable vesting date. On the vesting date, participants are eligible, subject to the GRO plan rules, to sell all or part of the shares vested.
The Company will use treasury shares for delivery of the vested shares.
The Remuneration Committee's evaluation of the current policy, which was adopted at the General Meeting of Shareholders in 2006, resulted in recommendations to the Supervisory Board to propose changes to that policy. The changes are aimed to further align the remuneration policy with Ahold's strategy and performance, corporate governance best practices, and remuneration of other (senior) executives and staff members. In line with these recommendations by the Remuneration Committee, the Supervisory Board will present an amended remuneration policy for Ahold's Corporate Executive Board at the General Meeting of Shareholders.
This 2012 Ahold Annual Report dated February 27, 2013 (the Annual Report) comprises regulated information within the meaning of sections 1:1 and 5:25c of the Dutch Act on Financial Supervision "Wet op het financieel toezicht".
For the consolidated and the parent company's 2012 financial statements "jaarrekening" within the meaning of section 2:361 of the Dutch Civil Code, please refer to Financials. The members of the Corporate Executive Board and the Supervisory Board have signed the 2012 financial statements pursuant to their obligation under section 2:101, paragraph 2 of the Dutch Civil Code.
The following sections of this Annual Report together form the management report "jaarverslag" within the meaning of section 2:391 of the Dutch Civil Code: Ahold at a glance, Our strategy, Our performance, How we manage risk, Our leadership, Corporate governance, Remuneration and the subsection Remuneration included in the Supervisory Board report.
For other information "overige gegevens" within the meaning of section 2:392 of the Dutch Civil Code, please refer to subsection Other information under Financials, and to the section Investors.
The members of the Corporate Executive Board as required by section 5:25c, paragraph 2, under c of the Dutch Act on Financial Supervision confirm that to the best of their knowledge:
| Dick Boer | President and Chief Executive Officer |
|---|---|
| Jeff Carr | Executive Vice President and Chief Financial Officer |
| Lodewijk Hijmans van den Bergh | Executive Vice President and Chief Corporate Governance Counsel |
| James McCann | Executive Vice President and Chief Operating Officer, Ahold USA |
This Annual Report, including the 2012 financial statements, audited by Deloitte Accountants B.V., has been presented to the Supervisory Board. The 2012 financial statements and the independent auditor's report relating to the audit of the 2012 financial statements were discussed with the Audit Committee in the presence of the Corporate Executive Board and the external auditor. The Supervisory Board recommends that the General Meeting of Shareholders adopts the 2012 financial statements included in this Annual Report and recommends the proposal to pay a cash dividend for the financial year 2012 of €0.44 per common share.
| René Dahan (Chairman) | Judith Sprieser |
|---|---|
| Tom de Swaan (Vice Chairman) | Mark McGrath |
| Derk Doijer | Ben Noteboom |
| Stephanie Shern | Rob van den Bergh |
Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements 1 The Company and its operations 2 Basis of preparation 3 Significant accounting policies 4 Acquisitions 5 Assets and liabilities held for sale and discontinued operations 6 Segment reporting 7 Net sales 8 Expenses by nature 9 Net financial expense 10 Income taxes 11 Property, plant and equipment 12 Investment property 13 Intangible assets 14 Investments in joint ventures 15 Other non-current financial assets 16 Inventories 17 Receivables 18 Other current financial assets 19 Cash and cash equivalents 20 Equity attributable to common shareholders 21 Loans and credit facilities 22 Other non-current financial liabilities 23 Pensions and other post-employment benefits 24 Provisions 25 Other non-current liabilities 26 Other current financial liabilities 27 Other current liabilities
28 Cash flow 29 Earnings per share 30 Financial risk management and financial instruments 31 Related party transactions 32 Share-based compensation 33 Operating leases 34 Commitments and contingencies 35 Subsequent events 36 List of subsidiaries, joint ventures and associates Parent company financial statements Income statement Balance sheet Notes to the parent company financial statements 1 Significant accounting policies 2 Employees 3 Auditor fees 4 Financial assets 5 Receivables 6 Shareholders' equity 7 Provisions 8 Loans 9 Other non-current liabilities 10 Current liabilities 11 Derivatives 12 Related party transactions 13 Commitments and contingencies
| Consolidated | |
|---|---|
| income | |
| statement | |
| € million | Note | 2012 | 2011 |
|---|---|---|---|
| Net sales | 7 | 32,841 | 30,271 |
| Cost of sales | 8 | (24,317) | (22,350) |
| Gross profit | 8,524 | 7,921 | |
| Selling expenses | (6,161) | (5,652) | |
| General and administrative expenses | (1,176) | (922) | |
| Total operating expenses | 8 | (7,337) | (6,574) |
| Operating income | 1,187 | 1,347 | |
| Interest income | 10 | 20 | |
| Interest expense | (236) | (245) | |
| Other financial expenses | (1) | (91) | |
| Net financial expenses | 9 | (227) | (316) |
| Income before income taxes | 960 | 1,031 | |
| Income taxes | 10 | (211) | (140) |
| Share in income of joint ventures | 14 | 81 | 141 |
| Income from continuing operations | 830 | 1,032 | |
| Loss from discontinued operations | 5 | (3) | (15) |
| Net income attributable to common shareholders | 827 | 1,017 | |
| Earnings per share | 29 | ||
| Net income per share attributable to common shareholders | |||
| Basic | 0.80 | 0.92 | |
| Diluted | 0.77 | 0.89 | |
| Income from continuing operations per share attributable to common shareholders | |||
| Basic | 0.80 | 0.93 | |
| Diluted | 0.78 | 0.90 | |
| Weighted average number of common shares outstanding (in millions) | |||
| Basic | 1,040 | 1,111 | |
| Diluted | 1,100 | 1,171 |
The accompanying notes are an integral part of these consolidated financial statements.
| Ahold Annual Report 2012 | 75 | |||||
|---|---|---|---|---|---|---|
| Consolidated statement of |
€ million Net income |
2012 827 |
2011 1,017 |
|||
| comprehensive income |
Currency translation differences in foreign interests: Currency translation differences in foreign interests before income taxes Income taxes |
(33) – |
122 1 |
|||
| Cash flow hedges: Fair value losses in the year |
(89) | (34) | ||||
| Transfers to net income Income taxes |
45 11 |
(13) 11 |
||||
| Share of other comprehensive loss of joint ventures Other comprehensive income (loss) |
(4) (70) |
(3) 84 |
||||
| Total comprehensive income attributable to common shareholders | 757 | 1,101 |
| Ahold Annual Report 2012 | 76 | ||||||
|---|---|---|---|---|---|---|---|
| Consolidated | December 30, | January 1, | |||||
| € million | Note | 2012 | 2012 | ||||
| balance sheet | Assets | ||||||
| Property, plant and equipment | 11 | 6,038 | 5,984 | ||||
| Investment property Intangible assets |
12 13 |
565 1, 569 |
593 836 |
||||
| Investments in joint ventures | 14 | 1,047 | 1,087 | ||||
| Other non-current financial assets | 15 | 1,059 | 859 | ||||
| Deferred tax assets | 10 | 353 | 394 | ||||
| Other non-current assets | 35 | 34 | |||||
| Total non-current assets | 10,666 | 9,787 | |||||
| Inventories | 16 | 1,492 | 1,466 | ||||
| Receivables | 17 | 793 | 751 | ||||
| Other current financial assets | 18 | 43 | 336 | ||||
| Income taxes receivable | 47 | 27 | |||||
| Other current assets | 155 | 175 | |||||
| Cash and cash equivalents | 19 | 1,886 | 2,438 | ||||
| Total current assets | 4,416 | 5,193 | |||||
| Total assets | 15,082 | 14,980 | |||||
| Equity and liabilities | |||||||
| Equity attributable to common shareholders | 20 | 5,995 | 5,877 | ||||
| Loans | 21 | 1,431 | 1,489 | ||||
| Other non-current financial liabilities | 22 | 1,930 | 1,813 | ||||
| Pensions and other post-employment benefits | 23 | 110 | 94 | ||||
| Deferred tax liabilities | 10 | 292 | 199 | ||||
| Provisions | 24 | 646 | 664 | ||||
| Other non-current liabilities | 25 | 251 | 230 | ||||
| Total non-current liabilities | 4,660 | 4,489 | |||||
| Accounts payable | 2,667 | 2,436 | |||||
| Other current financial liabilities | 26 | 236 | 648 | ||||
| Income taxes payable | 134 | 136 |
Provisions 24 256 253 Other current liabilities 27 1,134 1,141 Total current liabilities 4,427 4,614 Total equity and liabilities 15,082 14,980
| Ahold Annual Report 2012 | 77 | |||||||
|---|---|---|---|---|---|---|---|---|
| Consolidated statement of |
€ million | Note | Share capital |
Additional paid-in capital |
Currency translation reserve |
Cash flow hedging reserve |
Other reserves including accumulated deficit |
Equity attributable to common shareholders |
| changes in | Balance as of January 2, 2011 | 358 | 9,916 | (385) | (63) | (3,916) | 5,910 | |
| Dividends | – | – | – | – | (328) | (328) | ||
| equity | Total comprehensive income | – | – | 123 | (36) | 1,014 | 1,101 | |
| Share buyback | – | – | – | – | (837) | (837) | ||
| Cancellation of treasury shares | (28) | (822) | – | – | 850 | – | ||
| Share-based payments | – | – | – | – | 31 | 31 | ||
| Other changes in reserves | – | – | (3) | 6 | (3) | – | ||
| Balance as of January 1, 2012 | 20 | 330 | 9,094 | (265) | (93) | (3,189) | 5,877 | |
| Dividends | – | – | – | – | (415) | (415) | ||
| Total comprehensive income | – | – | (33) | (33) | 823 | 757 | ||
| Share buyback | – | – | – | – | (277) | (277) | ||
| Cancellation of treasury shares | (12) | (381) | – | – | 393 | – | ||
| Share-based payments | – | – | – | – | 53 | 53 | ||
| Balance as of December 30, 2012 | 20 | 318 | 8,713 | (298) | (126) | (2,612) | 5,995 | |
| Ahold Annual Report 2012 | 78 | ||||||
|---|---|---|---|---|---|---|---|
| € million | Note | 2012 | 2011 | ||||
| Consolidated | Operating income | 1,187 | 1,347 | ||||
| statement of | Adjustments for: | ||||||
| cash flows | Depreciation, amortization, write-downs and impairments | 968 | 797 | ||||
| Gains on the sale of assets / disposal groups held for sale | (21) | (12) | |||||
| Share-based compensation expenses | 40 | 29 | |||||
| Operating cash flows before changes in operating assets and liabilities | 2,174 | 2,161 | |||||
| Changes in working capital: | |||||||
| Changes in inventories | (24) | (103) | |||||
| Changes in receivables and other current assets | (9) | (7) | |||||
| Changes in payables and other current liabilities | 180 | 85 | |||||
| Changes in other non-current assets, other non-current liabilities and provisions | (71) | (138) | |||||
| Cash generated from operations | 2,250 | 1,998 | |||||
| Income taxes paid – net | (134) | (212) | |||||
| Operating cash flows from continuing operations | 2,116 | 1,786 | |||||
| Operating cash flows from discontinued operations | (6) | (10) | |||||
| Net cash from operating activities | 2,110 | 1,776 | |||||
| Payments to purchase non-current assets | (911) | (755) | |||||
| Divestments of assets / disposal groups held for sale | 51 | 23 | |||||
| Acquisition of businesses, net of cash acquired | 28 | (701) | (30) | ||||
| Divestment of businesses, net of cash divested | 28 | (43) | (13) | ||||
| Changes in short-term deposits | 155 | 71 | |||||
| Dividends received from joint ventures | 157 | 130 | |||||
| Interest received | 11 | 27 | |||||
| Other | (1) | 50 | |||||
| Investing cash flows from continuing operations | (1,282) | (497) | |||||
| Net cash from investing activities | (1,282) | (497) | |||||
| Interest paid | (236) | (246) | |||||
| Repayments of loans | (459) | (17) | |||||
| Repayments of finance lease liabilities | (75) | (60) | |||||
| Dividends paid on common shares | (415) | (328) | |||||
| Share buyback | (277) | (837) | |||||
| Other cash flows from derivatives | 111 | (19) | |||||
| Other | 16 | 6 | |||||
| Financing cash flows from continuing operations | (1,335) | (1,501) | |||||
| Financing cash flows from discontinued operations | (4) | (4) | |||||
| Net cash from financing activities | (1,339) | (1,505) | |||||
| Net cash from operating, investing and financing activities | 28 | (511) | (226) |
The accompanying notes are an integral part of these consolidated financial statements.
The principal activity of Koninklijke Ahold N.V. (Ahold or the Company or Group or Ahold group), a public limited liability company with its registered seat in Zaandam, the Netherlands and its head office in Amsterdam, the Netherlands, is the operation of retail stores in Europe and the United States through subsidiaries and joint ventures. Ahold's significant subsidiaries, joint ventures and associates are listed in Note 36.
These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) and also comply with the financial reporting requirements included in Part 9 of Book 2 of the Netherlands Civil Code. As the financial data of Koninklijke Ahold N.V. (the parent company) are included in the consolidated financial statements, the income statement in the parent company financial statements is presented in condensed form (in accordance with section 402, Book 2 of the Netherlands Civil Code).
Historical cost is used as the measurement basis unless otherwise indicated.
Ahold's financial year is a 52- or 53-week period ending on the Sunday nearest to December 31. Financial year 2012 consisted of 52 weeks and ended on December 30, 2012. The comparative financial year 2011 consisted of 52 weeks and ended on January 1, 2012.
These consolidated financial statements are presented in euros (€). The following exchange rates of the euro against the U.S. dollar (\$) have been used in the preparation of these financial statements:
| 2012 | 2011 | |
|---|---|---|
| Average exchange rate | 0.7782 | 0.7189 |
| Year-end closing exchange rate | 0.7566 | 0.7724 |
The preparation of financial statements requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. All assumptions, expectations and forecasts used as a basis for certain estimates within these financial statements represent good faith assessments of Ahold's future performance for which management believes there is a reasonable basis. They involve risks, uncertainties and other factors that could cause the Company's actual future results, performance and achievements to differ materially from those forecasted. The estimates, assumptions and judgments that management considers most critical relate to:
The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries. Subsidiaries are entities over which the Company has control. Control is defined as the power to govern the financial and operating policies of an entity, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date that control commences until the date that control ceases. All intragroup transactions, balances, income and expenses are eliminated upon consolidation. Unrealized losses on intra-group transactions are eliminated, unless the transaction provides evidence of an impairment of the assets transferred.
Non-controlling interests are recorded, as appropriate, on the consolidated balance sheet, in the consolidated income statement, and in the consolidated statement of comprehensive income for the non-controlling shareholders' share in the net assets and the income or loss of subsidiaries. Non-controlling shareholders' interest in an acquired subsidiary is initially measured at the non-controlling interest's proportion of the net fair value of the assets, liabilities and contingent liabilities recognized.
The financial statements of subsidiaries, joint ventures and associates are prepared in their functional currencies, which are determined based on the primary economic environment in which they operate. Transactions in currencies other than the functional currency are recorded at the rates of exchange prevailing on the transaction dates. At each balance sheet date, monetary items denominated in foreign currencies are translated into the entity's functional currency at the then prevailing rates. Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are included in net income for the period. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are considered as assets and liabilities denominated in the functional currency of the foreign entity.
Upon consolidation, the assets and liabilities of subsidiaries with a functional currency other than the euro are translated into euros using the exchange rates prevailing at the balance sheet date. Income and expense items are translated at the average exchange rates for the respective periods. Investments in joint ventures and associates with a functional currency other than the euro are translated into euros using exchange rates prevailing on the balance sheet date. Exchange rate differences arising during consolidation and on the translation of investments in joint ventures and associates are included in equity, in the currency translation reserve. Intercompany loans to and from foreign entities for which settlement is neither planned nor likely to occur in the foreseeable future are considered to increase or decrease the net investment in that foreign entity; therefore the exchange rate differences relating to these loans are also included in equity, in the currency translation reserve.
On the disposal of a foreign operation resulting in loss of control, loss of joint control or loss of significant influence, the related cumulative exchange rate difference that was included in equity is transferred to the consolidated income statement. On the partial disposal of a foreign operation not resulting in loss of control, the related cumulative exchange rate difference that was included in equity is proportionately re-attributed to the non-controlling interests in that foreign operation. On the disposal of a foreign operation not resulting in loss of joint control or loss of significant influence, the related cumulative exchange rate difference that was included in equity is proportionately transferred to the consolidated income statement.
Ahold's operating segments are its retail operating companies that engage in business activities from which they earn revenues and incur expenses and whose operating results are regularly reviewed by the Corporate Executive Board to make decisions about resources to be allocated to the segments and to assess their performance. In establishing the reportable segments, certain operating segments with similar economic characteristics have been aggregated.
Performance of the segments is evaluated against several measures, of which operating income is the most important. Intersegment sales are executed under normal commercial terms and conditions that would also be available to unrelated third parties. Net sales are attributed to geographic regions based on the location of stores.
Ahold generates and recognizes net sales to retail customers at the point of sale in its stores and upon delivery of groceries to internet customers. Ahold also generates revenues from the sale of products to retail franchisees that are recognized upon delivery. Ahold recognizes franchise fees as revenue when all material services relating to the contract have been substantially performed. Future discounts earned by customers in connection with bonus or loyalty cards and other company-sponsored programs are deferred on the balance sheet at the time of the sale and subsequently recognized in the income statement when redeemed.
Generally, net sales and cost of sales are recorded based on the gross amount received from the customer for products sold and the amount paid to the vendor for products purchased, excluding sales taxes and value-added taxes. However, for certain products or services, such as the sale of lottery tickets, third-party prepaid phone cards, stamps and public transportation tickets, Ahold acts as an agent and consequently records the amount of commission income in its net sales.
Cost of sales includes the purchase price of the products sold and other costs incurred in bringing the inventories to the location and condition ready for sale. These costs include costs of purchasing, storing, rent, depreciation of property, plant and equipment, salaries, and transporting products to the extent that it relates to bringing the inventories to the location and condition ready for sale.
Ahold receives various types of vendor allowances. The most common allowances vendors offer are (i) volume allowances, which are off-invoice or amounts billed back to vendors based on the quantity of products sold to customers or purchased from the vendor and (ii) promotional allowances, which relate to cooperative advertising and market development efforts. Volume allowances are recognized as a reduction of the cost of the related products as they are sold. Promotional allowances are recognized as a reduction of the cost of the related products when the Company has performed the activities specified in the contract with the vendor. If the contract does not specify any performance criteria, the allowance is recognized over the term of the contract. Vendor allowances are generally deducted from cost of sales, unless there is clear evidence that they should be classified as revenue or a reimbursement of costs. Ahold recognizes vendor allowances only where there is evidence of a binding arrangement with the vendor, the amount can be estimated reliably and receipt is probable.
The accounting for vendor allowances requires a number of estimates. First, the Company must estimate the allowances that are earned based on the fulfillment of its related obligations, many of which require management to estimate the volume of purchases that will be made during a period of time. Second, the Company needs to estimate the amount of related product that was sold and the amount that remains in ending inventories and accordingly allocate the allowance to cost of sales or inventories. Management makes this estimate based on the turnover of the inventories and allocates a portion of the related vendor allowance to ending inventories until such product is estimated to have been sold to customers.
Selling expenses consist of store employees' salaries and wages, store expenses, rent income and rent expense or depreciation related to stores, advertising costs and other selling expenses.
General and administrative expenses consist of support office employees' salaries and wages, rent and depreciation of support offices, impairment losses and reversals, gains and losses on the sale of non-current assets and disposal groups held for sale, restructuring costs, and other general and administrative expenses.
The grant date fair value of share-based compensation plans is expensed, with a corresponding increase in equity, on a straight-line basis over the vesting periods of the grants. The cumulative expense recognized at each balance sheet date reflects the extent to which the vesting period has expired and the Company's best estimate of the number of shares that will eventually vest. No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition (e.g. total shareholder return). Those are treated as vested irrespective of whether or not the market condition is ultimately satisfied, provided that all non-market conditions (e.g. continued employment) are satisfied.
Notes to the consolidated
Income tax expense represents the sum of current and deferred tax. Income tax is recognized in the income statement except to the extent that it relates to items recognized directly in equity. Current tax expense is based on the best estimate of taxable income for the year, using tax rates that have been enacted or substantively enacted at the balance sheet date and adjustments for current taxes payable (receivable) for prior years. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and the corresponding tax basis used in the computation of taxable income. Deferred tax assets and liabilities are generally recognized for all temporary differences, except to the extent that a deferred tax liability arises from the initial recognition of goodwill. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realized.
Deferred tax assets, including deferred tax assets for tax loss carryforward positions and tax credit carryforward positions, are recognized to the extent that it is probable that future taxable income will be available against which temporary differences, unused tax losses or unused tax credits can be utilized. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the assets to be recovered.
Deferred tax assets and liabilities are not discounted. Deferred income tax assets and liabilities are offset on the balance sheet when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to income taxes levied by the same fiscal authority. Current income tax assets and liabilities are offset on the balance sheet when there is a legally enforceable right to offset and when the Company intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
The ultimate tax effects of some transactions can be uncertain for a considerable period of time, requiring management to estimate the related current and deferred tax positions. The Company recognizes liabilities for uncertain tax positions when it is more likely than not that additional taxes will be due. These liabilities are presented as current income taxes payable, except in jurisdictions where prior tax losses are being carried forward to be used to offset future taxes that will be due; in these instances the liabilities are presented as a reduction to deferred tax assets.
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. For this to be the case the asset (or disposal group) must be available for immediate sale in its present condition and its sale must be highly probable. Non-current assets (or disposal groups) classified as held for sale are measured at the lower of the asset's carrying amount and the fair value less costs to sell. Depreciation or amortization of an asset ceases when it is classified as held for sale. Equity accounting ceases for an investment in a joint venture or associate when it is classified as held for sale; instead dividends received are recognized in the consolidated income statement.
A discontinued operation is a component of the Company that either has been disposed of or is classified as held for sale, and represents a separate major line of business or geographical area of operations or is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations. Results from discontinued operations that are clearly identifiable as part of the component disposed of and that will not be recognized subsequent to the disposal are presented separately as a single amount in the consolidated income statement. Results and cash flows from discontinued operations are reclassified for prior periods and presented in the financial statements so that the results and cash flows from discontinued operations relate to all operations that have been discontinued as of the balance sheet date for the latest period presented.
Items of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition or construction of an asset and borrowing costs incurred during construction. Where applicable, estimated asset retirement costs are added to the cost of an asset. Subsequent expenditures are capitalized only when it is probable that future economic benefits associated with the item will flow to the Company and the costs can be measured reliably. All other subsequent expenditures represent repairs and maintenance and are expensed as incurred.
Depreciation is computed using the straight-line method based on the estimated useful lives of the items of property, plant and equipment, taking into account the estimated residual value. Where an item of property, plant and equipment comprises major components having different useful lives, each such part is depreciated separately. The assets' useful lives are reviewed, and adjusted, if appropriate, at each balance sheet date.
The estimated useful lives of property, plant and equipment are:
| Land | indefinite |
|---|---|
| Buildings | 30 – 40 years |
| Building components | 7 – 20 years |
| Machinery and equipment | 5 – 12 years |
| Other | 3 – 10 years |
Depreciation of assets subject to finance leases and leasehold improvements is calculated on a straight-line basis over either the lease term (including renewal periods when renewal is reasonably assured) or the estimated useful life of the asset, whichever is shorter.
Notes to the consolidated
Investment property consists of land and buildings held by Ahold to earn rental income or for capital appreciation, or both. These properties are not used by Ahold in the ordinary course of business. Ahold often owns (or leases under a finance lease) shopping centers containing both an Ahold store and third-party retail units. In these cases, the third-party retail units generate rental income, but are primarily of strategic importance for operating purposes to Ahold in its retail operations. Ahold recognizes the part of an owned (or leased under a finance lease) shopping center that is leased to third-party retailers as investment property, unless it represents an insignificant portion of the property. Land and buildings leased to franchisees are not considered to be investment property as they contribute directly to Ahold's retail operations. Investment property is measured on the same basis as property, plant and equipment.
Ahold is a lessee of land, buildings and equipment under operating and finance lease arrangements. Ahold classifies its leases as finance leases when the lease agreement transfers substantially all the risks and rewards of ownership to Ahold. For leases determined to be finance leases, the asset and liability are recognized at the inception of the lease at an amount equal either to the fair value of the leased asset or the present value of the minimum lease payments during the lease term, whichever is lower. Lease payments are apportioned between interest charges and a reduction of the lease liability so as to achieve a constant rate of interest on the remaining liability balance. Contingent rentals are expensed as incurred.
Leases that do not qualify as finance leases are classified as operating leases, and the related lease payments are expensed on a straight-line basis over the lease term, including, as applicable, any rent-free period during which Ahold has the right to use the asset. Payments made to Ahold representing incentives to sign a new lease or representing reimbursements for leasehold improvements are deferred and recognized on a straight-line basis over the term of the lease as reductions to rental expense.
For leases with renewal options where the renewal is reasonably assured, the lease term used to (i) determine the appropriate lease classification, (ii) compute periodic rental expense and (iii) depreciate leasehold improvements (unless their economic lives are shorter) includes the periods of expected renewals.
Determining whether a lease agreement is a finance or an operating lease requires judgment on various aspects. These include the fair value of the leased asset, the economic life of the leased asset, whether or not to include renewal options in the lease term and the determination of an appropriate discount rate to calculate the present value of the minimum lease payments.
The gain or loss on sale and operating leaseback transactions is recognized in the income statement immediately if (i) Ahold does not maintain or maintains only minor continuing involvement in these properties, other than the required lease payments, and (ii) these transactions occur at fair value. Any gain or loss on sale and finance leaseback transactions is deferred and amortized over the term of the lease. In classifying the leaseback in a sale and leaseback transaction, similar judgments have to be made as described above under Leases.
In some sale and leaseback arrangements, Ahold sells a property and only leases back a portion of that property. These properties generally involve shopping centers that contain an Ahold store as well as other stores leased to third-party retailers. In such situations, Ahold recognizes a sale and the resulting profit on the portion of the shopping center that is not leased back to the extent that (i) the property is sold for fair value and (ii) the risks and rewards of owning stores that are not leased back to Ahold have been fully transferred to the buyer. The leaseback of the Ahold store and any gain on the sale of the Ahold store is accounted for under the sale and leaseback criteria described above.
In some sale and leaseback arrangements, Ahold subleases the property to third parties (including franchisees) or maintains a form of continuing involvement in the property sold, such as earn-out provisions or obligations or options to repurchase the property. In such situations, the transaction generally does not qualify for sale and leaseback accounting, but rather is accounted for as a financing transaction (financing). The carrying amount of the asset remains on the balance sheet and the sale proceeds are recorded as a financing obligation. The financing obligation is amortized over the lease term, using either the effective interest rate or Ahold's cost of debt rate, whichever is higher. Once Ahold's continuing involvement ends, the sale is accounted for under the sale and leaseback criteria described above.
Goodwill represents the excess of the cost of an acquisition over the Company's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities at the date of acquisition, and is carried at cost less accumulated impairment losses. Goodwill on acquisitions of joint ventures and associates is included in the carrying amount of the investment.
For the purposes of impairment testing, goodwill is allocated to each of the cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of a business combination. Goodwill is allocated to a cash-generating unit (or group of cashgenerating units) representing the lowest level within the Company at which the goodwill is monitored for internal management purposes and is never larger than an operating segment before aggregation. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the cashgenerating unit may be impaired. Goodwill on acquisitions of joint ventures and associates is assessed for impairment as part of the investment whenever there is an indication that the investment may be impaired. An impairment loss is recognized for the amount by which the cash-generating unit's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of a cash-generating unit's fair value less cost to sell and its value in use. An impairment loss is allocated first to reduce the carrying amount of the goodwill and then to the other assets of the cash-generating unit pro-rata on the basis of the carrying amount of each asset in the cash-generating unit. An impairment loss recognized for goodwill is not reversed in subsequent periods.
On the partial or complete disposal of an operation, the goodwill attributable to that operation is included in the determination of the gain or loss on disposal.
Other intangible assets are stated at fair value, determined at the date of acquisition of the related underlying business, or at cost if they are separately acquired or represent internally developed software, less accumulated amortization and impairment losses.
Customer relationships acquired in business acquisitions are stated at fair value determined using an income approach. Direct costs related to development of software for internal use are capitalized only if the costs can be measured reliably, technological feasibility has been established, future economic benefits are probable, and the Company intends to complete development and to use the software. All other costs, including all overhead, general and administrative, and training costs, are expensed as incurred. Lease-related intangible assets, consisting primarily of favorable operating lease contracts acquired in business acquisitions, are measured at the present value of the amount by which the contract terms are favorable relative to market prices at the date of acquisition.
Amortization is computed using the straight-line method based on the estimated useful lives, which are as follows:
| Customer relationships | 7 – 25 years |
|---|---|
| Software | 3 – 10 years |
| Lease-related intangibles | remaining duration of the lease |
| Brand names | indefinite |
| Other | 5 – indefinite |
The useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
A joint venture is a contractual arrangement whereby Ahold and other parties undertake an economic activity through a jointly controlled entity. Joint control exists when strategic, financial and operating policy decisions relating to the activities require the unanimous consent of the parties sharing control. Associates are entities over which Ahold has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Significant influence is the power to participate in the financial and operating policy decisions of the entity but is not control or joint control over those policies.
Joint ventures and associates are accounted for using the equity method. Under the equity method, investments in joint ventures and associates are measured at cost and adjusted for post-acquisition changes in Ahold's share of the net assets of the investment (net of any accumulated impairment in the value of individual investments). Where necessary, adjustments are made to the financial statements of joint ventures and associates to ensure consistency with the accounting policies of the Company.
Unrealized gains on transactions between Ahold and its joint ventures and associates are eliminated to the extent of Ahold's stake in these investments. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the assets transferred.
Ahold assesses on a quarterly basis whether there is any indication that non-current assets may be impaired. If indicators of impairment exist, Ahold estimates the recoverable amount of the asset. If it is not possible to estimate the recoverable amount of an individual asset, Ahold estimates the recoverable amount of the cash-generating unit to which it belongs. Individual stores are considered separate cash-generating units for impairment testing purposes.
The recoverable amount is the higher of an asset's fair value less cost to sell and the asset's value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognized in the income statement for the amount by which the asset's carrying amount exceeds its recoverable amount.
In subsequent years, Ahold assesses whether indications exist that impairment losses previously recognized for non-current assets other than goodwill may no longer exist or may have decreased. If any such indication exists, the recoverable amount of that asset is recalculated and, if required, its carrying amount is increased to the revised recoverable amount. The increase is recognized in operating income as an impairment reversal. An impairment reversal is recognized only if it arises from a change in the assumptions that were used to calculate the recoverable amount. The increase in an asset's carrying amount due to an impairment reversal is limited to the depreciated amount that would have been recognized had the original impairment not occurred.
Inventories are stated at the lower of cost or net realizable value. Cost consists of all costs of purchase, cost of conversion, and other costs incurred in bringing the inventories to their present location and condition, net of vendor allowances attributable to inventories. The cost of inventories is determined using either the first-in, first-out (FIFO) method or the weighted average cost method, depending on their nature or use. For certain inventories, cost is measured using the retail method, in which the sales value of the inventories is reduced by the appropriate percentage of gross margin. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated marketing, distribution and selling expenses.
Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the financial assets expire, or if the Company transfers the financial asset to another party and does not retain control or substantially all risks and rewards of the asset. Financial liabilities are derecognized when the Company's obligations specified in the contract expire or are discharged or cancelled. Purchases and sales of financial assets in the normal course of business are accounted for at settlement date (i.e. the date that the asset is delivered to or by the Company).
At initial recognition, management classifies its financial assets as either (i) at fair value through profit or loss, (ii) loans and receivables, (iii) held to maturity or (iv) available for sale, depending on the purpose for which the financial assets were acquired. Financial assets are initially recognized at fair value. For instruments not classified as at fair value through profit or loss, any directly attributable transaction costs are initially recognized as part of the asset value. Directly attributable transaction costs related to financial assets at fair value through profit or loss are expensed when incurred.
The fair value of quoted investments is based on current bid prices. If the market for a financial asset is not active, or if the financial asset represents an unlisted security, the Company establishes fair value using valuation techniques. These include the use of recent arm's-length transactions, reference to other instruments that are substantially the same, and discounted cash flow analysis, making maximum use of market inputs. Subsequent to initial recognition, financial assets are measured as described below. At each balance sheet date, the Company assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired.
Investments at fair value through profit or loss are those investments that are either held for trading or designated as such by the Company. A financial asset is classified as held for trading if it is acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Financial instruments held for trading are measured at fair value and changes therein are recognized in the income statement.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are carried at amortized cost using the effective interest method, less any impairment losses. They are included in current assets, except for loans and receivables with maturities greater than 12 months after the balance sheet date.
Held to maturity financial assets are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Company has the positive intention and ability to hold to maturity. They are carried at amortized cost using the effective interest method, less any impairment losses. They are included in current assets, except for held to maturity financial assets with maturities greater than 12 months after the balance sheet date.
Available-for-sale financial assets are non-derivative financial assets that are either designated in this category of financial assets or not classified in any of the other categories. They are measured at fair value based on quoted market prices with changes therein recognized directly in equity until the investment is derecognized or determined to be impaired, at which time the cumulative gain or loss previously recorded in equity is transferred to the income statement. Investments in equity instruments that do not have a quoted market price and whose fair value cannot be reliably measured are carried at cost. Available-for-sale financial assets are included in non-current assets unless management intends to dispose of the investment within 12 months after the balance sheet date.
Cash and cash equivalents include all cash on hand balances, checks, debit and credit card receivables, short-term highly liquid cash investments, and time deposits with original maturities of three months or less. Time deposits with original maturities of more than three months but less than 12 months are classified as other current financial assets. Bank overdrafts are included in short-term borrowings.
Loans and short-term borrowings are recognized initially at fair value, net of transaction costs incurred. Loans and short-term borrowings are subsequently stated at amortized cost, unless they are designated as fair value hedges. Any difference between the proceeds and redemption value is recognized in the income statement over the period of the loans and short-term borrowings using the effective interest method. Loans are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.
All derivative financial instruments are recognized initially on a settlement date basis and subsequently remeasured at fair value. Gains and losses resulting from the fair value remeasurement are recognized in the income statement as fair value gains (losses) on financial instruments, unless the derivative qualifies and is effective as a hedging instrument in a designated hedging relationship. In order for a derivative financial instrument to qualify as a hedging instrument for accounting purposes, the Company must document (i) at the inception of the transaction, the relationship between the hedging instrument and the hedged item, as well as its risk management objectives and strategy for undertaking various hedging transactions and (ii) its assessment, both at hedge inception and on an ongoing basis, of whether the derivative that is used in the hedging transaction is highly effective in offsetting changes in fair values or cash flows of hedged items. Derivatives that are designated as hedges are accounted for as either cash flow hedges or fair value hedges.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized initially in the cash flow hedging reserve, a separate component of equity. The gain or loss relating to the ineffective portion is recognized immediately in the income statement. Amounts accumulated in equity are reclassified into the income statement in the same period in which the related exposure impacts the income statement. When a cash flow hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecasted transaction is ultimately recognized in the income statement. When a forecasted transaction is no longer expected to occur, the cumulative gain or loss existing in equity is immediately recognized in the income statement.
Fair value changes of derivative instruments that qualify for fair value hedge accounting treatment are recognized in the income statement in the periods in which they arise, together with any changes in fair value of the hedged asset or liability. If the hedging instrument no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of the hedged item is amortized in the income statement over the remaining period to maturity of the hedged item.
Reinsurance assets include estimated receivable balances related to reinsurance contracts purchased by the Company. Reinsurance liabilities represent the expected insurance risks related to reinsurance contracts sold by the Company. Reinsurance assets and liabilities are measured on a discounted basis using accepted actuarial methods.
Financial guarantees are recognized initially as a liability at fair value. Subsequently, the liability is measured at the higher of the best estimate of the expenditure required to settle the obligation and the amount initially recognized less cumulative amortization.
Equity instruments issued by the Company are recorded at the value of proceeds received. Own equity instruments that are bought back (treasury shares) are deducted from equity. Incremental costs that are directly attributable to issuing or buying back own equity instruments are recognized directly in equity, net of the related tax. No gain or loss is recognized in the income statement on the purchase, sale, issue or cancellation of the Company's own equity instruments.
Cumulative preferred financing shares, for which dividend payments are not at the discretion of the Company, are classified as non-current financial liabilities and are stated at amortized cost. The dividends on these cumulative preferred financing shares are recognized as interest expense in the income statement, using the effective interest method. From the date when Ahold receives irrevocable notification from a holder of cumulative preferred financing shares to convert these shares into common shares, the cumulative preferred financing shares are classified as a separate class of equity.
The net assets and net liabilities recognized on the consolidated balance sheet for defined benefit plans represent the present value of the defined benefit obligations, less the fair value of plan assets, adjusted for unrecognized actuarial gains or losses and unamortized past service costs. Any net asset resulting from this calculation is limited to unrecognized actuarial losses and past service cost, plus the present value of available refunds and reductions in future contributions to the plan. No adjustment for the time value of money is made if the Company has an unconditional right to a refund of the full amount of the surplus, even if such a refund is realizable only at a future date.
Defined benefit obligations are actuarially calculated at least annually on the balance sheet date using the projected unit credit method. The present value of the defined benefit obligations is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds denominated in the currency in which the benefits will be paid, and that have an average duration similar to the expected duration of the related pension liabilities. Actuarial gains and losses are recognized using the corridor approach, which assumes that actuarial gains and losses may offset each other over the long term. Under this approach, if, for a specific plan, the net unrecognized actuarial gains and losses at the balance sheet date exceed the greater of 10% of the fair value of the plan assets and 10% of the defined benefit obligation, the excess is taken into account in determining net periodic expense for the subsequent period. The amount then recognized in the subsequent period is the excess divided by the expected remaining average working lives of employees covered by that plan on the balance sheet date.
Past service costs are recognized immediately to the extent that the associated benefits are already vested, and are otherwise amortized on a straight-line basis over the average period until the associated benefits become vested. Results from curtailments or settlements, including the related portion of net unrecognized actuarial gains and losses, are recognized immediately.
Contributions to defined contribution plans are recognized as an expense when they are due. Post-employment benefits provided through industry multi-employer plans, managed by third parties, are generally accounted for under defined contribution criteria.
For other long-term employee benefits, such as long-service awards, provisions are recognized on the basis of discount rates and other estimates that are consistent with the estimates used for the defined benefit obligations. For these provisions the corridor approach is not applied and all actuarial gains and losses are recognized in the income statement immediately.
Provisions are recognized when (i) the Company has a present (legal or constructive) obligation as a result of past events, (ii) it is more likely than not that an outflow of resources will be required to settle the obligation, and (iii) the amount can be reliably estimated. The amount recognized is the best estimate of the expenditure required to settle the obligation. Provisions are discounted whenever the effect of the time value of money is significant.
The provision for the Company's self-insurance program is recorded based on claims filed and an estimate of claims incurred but not yet reported. The provision includes expenses incurred in the claim settlement process that can be directly associated with specific claims. Other expenses incurred in the claim settlement process are expensed when incurred. The Company's estimate of the required liability of such claims is recorded on a discounted basis, utilizing an actuarial method, which is based upon various assumptions that include, but are not limited to, historical loss experience, projected loss development factors and actual payroll costs.
Restructuring provisions are recognized when the Company has approved a detailed formal restructuring plan and the restructuring either has commenced or has been announced to those affected by it. Onerous contract provisions are measured at the amount by which the unavoidable costs to fulfill agreements exceeds the expected benefits from such agreements.
The IASB issued several standards, or revisions to standards, and Interpretations that are not yet effective for 2012 but will become effective in coming years.
The amendment to IAS 1, "Presentation of Financial Statements" as part of the "Annual Improvements to IFRSs 2009-2011 Cycle" issued in May 2012, requires the Company to group the items in other comprehensive income on the basis of whether they are potentially able to be subsequently reclassified to profit or loss (reclassification adjustments). The application of the amendments to IAS 1 does not result in any impact on profit or loss, other comprehensive income or total comprehensive income. The amendment to IAS 1 was endorsed by the EU in 2012 and the Company will adopt the amendment in 2013.
IAS 19, "Employee benefits," was amended in June 2011 and endorsed by the EU in June 2012. The amendment will be effective for the Company as of January 1, 2013. The main changes in the revised IAS 19 are to eliminate the corridor approach and recognize all actuarial gains and losses in other comprehensive income as they occur, to immediately recognize all past service costs, and to replace interest cost and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (asset).
The amendments to IAS 19 require retrospective application. Based on the Company's preliminary assessment, when the Company applies the amendments to IAS 19 for the first time for the year ending December 29, 2013, an adjustment will be made to recognize the January 1, 2012, opening balances of actuarial gains and losses and past service costs. This will result in a reduction in accumulated other comprehensive income (€39 million), a decrease in the opening balance of net pension assets (€122 million, which includes a €27 million adjustment for future employee contributions reducing the defined benefit obligation) and an increase in deferred tax assets (€83 million). The profit after income tax for the year ended December 30, 2012, will be increased by €86 million and other comprehensive income for the year will be decreased by €1,203 million (€873 million after tax) with the corresponding adjustments being recognized within pension assets and provisions as well as income tax assets and liabilities. The adjustment to accumulated other comprehensive income as of December 30, 2012, amounts to €912 million. The net effect of these changes reflects a number of adjustments, including their income tax effects: a) full recognition of actuarial gains through other comprehensive income and decrease in the net pension asset; b) immediate recognition of past service costs in profit or loss and an increase in the net pension asset; and c) reversal of the difference between the gain arising from the expected rate of return on pension plan assets and the discount rate through other comprehensive income.
IFRS 9, "Financial instruments," addresses the classification, measurement and recognition of financial assets and financial liabilities. The IASB is adding to the standard as it completes the various phases of its comprehensive project on financial instruments, and it will eventually form a complete replacement for IAS 39 "Financial Instruments: Recognition and Measurement." Phases two and three of the financial instruments project, the impairment of financial assets and hedge accounting phases, respectively, are still a work in progress. IFRS 9 was issued in parts in November 2009 and October 2010 and amended in 2011. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change that is due to an entity's own credit risk is recorded in other comprehensive income rather than in the income statement. The Company has yet to assess IFRS 9's full impact. The standard will be effective for the Company as of January 1, 2015, subject to EU endorsement.
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IFRS 10, "Consolidated financial statements," replaces parts of IAS 27, "Consolidated and separate financial statements," and SIC 12, "Consolidation – special purpose entities," and builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. IFRS 10 was endorsed by the EU in 2012, and the Company will adopt the standard in 2013. The adoption of IFRS 10 should not have a significant effect on the future consolidated financial statements.
IFRS 11, "Joint arrangements," replaces IAS 31, "Interests in joint ventures," and SIC 13, "Jointly controlled entities," and deals with how a joint arrangement in which two or more parties have joint control over an entity should be classified. Under IFRS 11, joint arrangements are classified as joint operations or joint ventures, depending on the rights and obligations of the parties to the arrangements. Joint ventures under IFRS 11 are required to be accounted for using the equity method of accounting, whereas jointly controlled entities under IAS 31 can be accounted for using the equity method of accounting or proportionate accounting. IFRS 11 was endorsed by the EU in 2012, and the Company will adopt the standard in 2013. The adoption of IFRS 11 should not have a significant effect on the future consolidated financial statements.
IFRS 12, "Disclosures of interests in other entities," includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. IFRS 12 was endorsed by the EU in 2012, and the Company will adopt the standard in 2013. In general, the disclosure requirements in IFRS 12 are more extensive than those in the current standards.
IFRS 13, "Fair value measurement," aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across all IFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within the IFRSs. IFRS 13 was endorsed by the EU in 2012 and will be effective for the Company as of January 1, 2013. It is unlikely that the adoption of IFRS 13 will significantly affect amounts reported in the future consolidated financial statements. In general, the disclosure requirements in IFRS 13 are more extensive than those in the current standards.
There are no other IFRSs or IFRIC interpretations that have been issued but are not yet effective that are expected to have a material impact on the future consolidated financial statements.
Notes to the consolidated
In May 2012, Ahold acquired bol.com. The purchase consideration was €353 million in cash for 100% of the voting equity interest. The acquisition was made to further expand Ahold's online presence and broaden the range of its product offering into new non-food categories. Goodwill recognized in the amount of €248 million, which will not be deductible for tax purposes, represents expected synergies from the combination of operations, as well as the ability to broaden Ahold's offering and expand its geographic reach. Included in other intangible assets acquired were information technology, customer lists and a trade name.
Bol.com contributed €294 million to net sales and had an insignificant impact on net income in the period from May 9 to December 30, 2012. The impact excludes €6 million in transaction costs related to the acquisition, included in general and administrative expenses. Had the acquisition occurred on January 2, 2012, Ahold's 2012 pro-forma net sales would have increased by €111 million to €32,952 million. The pro-forma effect on Ahold's consolidated net income of €827 million for 2012 would have been insignificant.
In July 2012, the Giant Carlisle division acquired 15 Genuardi's Family Markets stores from Safeway. The stores acquired are located in the greater Philadelphia area. The total purchase consideration was \$113 million (€91 million) for 15 store locations, equipment and lease agreements. Goodwill recognized amounted to \$77 million (€62 million) and represents synergies from the combination of operations, as well as the ability to service customers in a new geographic area. Of this amount, \$72 million (€58 million) is deductible for tax purposes.
These stores contributed \$165 million (€129 million) to net sales and had an insignificant impact on net income in the period from July 13 to December 30, 2012, before one-time start-up and conversion costs of \$16 million (€13 million). The result excludes €2 million in transaction costs related to the acquisition, included within general and administrative expenses. It is not practicable to provide the 2012 pro-forma effect on Ahold's net sales and net income.
In August 2012, Ahold announced that its Albert Heijn division had completed its transaction with Jumbo concerning 78 C1000 and 4 Jumbo stores for €290 million with €265 million paid up to December 30, 2012, and the remaining to be settled as agreements are reached with the franchisees. During the second half of 2012, 15 of the stores were converted to the Albert Heijn banner. The remaining 67 franchisee-owned stores will be converted to the Albert Heijn banner over a period of time, in close cooperation with the entrepreneurs. €204 million of the amount paid, relating to these 67 stores, was included in other intangible assets (see Note 13). Goodwill recognized in the amount of €53 million relates to the stores that have been converted to the Albert Heijn banner and represents expected synergies from the combination of operations, as well as the ability to expand Ahold's geographic reach. The amount will not be deductible for tax purposes. The amounts recognized in the financial statements for this transaction were determined on a provisional basis.
The 15 stores that were converted to the Albert Heijn banner have contributed €33 million to net sales and an insignificant amount to net income. It is not practicable to provide the 2012 proforma effect on Ahold's net sales and net income.
Ahold completed several other minor acquisitions with a total purchase consideration of €16 million.
All acquisitions were accounted for using the purchase method of accounting.
The allocation of the fair value of the net assets acquired and the goodwill arising from the acquisitions during 2012 is as follows:
| € million | bol.com | Genuardi's | Jumbo | Other | Total |
|---|---|---|---|---|---|
| Property, plant and equipment | 2 | 88 | 4 | 14 | 108 |
| Goodwill | 2481 | 62 | 53 | 9 | 372 |
| Other intangible and non-current assets | 196 | 10 | 210 | 2 | 418 |
| Current assets | 52 | 8 | – | 1 | 61 |
| Non-current liabilities | (81) | (74) | (2) | (10) | (167) |
| Current liabilities | (64) | (3) | – | – | (67) |
| Total purchase consideration | 353 | 91 | 265 | 16 | 725 |
| Cash acquired | (24) | – | – | – | (24) |
| Acquisition of business, net of cash | 329 | 91 | 265 | 16 | 701 |
1 Of the €248 million of goodwill that resulted from the acquisition of bol.com, €47 million has been allocated to Albert Heijn, see Note 13.
Ahold completed several minor acquisitions in 2011 with a total purchase consideration of €30 million.
All acquisitions were accounted for using the purchase method of accounting.
| Ahold Annual Report 2012 | 90 | |
|---|---|---|
At year-end 2012, the assets held for sale (€1 million) were included in other current assets and there were no liabilities held for sale. There were no assets and liabilities held for sale at yearend 2011.
Loss from discontinued operations is specified as follows:
| € million | 2012 | 2011 |
|---|---|---|
| BI-LO / Bruno's | 3 | (5) |
| Various1 | (6) | (10) |
| Results on divestments2 | (3) | (15) |
| Loss from discontinued operations, net of income taxes | (3) | (15) |
1 Includes adjustments to the results on various other past divestments.
2 Results on divestments are after net income taxes of nil and net income tax benefits of €7 million in 2012 and 2011, respectively.
See Note 28 for the reconciliation between cash received and results on divestments of discontinued operations.
Two former subsidiaries of Ahold, BI-LO, LLC and Bruno's Supermarkets, LLC (BI-LO and Bruno's), filed for protection under Chapter 11 of the U.S. Bankruptcy Code in 2009. Related to obligations under the lease guarantees, the Company recognized a provision, after tax, of €62 million in 2009. In 2010, the reorganized BI-LO exited bankruptcy protection. In 2012, Ahold recognized a reduction of €3 million (2011: an increase of €5 million) in its provision, after tax, within results on divestments. For a description of the remaining provisions, see Note 34.
Ahold's retail operations are presented in three reportable segments. In addition, Other retail, consisting of Ahold's unconsolidated joint ventures ICA and JMR and Ahold's Corporate Center are presented separately. The accounting policies used for the segments are the same as the accounting policies used for the consolidated financial statements as described in Note 3.
| Reportable segment | Included in the Reportable segment |
|---|---|
| Ahold USA | Stop & Shop New England, Stop & Shop New York Metro, Giant Landover, Giant Carlisle and Peapod |
| The Netherlands | Albert Heijn, Albert Heijn Belgium, Albert Heijn Germany, Etos, Gall & Gall, bol.com and albert.nl |
| Other Europe | Albert (Czech Republic and Slovakia) and Hypernova (Slovakia) |
| Other | Included in Other |
|---|---|
| Other retail | Unconsolidated joint ventures ICA and JMR |
| Corporate Center | Corporate Center staff (the Netherlands, Switzerland and the United States) |
| € million | 2012 | 2011 |
|---|---|---|
| Ahold USA | 20,112 | 18,026 |
| The Netherlands | 11,054 | 10,506 |
| Other Europe | 1,675 | 1,739 |
| Ahold group | 32,841 | 30,271 |
| € million | 2012 | 2011 |
|---|---|---|
| Ahold USA | 619 | 734 |
| The Netherlands | 676 | 675 |
| Other Europe | 3 | 18 |
| Corporate Center | (111) | (80) |
| Ahold group | 1,187 | 1,347 |
| 2012 | 2011 |
|---|---|
| 813 | 582 |
| 1,016 | 262 |
| 47 | 37 |
| – | – |
| 1,876 | 881 |
| € million | 2012 | 2011 |
|---|---|---|
| Ahold USA | 552 | 510 |
| The Netherlands | 222 | 212 |
| Other Europe | 45 | 49 |
| Corporate Center | 2 | 1 |
| Ahold group | 821 | 772 |
| € million | 2012 | 2011 |
|---|---|---|
| Ahold USA | 124 | 23 |
| The Netherlands | 5 | – |
| Other Europe | 18 | 2 |
| Corporate Center | – | – |
| Ahold group | 147 | 25 |
| € million | 2012 | 2011 |
|---|---|---|
| Ahold USA | 5,332 | 5,345 |
| The Netherlands | 2,398 | 1,616 |
| Other Europe | 440 | 449 |
| Corporate Center | 2 | 3 |
| Ahold group | 8,172 | 7,413 |
Segment results do not include significant non-cash items other than depreciation, amortization, write-downs, and impairment losses and reversals. For more information on write-downs of intangible assets under development, see Note 13.
The information presented below with respect to ICA and JMR (on a 100% basis) represents amounts that are not consolidated in the Company's financial statements since the investments in ICA and JMR are accounted for under the equity method, as described in Notes 3 and 14.
| € million | 2012 2011 |
|---|---|
| Net sales 14,420 |
13,737 |
| Operating income | 439 430 |
| Net income | 128 236 |
| Additions to property, plant and equipment, investment property, and intangible assets | 274 372 |
| Depreciation and amortization | 274 267 |
| Impairment losses net of reversals | 25 7 |
| Non-current assets 4,155 |
3,962 |
| Current assets 2,345 |
2,360 |
| Non-current liabilities 1,285 |
1,092 |
| Current liabilities 3,563 |
3,492 |
| € million | 2012 | 2011 |
|---|---|---|
| Sales to retail customers | 29,579 | 27,480 |
| Sales to franchisees and franchise fees | 2,324 | 2,228 |
| Online sales | 830 | 456 |
| Other sales | 108 | 107 |
| Net sales | 32,841 | 30,271 |
Notes to the consolidated financial statements 8 Expenses by nature
The aggregate of cost of sales and operating expenses is specified by nature as follows:
| € million | 2012 | 2011 |
|---|---|---|
| Cost of product 23,181 |
21,285 | |
| Employee benefit expenses 4,461 |
4,001 | |
| Other operational expenses 2,538 |
2,367 | |
| Depreciation and amortization | 821 | 772 |
| Write-down of intangible assets under development (Note 13) | 92 | – |
| Rent (income) expense – net | 527 | 486 |
| Impairment losses and reversals – net | 55 | 25 |
| Gains on the sale of assets – net | (21) | (12) |
| Total expenses 31,654 |
28,924 |
| € million | 2012 | 2011 |
|---|---|---|
| Interest income | 10 | 20 |
| Interest expense | (236) | (245) |
| Gains (losses) on foreign exchange | (10) | (7) |
| Fair value gains on financial instruments | 16 | 20 |
| Other | (7) | (104) |
| Other financial expenses | (1) | (91) |
| Net financial expenses | (227) | (316) |
Interest income mainly corresponds to interest earned on cash and cash equivalents and short-term cash deposits.
Interest expense primarily relates to financial liabilities measured at amortized cost (mainly loans, finance lease liabilities, financing obligations and cumulative preferred financing shares) and interest accretions to provisions. The reduction primarily relates to debt repayments (EUR 407 million notes) done in 2012, see Note 21.
The gains (losses) on foreign exchange in both 2012 and 2011 mainly result from the foreign exchange translation of the GBP 500 million notes and from settlement of forward contracts done in 2012. Foreign exchange results on financial assets and liabilities, including amounts released from the cash flow hedging reserve, are presented as part of net financial expense, within gains (losses) on foreign exchange. Foreign exchange results arising from the purchase of goods for sale or goods and services consumed in Ahold's operations are included in cost of sales or in the appropriate element of operating expenses, respectively. In 2012 the Company incurred a net exchange result (including impact of foreign exchange hedging instruments) of €2 million in operating income (2011: €1 million).
The fair value gains on financial instruments primarily resulted from the derivatives related to the GBP 500 million notes (an interest rate and a cross currency swap), which do not qualify for hedge accounting treatment, and were mainly caused by the US dollar interest rate and exchange rate movements. For more information on financial instruments, see Note 30.
Other financial expenses in 2011 primarily included a loss of €92 million, as a result of a financial guarantee provision, related to the estimated impact of the legal judgment rendered in connection with Stop & Shop Bradlees' lease litigation with Vornado. For more information, see Note 34.
| Ahold Annual Report 2012 | 95 | |||
|---|---|---|---|---|
| -------------------------- | -- | -- | -- | ---- |
Notes to the consolidated financial statements 10 Income taxes
The following table specifies the current and deferred tax components of income taxes on continuing operations in the income statement:
| € million | 2012 | 2011 |
|---|---|---|
| Current income taxes | ||
| Domestic taxes (the Netherlands) | (76) | (111) |
| Foreign taxes | ||
| United States | (14) | 42 |
| Europe – Other | (22) | (11) |
| Total current tax expense | (112) | (80) |
| Deferred income taxes | ||
| Domestic taxes (the Netherlands) | (58) | (33) |
| Foreign taxes | ||
| United States | (39) | (37) |
| Europe – Other | (2) | 10 |
| Total deferred tax expense | (99) | (60) |
| Total income taxes on continuing operations | (211) | (140) |
Ahold's effective tax rate in the income statement differed from the statutory income tax rate of the Netherlands of 25.0%. The following table reconciles the statutory income tax rate with the effective income tax rate in the income statement:
| 2012 | 2011 | |||
|---|---|---|---|---|
| € million | % | € million | % | |
| Income before income taxes | 960 | 1,031 | ||
| Income tax expense at statutory tax rates | (240) | 25.0% | (258) | 25.0% |
| Adjustments to arrive at effective income tax rates: | ||||
| Rate differential (local rates versus the statutory rate of the Netherlands) | (19) | 2.0% | (47) | 4.6% |
| Deferred tax income related to recognition of deferred tax assets-net | 5 | (0.5)% | 21 | (2.0)% |
| Reserves, (non-) deductibles and discrete items | 43 | (4.5)% | 144 | (14.0)% |
| Total income taxes | (211) | 22.0% | (140) | 13.6% |
"Rate differential" indicates the effect of Ahold's taxable income being generated and taxed in jurisdictions where tax rates differ from the statutory tax rate in the Netherlands. "Reserves, (non-) deductibles and discrete items" include one-time events.
During 2011, a tax benefit of €109 million was recognized, resulting from a release of an income tax contingency reserve related to financing transactions that occurred prior to 2004.
Notes to the consolidated financial statements 10 Income taxes (continued)
Current and deferred income tax related to discontinued operations amounted to nil in 2012 and a benefit of €7 million in 2011 and has been included within the result from discontinued operations. The 2012 current and deferred income tax on discontinued operations included a €2 million expense related to the financial obligations under various lease guarantees that the Company had previously provided to landlords of its former BI-LO / Bruno's subsidiaries and a €2 million benefit related to Tops. For further information, see Notes 5 and 34.
The significant components and annual movements of deferred income tax assets and liabilities as of December 30, 2012, and January 1, 2012, (including discontinued operations) are as follows:
| Recognized in | |||||||
|---|---|---|---|---|---|---|---|
| € million | January 2, 2011 |
Recognized in income statement |
Other | January 1, 2012 |
income statement |
Other | December 30, 2012 |
| Leases and financings | 222 | 8 | 5 | 235 | 3 | (1) | 237 |
| Pensions and other post-employment benefits | 46 | (30) | – | 16 | – | (16) | – |
| Provisions | 131 | (4) | 7 | 134 | (20) | – | 114 |
| Derivatives and loans | 7 | (2) | 11 | 16 | (4) | 12 | 24 |
| Interest | 35 | 2 | 1 | 38 | 20 | (1) | 57 |
| Other | 52 | 30 | 2 | 84 | 3 | (9) | 78 |
| Total gross deductible temporary differences | 493 | 4 | 26 | 523 | 2 | (15) | 510 |
| Unrecognized deductible temporary differences | (20) | (30) | (1) | (51) | (5) | – | (56) |
| Total recognized deductible temporary differences | 473 | (26) | 25 | 472 | (3) | (15) | 454 |
| Tax losses and tax credits | 572 | (273) | 17 | 316 | (56) | (81) | 179 |
| Unrecognized tax losses and tax credits | (459) | 324 | (4) | (139) | 4 | 91 | (44) |
| Total recognized tax losses and tax credits | 113 | 51 | 13 | 177 | (52) | 10 | 135 |
| Total net deferred tax asset position | 586 | 25 | 38 | 649 | (55) | (5) | 589 |
| Pensions and other post-employment benefits | – | – | – | – | (62) | 14 | (48) |
| Property, plant and equipment and intangible assets | (245) | (81) | (10) | (336) | 18 | (46) | (364) |
| Inventories | (103) | (6) | (3) | (112) | (1) | 2 | (111) |
| Other | (5) | – | (1) | (6) | 1 | – | (5) |
| Total deferred tax liabilities | (353) | (87) | (14) | (454) | (44) | (30) | (528) |
| Net deferred tax assets | 233 | (62) | 24 | 195 | (99) | (35) | 61 |
The column "Other" in the table above includes amounts recorded in equity, the effects of acquisitions, divestments and exchange rate differences, as well as reclassifications between deferred tax components and the application of tax losses and tax credits against current year income tax payables.
Deferred income tax assets and liabilities are offset on the balance sheet when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to income taxes levied by the same fiscal authority. The deferred tax assets and liabilities are presented as non-current assets and liabilities on the balance sheet as follows:
| € million | December 30, 2012 |
January 1, 2012 |
|---|---|---|
| Deferred tax assets | 353 | 394 |
| Deferred tax liabilities | (292) | (199) |
| Net deferred tax assets | 61 | 195 |
As of December 30, 2012, Ahold had operating and capital loss carryforwards of a total nominal amount of €1,346 million, mainly expiring between 2013 and 2031 (January 1, 2012: €2,771 million). The following table specifies the years in which Ahold's operating and capital loss carryforwards, and tax credits are scheduled to expire:
| € million | 2013 | 2014 | 2015 | 2016 | 2017 | 2018- 2022 |
2023- 2027 |
After 2027 |
Does not expire |
Total |
|---|---|---|---|---|---|---|---|---|---|---|
| Operating and capital losses (nominal value) | 6 | 10 | 40 | 12 | 30 | 280 | 561 | 400 | 7 | 1,346 |
| Operating and capital losses (tax value) | 1 | 2 | 8 | 2 | 9 | 53 | 30 | 23 | 2 | 130 |
| Tax credits | 12 | 7 | 6 | 4 | 4 | 5 | 1 | 0 | 10 | 49 |
| Tax losses and tax credits | 13 | 9 | 14 | 6 | 13 | 58 | 31 | 23 | 12 | 179 |
Operating and capital loss carryforwards related to one jurisdiction may not be used to offset income taxes in other jurisdictions. Of the loss carryforwards, €1,138 million relates to U.S. state taxes, for which a weighted average tax rate of 5.45% applies.
The majority of the above mentioned deferred tax assets relate to tax jurisdictions in which Ahold has suffered a tax loss in the current or a preceding period. Significant judgment is required in determining whether deferred tax assets are realizable. Ahold determines this on the basis of expected taxable profits arising from the reversal of recognized deferred tax liabilities and on the basis of budgets, cash flow forecasts and impairment models. Where utilization is not considered probable, deferred tax assets are not recognized.
Current and deferred income taxes recognized in and transferred from equity in 2012 and 2011 are as follows:
| € million | 2012 | 2011 |
|---|---|---|
| Share-based compensation | 4 | (3) |
| Cash flow hedges | 11 | 11 |
| Currency translation differences in foreign interests | – | 1 |
| Total | 15 | 9 |
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Ahold Annual Report 2012 98
Ahold at a glance Our strategy Our performance Governance Financials Investors
Notes to the consolidated
| Buildings and land | ||||||
|---|---|---|---|---|---|---|
| € million | Stores | Other | Furnishings, machinery and equipment |
Other | Under construction |
Total |
| As of January 2, 2011 | ||||||
| At cost | 6,471 | 555 | 3,716 | 86 | 165 | 10,993 |
| Accumulated depreciation and impairment losses | (2,417) | (192) | (2,510) | (47) | – | (5,166) |
| Carrying amount | 4,054 | 363 | 1,206 | 39 | 165 | 5,827 |
| Year ended January 1, 2012 | ||||||
| Additions | 145 | 6 | 110 | 10 | 423 | 694 |
| Transfers from under construction | 190 | 5 | 227 | 2 | (424) | – |
| Acquisitions through business combinations | 32 | – | 2 | – | – | 34 |
| Depreciation | (318) | (20) | (337) | (7) | – | (682) |
| Impairment losses | (21) | – | (7) | – | – | (28) |
| Impairment reversals | 4 | – | 1 | – | – | 5 |
| Assets classified from / (to) held for sale or sold | 1 | 3 | 1 | – | – | 5 |
| Other movements | (10) | – | 1 | – | 6 | (3) |
| Exchange rate differences | 99 | 3 | 25 | 1 | 4 | 132 |
| Closing carrying amount | 4,176 | 360 | 1,229 | 45 | 174 | 5,984 |
| As of January 1, 2012 | ||||||
| At cost | 6,829 | 567 | 3,918 | 95 | 174 | 11,583 |
| Accumulated depreciation and impairment losses | (2,653) | (207) | (2,689) | (50) | – | (5,599) |
| Carrying amount | 4,176 | 360 | 1,229 | 45 | 174 | 5,984 |
| Year ended December 30, 2012 | ||||||
| Additions | 56 | 8 | 98 | 21 | 650 | 833 |
| Transfers from under construction | 300 | 24 | 293 | 2 | (619) | – |
| Acquisitions through business combinations | 99 | 1 | 8 | – | – | 108 |
| Depreciation | (351) | (21) | (348) | (9) | – | (729) |
| Impairment losses | (38) | – | (10) | (1) | – | (49) |
| Impairment reversals | – | – | 1 | – | – | 1 |
| Assets classified from / (to) held for sale or sold | (3) | – | (3) | – | – | (6) |
| Other movements | (5) | (6) | (1) | – | (1) | (13) |
| Exchange rate differences | (69) | (1) | (18) | (1) | (2) | (91) |
| Closing carrying amount | 4,165 | 365 | 1,249 | 57 | 202 | 6,038 |
| As of December 30, 2012 | ||||||
| At cost | 7,067 | 563 | 4,080 | 113 | 202 | 12,025 |
| Accumulated depreciation and impairment losses | (2,902) | (198) | (2,831) | (56) | – | (5,987) |
| Carrying amount | 4,165 | 365 | 1,249 | 57 | 202 | 6,038 |
Buildings and land includes improvements to these assets. "Other" buildings and land mainly includes distribution centers. "Other" property, plant and equipment mainly consists of trucks, trailers and other vehicles. Assets under construction mainly consists of stores.
In 2012, Ahold recognized impairment losses of €49 million. These were related to Ahold USA (€31 million), Other Europe (€17 million) and the Netherlands (€1 million). The carrying amount of the affected assets exceeded the higher of their value in use and fair value less costs to sell. The value-in-use method involves estimating future cash flows. The present value of estimated future cash flows has been calculated using pre-tax discount rates ranging between 7.0% and 12.1% (2011: 7.6%-10.5%). Fair value represents the price at which a property could be sold to a knowledgeable, willing party, and has generally been determined based on internal appraisals, using discounted cash flow projections.
The additions to property, plant and equipment include capitalized borrowing costs of €2 million (2011: €2 million). Generally, the capitalization rate used to determine the amount of capitalized borrowing costs is a weighted average of the interest rate applicable to the respective operating companies. This rate ranged between 4.1% and 9.2% (2011: 4.6%-7.6%).
Other movements mainly include transfers to investment property and from lease-related intangible assets.
The carrying amount of land and buildings includes an amount related to assets held under finance leases and financings of €881 million and €182 million (January 1, 2012: €850 million and €196 million), respectively. In addition, the carrying amount of machinery and equipment includes an amount of €2 million (January 1, 2012: €5 million) relating to assets held under finance leases. Ahold does not have legal title to these assets. Company-owned property, plant and equipment with a carrying amount of €64 million (January 1, 2012: €67 million) has been pledged as security for liabilities, mainly for loans.
| € million | 2012 | 2011 |
|---|---|---|
| At the beginning of the year | ||
| At cost | 870 | 809 |
| Accumulated depreciation and impairment losses | (277) | (227) |
| Carrying amount | 593 | 582 |
| Additions | 18 | 27 |
| Depreciation | (24) | (23) |
| Impairment losses | (7) | (1) |
| Assets classified from / (to) held for sale or sold | (32) | (7) |
| Transfers from property, plant and equipment | 24 | 3 |
| Exchange rate differences | (7) | 12 |
| Closing carrying amount | 565 | 593 |
| At the end of the year | ||
| At cost | 876 | 870 |
| Carrying amount | 565 | 593 |
|---|---|---|
| Accumulated depreciation and impairment losses | (311) | (277) |
A significant portion of Ahold's investment property is comprised of shopping centers containing both an Ahold store and third-party retail units. The third-party retail units generate rental income, but are primarily of strategic importance to Ahold in its retail operations. Ahold recognizes the part of a shopping center leased to a third-party retailer as investment property, unless it represents an insignificant portion of the property.
In 2012, Ahold recognized impairment losses of €7 million. These were related to Ahold USA (€5 million) and Other Europe (€2 million).
The carrying amount of investment property includes an amount related to assets held under finance leases and financings of €38 million and €50 million (January 1, 2012: €40 million and €53 million), respectively. Ahold does not have legal title to these assets. Company-owned investment property with a carrying amount of €66 million (January 1, 2012: €70 million) has been pledged as security for liabilities, mainly for loans.
The fair value of investment property as of December 30, 2012 amounted to approximately €757 million (January 1, 2012: €835 million). Fair value represents the price at which a property could be sold to a knowledgeable, willing party, and has generally been determined based on internal appraisals, using discounted cash flow projections. For mixed use properties and properties held for strategic purposes, Ahold cannot determine the fair value of the investment property reliably. In such cases, the fair value is assumed to be equal to the carrying amount.
Rental income from investment property included in the income statement in 2012 amounted to €69 million (2011: €72 million). Direct operating expenses (including repairs and maintenance but excluding depreciation expense) arising from rental-income-generating and non-rent-generating investment property in 2012 amounted to €36 million (2011: €30 million).
Ahold Annual Report 2012 101
Notes to the consolidated
| Notes to the consolidated financial statements |
13 Intangible assets | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| € million | Goodwill | Lease-related intangibles |
Software | Customer relationships |
Brand names | Other | Under development |
Total | ||||
| As of January 2, 2011 | ||||||||||||
| At cost | 376 | 240 | 509 | 48 | – | 151 | 98 | 1,422 | ||||
| Accumulated amortization and impairment losses | (3) | (129) | (437) | (35) | – | (56) | – | (660) | ||||
| Carrying amount | 373 | 111 | 72 | 13 | – | 95 | 98 | 762 | ||||
| Year ended January 1, 2012 | ||||||||||||
| Additions | – | 1 | 8 | – | – | 6 | 85 | 100 | ||||
| Transfers from under development | – | – | 12 | – | – | 5 | (17) | – | ||||
| Acquisitions through business combinations | 24 | 1 | – | – | – | 1 | – | 26 | ||||
| Amortization | – | (10) | (44) | (3) | – | (10) | – | (67) | ||||
| Impairment losses | – | (1) | – | – | – | – | – | (1) | ||||
| Other movements | – | (1) | – | – | – | 1 | – | – | ||||
| Exchange rate differences | 7 | 3 | – | – | – | 2 | 4 | 16 | ||||
| Closing carrying amount | 404 | 104 | 48 | 10 | – | 100 | 170 | 836 | ||||
| As of January 1, 2012 | ||||||||||||
| At cost | 407 | 248 | 545 | 49 | – | 166 | 170 | 1,585 | ||||
| Accumulated amortization and impairment losses | (3) | (144) | (497) | (39) | – | (66) | – | (749) | ||||
| Carrying amount | 404 | 104 | 48 | 10 | – | 100 | 170 | 836 | ||||
| Year ended December 30, 2012 | ||||||||||||
| Additions | – | 8 | 9 | – | – | 5 | 109 | 131 | ||||
| Transfers from under development | – | – | 124 | – | – | 6 | (130) | – | ||||
| Acquisitions through business combinations | 372 | 8 | 43 | 73 | 86 | 204 | – | 786 | ||||
| Amortization | – | (10) | (41) | (6) | – | (11) | – | (68) | ||||
| Write-downs | – | – | – | – | – | – | (92) | (92) | ||||
| Assets classified from / (to) held for sale or sold | – | – | – | – | – | (1) | – | (1) | ||||
| Other movements | – | (11) | – | – | – | – | – | (11) | ||||
| Exchange rate differences | (7) | (1) | (1) | – | – | (1) | (2) | (12) | ||||
| Closing carrying amount | 769 | 98 | 182 | 77 | 86 | 302 | 55 | 1,569 | ||||
| As of December 30, 2012 | ||||||||||||
| At cost | 772 | 254 | 714 | 121 | 86 | 379 | 55 | 2,381 | ||||
| Accumulated amortization and impairment losses | (3) | (156) | (532) | (44) | – | (77) | – | (812) | ||||
| Carrying amount | 769 | 98 | 182 | 77 | 86 | 302 | 55 | 1,569 |
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Goodwill recognized on acquisitions in 2012 relates mainly to the acquisition of bol.com, Genuardi's Family Markets stores, and C1000 and Jumbo stores (see Note 4 for more details). Goodwill recognized on acquisitions in 2011 relates mainly to the acquisitions of Norkus Foodtown supermarket stores and King Kullen supermarket stores at Ahold USA.
Goodwill acquired in business combinations is allocated, at acquisition, to the Cash-Generating Units (CGUs) or groups of CGUs expected to benefit from that business combination. The carrying amounts of goodwill allocated to CGUs within Ahold's reportable segments are as follows:
| € million | December 30, 2012 |
January 1, 2012 |
|
|---|---|---|---|
| Reportable segment | Cash-generating unit | ||
| Ahold USA | Stop & Shop New England | 12 | 12 |
| Stop & Shop New York Metro | 23 | 23 | |
| Giant Carlisle | 217 | 164 | |
| Giant Landover | 7 | – | |
| Peapod | 20 | 20 | |
| The Netherlands | Albert Heijn1 | 255 | 152 |
| bol.com1 | 201 | – | |
| Etos | 7 | 6 | |
| Gall & Gall | 1 | 1 | |
| Other Europe | Czech Republic | 26 | 26 |
| Ahold group | 769 | 404 |
1 Of the €248 million of goodwill that resulted from the acquisition of bol.com, €47 million has been allocated to Albert Heijn.
CGUs to which goodwill has been allocated are tested for impairment annually or more frequently if there are indications that a particular CGU might be impaired. The recoverable amount of each CGU was determined based on value-in-use calculations. Value-in-use was determined using discounted cash flow projections that generally cover a period of five or 10 years and are based on the financial plans approved by the Company's management. The key assumptions for the value-in-use calculations are those regarding discount rates, growth rates and operating margins. The post-tax rates used to discount the projected cash flows reflect specific risks relating to relevant CGUs and are 4.7% for Ahold USA, 5.2% for the Netherlands and 8.2% for the Czech Republic. The sensitivity analysis, with respect to changes in the discount rates, indicated that the recoverable amounts of the CGUs would still be in excess of the carrying amounts with sufficient and reasonable headroom if the discount rates were higher by 2%.The growth rates and operating margins used to estimate future performance are based on past performance and experience of growth rates and operating margins achievable in Ahold's main markets. Growth rates used to extrapolate cash flows beyond the explicit forecast period are set such that the return on invested capital never exceeds the weighted average cost of capital of the CGUs.
Lease-related intangible assets consist primarily of favorable operating lease contracts acquired in business acquisitions. Customer relationships consist primarily of pharmacy scripts and customer lists recognized through the acquisition of bol.com in 2012. Brand names include "bol.com." Ahold expects bol.com will play an important role in its business strategy and believes there is currently no foreseeable limit to the period over which the brand is expected to generate net cash inflows. Therefore the brand is assessed to have an indefinite useful life. The asset is tested for impairment in accordance with the policies as stated in Note 3. "Other" mainly includes intangible assets related to location development rights, deed restrictions and similar assets. Included in "Other" is an intangible asset allocated to Stop & Shop New England with an indefinite useful life and a carrying value of €26 million (2011: €26 million). The useful life of this asset is assessed to be indefinite since it relates to the land portion of an owned location. Also included in 2012 is the prepaid purchase consideration for the transfer of C1000 stores (€204 million). The amount will be reallocated to the appropriate intangible assets (mainly goodwill) as agreements are reached with the franchisees. Intangible assets under development relate mainly to software development.
The additions to intangible assets under development include capitalized borrowing costs of €5 million (2011: €3 million). The capitalization rate used was the same as for property, plant and equipment (see Note 11). In 2012, €92 million has been recognized as write-downs of intangible assets under development. These were related to Ahold USA (€88 million) and the Netherlands (€4 million).
Ahold owns 60% of the outstanding common shares of ICA AB (ICA), a food retailer operating in Sweden, Norway and the Baltic states. The 60% shareholding does not entitle Ahold to unilateral decision-making authority over ICA due to the shareholders' agreement with the joint venture partner, which provides that strategic, financial and operational decisions will be made only on the basis of mutual consent. On the basis of this shareholders' agreement, the Company concluded that it has no control over ICA and, consequently, does not consolidate ICA.
Ahold has a 49% stake in JMR – Gestão de Empresas de Retalho, SGPS. S.A. (JMR). JMR operates food retail stores in Portugal under the brand name Pingo Doce.
The Company's share in income of ICA and JMR were €73 million (2011: €122 million) and €5 million (2011: €16 million), respectively. In 2012, ICA's net income was negatively impacted by a tax expense of €150 million (Ahold's share: €90 million) related to the denial by the Swedish Tax Agency of certain interest deductions made in 2004-2008. For more details on ICA's tax claim, see Note 34. For condensed financial information on ICA and JMR, see Note 6.
Ahold is also a partner in various smaller joint ventures. Changes in investments in joint ventures are as follows:
| € million 2012 |
2011 |
|---|---|
| Beginning of the year 1,087 |
1,072 |
| Share in income of joint ventures 81 |
141 |
| Dividend (157) |
(130) |
| Share of other comprehensive loss (4) |
(3) |
| Investments classified from / (to) held for sale or sold (3) |
– |
| Other changes in equity of joint ventures 12 |
2 |
| Exchange rate differences 31 |
5 |
| End of the year 1,047 |
1,087 |
| December 30, € million 2012 |
January 1, 2012 |
|---|---|
| Derivative financial instruments 280 |
239 |
| Defined benefit asset 662 |
498 |
| Reinsurance assets 68 |
64 |
| Loans receivable 35 |
32 |
| Other 14 |
26 |
| Total other non-current financial assets 1,059 |
859 |
For more information on derivative financial instruments and fair values, see Note 30.
The defined benefit asset represents defined benefit pension plans for which the present value of the defined benefit obligations, less the fair value of plan assets, adjusted for unrecognized actuarial gains or losses, results in a net asset. For more information on defined benefit plans, see Note 23.
Of the non-current loans receivable, €12 million matures between one and five years and €23 million after five years (January 1, 2012: €8 million between one and five years and €24 million after five years). The current portion of loans receivable of €3 million is included in other receivables (January 1, 2012: €4 million).
Under the self-insurance program, part of the insurance risk is ceded under a reinsurance treaty, which is a pooling arrangement between unrelated companies. At the same time, Ahold assumes a share of the reinsurance treaty risks that is measured by Ahold's participation percentage in the treaty. The participation percentage is the ratio of premium paid by Ahold to the total premium paid by all treaty members. In connection with this pooling arrangement, the Company recognizes reinsurance assets and reinsurance liabilities (see also Notes 18, 22 and 26) on its balance sheet. There were no significant gains or losses related to this pooling arrangement during 2012 or 2011.
Notes to the consolidated financial statements 16 Inventories
| € million | December 30, 2012 |
January 1, 2012 |
|---|---|---|
| Finished products and merchandise inventories | 1,497 | 1,468 |
| Raw materials, packaging materials, technical supplies and other | 45 | 41 |
| 1,542 | 1,509 | |
| Valuation allowance | (50) | (43) |
| Total inventories | 1,492 | 1,466 |
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In 2012, €645 million has been recognized as a write-off of inventories in the income statement (2011: €549 million). The increase was mainly related to Ahold USA (€83 million), primarily as a result of exchange rate differences, inflation and new stores.
| € million | December 30, 2012 |
January 1, 2012 |
|---|---|---|
| Trade receivables | 424 | 385 |
| Vendor allowance receivables | 212 | 214 |
| Other receivables | 174 | 168 |
| 810 | 767 | |
| Provision for impairment | (17) | (16) |
| Total receivables | 793 | 751 |
At December 30, 2012, the aging analysis of receivables was as follows:
| Past due | ||||||
|---|---|---|---|---|---|---|
| € million | Total | Not past due |
0–3 months |
3–6 months |
6–12 months |
> 12 months |
| Trade receivables | 424 | 345 | 59 | 8 | 3 | 9 |
| Vendor allowance receivables | 212 | 173 | 35 | 3 | – | 1 |
| Other receivables | 174 | 95 | 54 | 14 | 4 | 7 |
| 810 | 613 | 148 | 25 | 7 | 17 | |
| Provision for impairment | (17) | – | (3) | (1) | (2) | (11) |
| Total receivables | 793 | 613 | 145 | 24 | 5 | 6 |
At January 1, 2012, the aging analysis of receivables was as follows:
| Past due | ||||||
|---|---|---|---|---|---|---|
| € million | Total | Not past due |
0–3 months |
3–6 months |
6–12 months |
> 12 months |
| Trade receivables | 385 | 326 | 48 | 2 | 3 | 6 |
| Vendor allowance receivables | 214 | 166 | 45 | 1 | 1 | 1 |
| Other receivables | 168 | 100 | 40 | 13 | 7 | 8 |
| 767 | 592 | 133 | 16 | 11 | 15 | |
| Provision for impairment | (16) | (1) | (1) | (1) | (2) | (11) |
| Total receivables | 751 | 591 | 132 | 15 | 9 | 4 |
The concentration of credit risk with respect to receivables is limited, as the Company's customer base and vendor base are large and unrelated. The Company does not hold any significant collateral on its receivables. Management believes there is no further credit risk provision required in excess of the normal individual and collective impairment, based on the aging analysis performed as of December 30, 2012. For more information about credit risk, see Note 30.
The changes in the provision for impairment were as follows:
| € million | 2012 | 2011 |
|---|---|---|
| Beginning of the year | (16) | (18) |
| Additions | (14) | (15) |
| Used | 7 | 7 |
| Released to income | 6 | 10 |
| End of the year | (17) | (16) |
| € million | December 30, 2012 |
January 1, 2012 |
|---|---|---|
| Short-term deposits | – | 154 |
| Reinsurance assets – current portion (see Note 15) | 41 | 39 |
| Other | 2 | 143 |
| Total other current financial assets | 43 | 336 |
As per January 1, 2012, short-term deposits included cash time deposits. These deposits were fully collateralized, mainly by equity securities and government and sovereign bonds.
Other mainly consists of the current portion of the derivative financial instruments. As of January 1, 2012, €141 million (cash flow hedges) related to the EUR 600 million notes paid in March 2012.
For more information on financial instruments and fair values, see Note 30.
| € million | December 30, 2012 |
January 1, 2012 |
|---|---|---|
| Cash in banks and cash equivalents | 1,547 | 2,090 |
| Cash on hand | 339 | 348 |
| Total cash and cash equivalents | 1,886 | 2,438 |
Of the cash and cash equivalents as of December 30, 2012, €22 million was restricted (January 1, 2012: €31 million). This primarily consisted of cash held for insurance purposes for U.S. workers' compensation and general liability programs, and cash held in escrow accounts mainly related to construction activities.
Ahold's banking arrangements allow the Company to fund outstanding checks when presented to the bank for payment. This cash management practice may result in a net cash book overdraft position, which occurs when the total issued checks exceed available cash balances within the Company's cash concentration structure. Such book overdrafts are classified in accounts payable and amounted to €170 million and €181 million as of December 30, 2012, and January 1, 2012, respectively. No right to offset with other bank balances exists for these book overdraft positions.
| Notes to the consolidated | |
|---|---|
Authorized share capital is comprised of the following classes of shares as of December 30, 2012:
| € million | |
|---|---|
| Common shares (1,700,000,000 of €0.30 par value each) | 510 |
| Cumulative preferred shares (1,250,000 of €500 par value each) | 625 |
| Total authorized share capital | 1,135 |
In addition, Ahold has cumulative preferred financing shares outstanding. These cumulative preferred financing shares are considered debt under IFRSs until the date that Ahold receives irrevocable notification from a holder of cumulative preferred financing shares to convert these shares into common shares. Upon this notification, the cumulative preferred financing shares are classified as a separate class of equity since they no longer meet the definition of a liability. For disclosures regarding Ahold's cumulative preferred financing shares, see Note 22.
Changes in the number of common shares and the number of treasury shares were as follows:
| Number of common | Number of common | ||||
|---|---|---|---|---|---|
| shares issued and fully | Number of treasury | shares outstanding | |||
| paid (x 1,000) | shares (x 1,000) | (x 1,000) | |||
| Balance as of January 2, 2011 | 1,191,888 | 46,743 | 1,145,145 | ||
| Share buyback | – | 91,624 | (91,624) | ||
| Cancellation of treasury shares | (91,000) | (91,000) | – | ||
| Share-based payments | – | (6,284) | 6,284 | ||
| Balance as of January 1, 2012 | 1,100,888 | 41,083 | 1,059,805 | ||
| Share buyback | – | 26,832 | (26,832) | ||
| Cancellation of treasury shares | (39,900) | (39,900) | – | ||
| Share-based payments | – | (5,534) | 5,534 | ||
| Balance as of December 30, 2012 | 1,060,988 | 22,481 | 1,038,507 |
On April 17, 2012, the General Meeting of Shareholders approved the dividend over 2011 of €0.40 per common share (€415 million in the aggregate). The dividend was paid on May 2, 2012. The Corporate Executive Board, with the approval of the Supervisory Board, proposes that a dividend of €0.44 per common share be paid in 2013 with respect to 2012. This dividend is subject to approval by the General Meeting of Shareholders and has not been included as a liability on the consolidated balance sheet as of December 30, 2012. The payment of this dividend will not have income tax consequences for the Company.
On March 19, 2012, Ahold completed its €1 billion share buyback program announced on March 3, 2011. Under this program, 106,814,343 of the Company's own shares were repurchased and delivered in 2011 and 2012 (2011: 79,982,258 and 2012: 26,832,085) for a total consideration of €1 billion (2011: €723 million and 2012: €277 million), at an average price of €9.36 (2011: €9.04 and 2012: €10.33).
On February 24, 2011, Ahold completed its €500 million share buyback program announced on March 4, 2010. The total number of shares repurchased under the program over the period from April 6, 2010, through February 24, 2011, was 50,359,330 common shares (2011: 11,641,727 and 2010: 38,717,603), for a total consideration of €500 million (2011: €114 million and 2010: €386 million), at an average price of €9.93 (2011: €9.80 and 2010: €9.96).
Of the total shares repurchased, 39,900,000 were cancelled on July 9, 2012, 30,000,000 were cancelled on June 7, 2011, and 61,000,000 on December 23, 2011.
Ahold Annual Report 2012 107
Ahold at a glance Our strategy Our performance Governance Financials Investors
Notes to the consolidated
Share-based payments recognized in equity in the amount of €53 million (2011: €31 million) relate to the 2012 GRO share-based compensation expenses of €40 million (2011: €29 million), see Note 32; the stock options exercised of €9 million (2011: €5 million); and the current and deferred income taxes recognized in and transferred from equity relating to share-based compensation of €4 million (2011: negative €3 million), see Note 10.
The Company's Articles of Association provide for the possible issuance of cumulative preferred shares. The Company believes that its ability to issue this class of shares could prevent, or at least delay, an attempt by a potential bidder to make a hostile takeover bid. In this respect, but also in other circumstances, this ability may safeguard the interests of the Company and all stakeholders in the Company and resist influences that might conflict with those interests by affecting the Company's continuity, independence or identity. No cumulative preferred shares were outstanding as of December 30, 2012, or during 2012 and 2011.
In March 1989, the Company entered into an agreement with Stichting Ahold Continuïteit (SAC) as amended and restated in April 1994, March 1997, December 2001, and December 2003 (the Option Agreement). Pursuant to the Option Agreement, SAC was granted an option for no consideration to acquire from the Company, from time to time until December 2016, cumulative preferred shares up to a total par value that is equal to the total par value of all issued and outstanding shares of Ahold's share capital, excluding cumulative preferred shares, at the time of exercising the option. In case the authorized share capital of the Company is amended during the term of the option, the Option Agreement provides for a corresponding change of the total par value of cumulative preferred shares under option. The holders of the cumulative preferred shares are entitled to 1,666.67 votes per share and a cumulative dividend expressed as a percentage of the amount called-up and paid-in to purchase the cumulative preferred shares. The percentage to be applied is the sum of (1) the average basic refinancing transaction interest rate as set by the European Central Bank – measured by the number of days during which that rate was in force in the fiscal year over which the dividend is paid – plus 2.1%, and (2) the average interest surcharge rate – measured by the number of days during which that rate was in force in the fiscal year over which the dividend is paid – that would be charged by the largest credit institution in the Netherlands (based on balance sheet total as at the close of the fiscal year immediately preceding the fiscal year over which the dividend is paid). The minimum percentage to be applied is 5.75%. Subject to limited exceptions, any potential transfer of cumulative preferred shares requires the approval of the Corporate Executive Board. Cumulative preferred shares can only be issued in a registered form. The Company may stipulate that only 25% of the par value will be paid upon subscription to cumulative preferred shares until payment in full is later required by the Company. SAC would then only be entitled to a market-based interest return on its investment.
SAC is a foundation organized under the laws of the Netherlands. Its statutory purpose is to safeguard the interests of the Company and all stakeholders in the Company and to resist, to the best of its ability, influences that might conflict with those interests by affecting the Company's continuity, independence or identity. In the case of liquidation, the SAC board of directors will decide on the use of any remaining residual assets. The SAC board of directors has three members, who are appointed by the board of SAC itself.
In accordance with the Netherlands Civil Code and statutory requirements in other countries, legal reserves have to be established in certain circumstances. Legal reserves are not available for distribution to the Company's shareholders. The currency translation reserve, cash flow hedging reserve and other reserves include non-distributable amounts. From the total equity as per December 30, 2012, of €5,995 million, an amount of €642 million is non-distributable (January 1, 2012: €732 million out of total equity of €5,877 million). See Note 6 to the parent company financial statements for more detail on the legal reserves.
The notes in the table below were issued by Ahold or one of its subsidiaries, the latter of which are guaranteed by Ahold unless otherwise noted. All related swap contracts have the same maturity as the underlying debt unless otherwise noted.
| Current | Non-current portion | Current | Non-current portion | |||||
|---|---|---|---|---|---|---|---|---|
| € million | portion within 1 year |
Between 1 to 5 years |
After 5 years |
Total December 30, 2012 |
portion within 1 year |
Between 1 to 5 years |
After 5 years |
Total January 1, 2012 |
| Notional redemption amounts | ||||||||
| EUR 600 notes 5.875%, due March 20121 | – | – | – | – | 407 | – | – | 407 |
| GBP 500 notes 6.50%, due March 20172 | – | 290 | – | 290 | – | – | 280 | 280 |
| USD 94 indebtedness 7.82%, due January 20203 | 6 | 29 | 13 | 48 | 5 | 27 | 22 | 54 |
| USD 71 indebtedness 8.62%, due January 2025 | – | – | 54 | 54 | – | – | 55 | 55 |
| USD 500 notes 6.875%, due May 2029 | – | – | 378 | 378 | – | – | 386 | 386 |
| JPY 33,000 notes LIBOR plus 1.5%, due May 20314 | – | – | 290 | 290 | – | – | 331 | 331 |
| Deferred financing costs | – | (1) | (3) | (4) | – | (2) | (2) | (4) |
| Total notes | 6 | 318 | 732 | 1,056 | 412 | 25 | 1,072 | 1,509 |
| Other loans | – | 2 | 3 | 5 | 1 | 2 | – | 3 |
| Financing obligations5 | 13 | 63 | 305 | 381 | 13 | 65 | 321 | 399 |
| Mortgages payable6 | 3 | 2 | 6 | 11 | 3 | 4 | – | 7 |
| Total loans | 22 | 385 | 1,046 | 1,453 | 429 | 96 | 1,393 | 1,918 |
1 Notes were swapped to the U.S. dollar at an interest rate of 6.835%. During 2005, Ahold bought back a part of the notes with a principal amount of €193 million and terminated a notional portion of the corresponding swap in the same amount.
2 During 2005 Ahold bought back GBP 250 million of the notes. The remaining notional redemption amount of GBP 250 million (€ 306 million) has been netted with €16 million as per December 30, 2012, (January 1, 2012: €20 million) representing an amount, which is amortized over the remaining terms of the notes, that relates to a hedging instrument that stopped qualifying for fair value hedge accounting. The remaining notional amount of GBP 250 million was, through two swap contracts, swapped to \$356 million and carries a six-month floating U.S. dollar interest rate (see Note 30 for additional information). Ahold is required under these swap contracts to redeem the U.S. dollar notional amount through semi-annual installments that commenced in September 2004. \$232 million has been paid down as of December 30, 2012.
3 As of December 30, 2012, \$31 million has been repaid since inception.
4 Notes were swapped to €299 million at an interest rate of 7.065% (see Note 30 for additional information related to the JPY swap).
5 The average interest rate for the financing obligations amounted to 7.9% in 2012 (2011: 7.9%).
6 Mortgages payable are collateralized by buildings and land. The average interest rate for these mortgages payable amounted to 7.2% in 2012 (2011: 7.4%).
The fair values of financial instruments, corresponding derivatives, and the foreign exchange and interest rate risk management policies applied by Ahold are disclosed in Note 30.
The Company has a Euro Medium Term Note (EMTN) program that had an aggregate of €596 million of outstanding notes as of December 30, 2012. The notes issued under the program include the remaining outstanding balances of GBP 500 million and JPY 33,000 million notes, maturing in 2017 and 2031, respectively. The notes issued under the EMTN program contain customary restrictive covenants. During 2012, Ahold was in compliance with these covenants.
Ahold has access to a €1.2 billion unsecured, committed, multi-currency and syndicated credit facility, which was refinanced in June 2011. In June 2012, we extended its maturity by one year to June 2017 while the facility size will reduce by €186 million in 2016. This credit facility may be used for working capital and for general corporate purposes of the Company and provides for the issuance of letters of credit to an aggregate maximum amount of \$550 million (€416 million).
The facility contains customary covenants and is subject to a financial covenant that requires Ahold not to exceed a maximum leverage ratio, as defined in the facility agreement, of 4.0:1.
During 2012, Ahold was in compliance with these covenants, and as of December 30, 2012, there were no outstanding borrowings under the facility other than letters of credit to an aggregate amount of \$244 million (€184 million).
Ahold also has access to various uncommitted credit facility lines serving working capital needs that, as of December 30, 2012, totaled €110 million. As of December 30, 2012, €2 million was drawn under these credit facility lines.
| € million | December 30, 2012 |
January 1, 2012 |
|---|---|---|
| Finance lease liabilities | 1,179 | 1,158 |
| Cumulative preferred financing shares | 497 | 497 |
| Derivative financial instruments | 175 | 89 |
| Reinsurance liabilities | 76 | 67 |
| Other | 3 | 2 |
| Total other non-current financial liabilities | 1,930 | 1,813 |
For more information on derivative financial instruments and fair values, see Note 30.
The Company recognizes reinsurance liabilities on its balance sheet in connection with a pooling arrangement between unrelated companies. For more information, see Note 15.
Finance lease liabilities are payable as follows:
| € million | December 30, 2012 | January 1, 2012 | ||||
|---|---|---|---|---|---|---|
| Future minimum lease payments |
Interest portion |
Present value of minimum lease payments |
Future minimum lease payments |
Interest portion |
Present value of minimum lease payments |
|
| Within one year | 172 | 97 | 75 | 165 | 98 | 67 |
| Between one and five years | 665 | 317 | 348 | 643 | 331 | 312 |
| After five years | 1,145 | 314 | 831 | 1,195 | 349 | 846 |
| Total | 1,982 | 728 | 1,254 | 2,003 | 778 | 1,225 |
| Current portion finance lease liabilities (see Note 26) | 75 | 67 | ||||
| Non-current portion finance lease liabilities | 1,179 | 1,158 |
Finance lease liabilities are principally for buildings. Terms range primarily from 10 to 25 years and include renewal options if it is reasonably certain, at the inception of the lease, that they will be exercised. At the time of entering into finance lease agreements, the commitments are recorded at their present value using the interest rate implicit in the lease, if this is practicable to determine; if not, the operating company-specific interest rate applicable for long-term borrowings is used. As of December 30, 2012, the finance lease liabilities are recorded at their present value at an average interest rate of 8.0% (January 1, 2012: 8.4%).
Certain store leases provide for contingent additional rentals based on a percentage of sales and consumer price indices. Substantially all of the store leases have renewal options for additional terms. None of Ahold's leases impose restrictions on Ahold's ability to pay dividends, incur additional debt or enter into additional leasing arrangements.
During 2012, interest expense on finance lease liabilities was €102 million (2011: €94 million), of which €2 million related to discontinued operations (2011: €3 million). Total future minimum sublease income expected to be received under non-cancelable subleases as of December 30, 2012, is €140 million (January 1, 2012: €156 million). The total contingent rent expense recognized during the year on finance leases was €1 million (2011: €1 million).
| Number | ||
|---|---|---|
| of shares | ||
| (x 1,000) | € million | |
| Issued cumulative preferred financing shares (€0.30 par value each) | 268,415 | 81 |
| Authorized cumulative preferred financing shares (€0.30 par value each) | 477,581 | 143 |
| Other | |
|---|---|
| non-current | |
| financial | |
| € million | liabilities |
| Paid-in capital issued cumulative preferred financing shares | 81 |
| Additional paid-in capital cumulative preferred financing shares | 416 |
| Balance as of December 30, 2012, and January 1, 2012 | 497 |
The cumulative preferred financing shares were issued in four tranches. Dividends are paid on each preferred financing share at a percentage (financing dividend percentage) that differs per tranche. When a period of 10 years has lapsed after the issue date of a tranche, and every 10 years thereafter (reset date), the financing dividend percentage is reset. The current financing dividend percentage is 5.93% per year for the shares issued in June 1996, 6.08% per year for the shares issued in August 1998, 3.85% per year for the shares issued in October 2000, and 7.33% per year for the shares issued in December 2003. The nominal value plus additional paid-in capital per tranche is €71 million (June 1996 tranche), €46 million (August 1998 tranche), €320 million (October 2000 tranche) and €60 million (December 2003 tranche); in the aggregate €497 million.
The total number of votes that can be exercised by the cumulative preferred financing shares is approximately 75 million. This represents approximately 7% of the total number of votes that can be cast (this total being calculated as the sum of the outstanding cumulative preferred financing shares and the outstanding common shares).
The cumulative preferred financing shares are convertible into common shares. The conversion conditions have been set so as to avoid any transfer of value from the common shares to the cumulative preferred financing shares. The maximum number of common shares to be received upon conversion of all outstanding cumulative preferred financing shares is approximately 90 million. The conversion features are similar for all tranches. Conversion is allowed for all shares in one tranche held by one investor but not for fractions of tranches held by one investor. Upon conversion, the holders of (depositary receipts of) cumulative preferred financing shares will receive a number of common shares that is calculated by dividing the value of the cumulative preferred financing shares on the day before the conversion date by the average share price of Ahold common shares on the five trading days preceding the notification date, on the notification date, and on the four trading days following the notification date. The value of the cumulative preferred financing shares will be considered, for this purpose, to be equal to the lower of the nominal value plus the additional paid-in capital of the cumulative preferred financing shares (par value) or to the present value of the remaining preferred dividends until the first reset date plus the present value of the par value at the first reset date.
Subject to the approval of the General Meeting of Shareholders, the Company can redeem the cumulative preferred financing shares of a certain tranche, but not fractions of a tranche. Redemption of a tranche is subject to the approval of the holders of depositary receipts of that tranche, unless all (remaining) cumulative preferred financing shares are redeemed. Redemption takes place at the higher of the par value or the present value of the remaining preferred dividends plus the present value of the par value at the reset date.
| Notes to the consolidated | |
|---|---|
Ahold has a number of defined benefit pension plans covering a substantial number of employees, former employees and retirees in the Netherlands and the United States. Generally, the plans are career average or final pay defined benefit plans. In 2008, the Company decided to transition its defined benefit pension plan for active salaried, non-union and certain union employees in the United States to a defined contribution pension plan, as further described below. In addition, Ahold provides life insurance and medical care benefits for certain retired employees meeting age and service requirements at its U.S. subsidiaries, which the Company funds as claims are incurred.
Net assets relating to one plan are not offset against net liabilities of another plan, resulting in the following presentation of the pension and other post-employment benefits on the consolidated balance sheet:
| December 30, | January 1, | |
|---|---|---|
| € million | 2012 | 2012 |
| Defined benefit liabilities | (110) | (94) |
| Defined benefit assets | 662 | 498 |
| Total defined benefit plans | 552 | 404 |
The defined benefit assets are part of the other non-current financial assets; for more information, see Note 15.
Net defined benefit cost, which is presented in the income statement according to its function as a component of cost of sales, selling expenses, and general and administrative expenses, was as follows:
| € million | 2012 | 2011 |
|---|---|---|
| Current service cost | 76 | 73 |
| Interest cost | 195 | 182 |
| Expected return on plan assets | (221) | (211) |
| Actuarial losses | 28 | 19 |
| Curtailment gain | (33) | – |
| Settlement loss | 121 | – |
| Total net defined benefit cost | 166 | 63 |
| Ahold Annual Report 2012 | 112 | ||||
|---|---|---|---|---|---|
The changes in the defined benefit obligations and plan assets in 2012 and 2011 were as follows:
| The Netherlands | United States | Total | ||||
|---|---|---|---|---|---|---|
| € million | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 |
| Defined benefit obligations | ||||||
| Beginning of the year | 2,155 | 2,118 | 1,469 | 1,297 | 3,624 | 3,415 |
| Current service cost | 57 | 55 | 19 | 18 | 76 | 73 |
| Interest cost | 119 | 111 | 76 | 71 | 195 | 182 |
| Actuarial (gains) losses | 1,250 | (48) | 193 | 93 | 1,443 | 45 |
| Contributions by plan participants | 12 | 12 | – | – | 12 | 12 |
| Benefits paid | (88) | (93) | (68) | (65) | (156) | (158) |
| Curtailment | (38) | – | – | – | (38) | – |
| Settlement | – | – | (305) | – | (305) | – |
| Other | – | – | – | 3 | – | 3 |
| Exchange rate differences | – | – | (34) | 52 | (34) | 52 |
| End of the year | 3,467 | 2,155 | 1,350 | 1,469 | 4,817 | 3,624 |
| Plan assets | ||||||
| Fair value of assets, beginning of the year | 2,762 | 2,476 | 1,117 | 1,020 | 3,879 | 3,496 |
| Expected return on plan assets | 146 | 141 | 75 | 70 | 221 | 211 |
| Actuarial gains (losses) | 236 | 109 | 32 | (15) | 268 | 94 |
| Company contribution | 122 | 117 | 193 | 69 | 315 | 186 |
| Contributions by plan participants | 12 | 12 | – | – | 12 | 12 |
| Benefits paid | (88) | (93) | (68) | (65) | (156) | (158) |
| Settlement | – | – | (352) | – | (352) | – |
| Exchange rate differences | – | – | (24) | 38 | (24) | 38 |
| Fair value of assets, end of the year | 3,190 | 2,762 | 973 | 1,117 | 4,163 | 3,879 |
| Surplus / (deficit) | (277) | 607 | (377) | (352) | (654) | 255 |
| Unrecognized actuarial (gains) losses | 809 | (199) | 398 | 349 | 1,207 | 150 |
| Unrecognized past service cost | – | – | (1) | (1) | (1) | (1) |
| Net asset / (liability) | 532 | 408 | 20 | (4) | 552 | 404 |
The total defined benefit obligation of €4,817 million as of December 30, 2012, includes €178 million related to plans that are wholly unfunded. These plans include other benefits (such as life insurance and medical care) and supplemental executive retirement plans.
The assets that Ahold has recognized reflect unrecognized actuarial losses as well as Ahold's unconditional right to use surplus assets for the gradual settlement of the plan liabilities over time until all members have left the plan. Therefore, the defined benefit asset is not realizable immediately as of December 30, 2012.
During 2012, the Company amended its defined benefit pension plan in the Netherlands. The plan amendments included, among other changes, raising the retirement age and gradually increasing the amount that participants will contribute in future years. The effect of all amendments was a net curtailment gain of €33 million.
During 2012, the Company has changed its methodology for measuring past service years within the Dutch pension fund. The previous methodology was to calculate past service years based on a participant's accrued benefits, but this has been changed to a methodology that will use the maximum past service years based on a participant's actual date of hire or accrued benefits. The effect of the change on the 2012 year end defined benefit obligation is an increase of €101 million, which has been recognized as a current year actuarial loss.
In 2008, the Company decided to transition its defined benefit pension plan for active salaried, non-union and certain union employees ("eligible employees") in the United States to a defined contribution pension plan. Eligible employees who were at least 50 years of age or had 25 or more years of service as of December 31, 2009, could choose to either stay in the defined benefit plan or transfer to a 401(k) plan. All other eligible employees were transferred to a 401(k) plan. Accrued benefits under the defined benefit plan for employees transferred to a 401(k) plan were frozen for pay and service as of December 31, 2009 (frozen plan). The resulting curtailment gain in 2008 was largely offset by accrued additional (transition) contributions that the Company will make to a 401(k) plan for a period of five years (2010-2014) to employees meeting certain age or service requirements who were transferred to a 401(k) plan. During 2012, the Company settled the frozen accrued benefits of participants who elected to receive a lump sum payout. At that time the Company recognized a settlement loss of €121 million, which consisted of the amortization of the unrecognized actuarial losses attributable to the benefits settled. In addition, the Company also recognized a liability for the remainder of the benefits, which will be settled by the purchase of annuity contracts in 2013.
From 2012 to 2013, Company contributions are expected to increase from €122 million to €132 million in the Netherlands and decrease from \$251 million (€193 million) to \$88 million (€66 million) in the United States.
As of year-end 2012, the funding ratio, calculated in accordance with regulatory requirements, of the largest Dutch plan was 114% and the ongoing U.S. pension plan was 118%. Since the frozen plan was terminated effective July 1, 2011, the plan is no longer subject to U.S. funding requirements. However, under plan termination rules Ahold will be required to fully fund the liabilities at the time the assets are distributed to settle the plan. Under the financing agreement with the Dutch pension fund, Ahold can be required to contribute a maximum amount of €150 million over a five-year period if the funding ratio is below 105% (€50 million was paid under this agreement in 2009). The contributions to the U.S. plans in 2012 included additional contributions of \$62 million (€48 million) in order to bring funding ratios to minimum required levels and \$131 million (€100 million) in partial settlement of the frozen plan.
The assumptions used in the actuarial calculations of the defined benefit obligations and net defined benefit cost require a large degree of judgment. Actual experience may differ from the assumptions made. The following table provides a summary of the funded status of all defined benefit plans and the experience adjustments (i.e. the part of the actuarial results that is not caused by changes in actuarial assumptions) on defined benefit obligations and plan assets. The experience adjustments for each year relate to the plans included in the balance sheet at the end of that year.
| € million | 2012 | 2011 | 2010 | 2009 | 2008 |
|---|---|---|---|---|---|
| Defined benefit obligations at year end | (4,817) | (3,624) | (3,415) | (3,167) | (2,835) |
| Fair value of plan assets at year end | 4,163 | 3,879 | 3,496 | 3,089 | 2,636 |
| Surplus / (deficit) | (654) | 255 | 81 | (78) | (199) |
| Experience gains (losses) on defined benefit obligations | 19 | 34 | (25) | 2 | (29) |
| Experience gains (losses) on plan assets | 269 | 93 | 112 | 157 | (785) |
The assumptions required to calculate the actuarial present value of benefit obligations and net defined benefit costs are determined per plan. The key assumptions are as follows (expressed as weighted averages):
| The Netherlands | United States | ||||
|---|---|---|---|---|---|
| Percent | 2012 | 2011 | 2012 | 2011 | |
| Discount rate for obligations | 3.6 | 5.4 | 4.2 | 5.2 | |
| Expected return on plan assets | 5.2 | 5.9 | 6.6 | 7.1 | |
| Future salary increases | 4.2 | 3.9 | 5.0 | 5.0 |
The discount rates used to calculate the present value of the obligations are based on the market yields on high-quality corporate bonds (i.e. bonds rated AA) with the same currency and term as the obligations.
The following table shows the effect on the defined benefit obligations and on net defined benefit cost if the discount rate had been 0.5 percentage-points higher or lower as of year-end 2012. Positive amounts represent increases and negative amounts represent decreases in defined benefit obligations and net defined benefit cost:
| € million | The Netherlands | United States | Total |
|---|---|---|---|
| 0.5 percentage-point increase | |||
| Defined benefit obligations at year-end 2012 | (352) | (82) | (434) |
| Net defined benefit cost 2013 | (31) | 5 | (26) |
| 0.5 percentage-point decrease | |||
| Defined benefit obligations at year-end 2012 | 412 | 92 | 504 |
| Net defined benefit cost 2013 | 34 | (7) | 27 |
The expected return on plan assets is determined as a weighted-average rate of return based on the current and projected investment portfolio mix of each plan, taking into account the corresponding long-term yields for the separate asset categories, which depend on components such as the risk-free rate of return in real terms, expected inflation and expected risk and liquidity premiums. In addition, actual long-term historical return information is taken into account. The actual return on plan assets in 2012 was 12.8% for the Dutch plans (2011: 9.5%) and 10.2% for the U.S. plans (2011: 5.1%).
The assumed medical cost trend rates used in measuring the defined benefit obligations related to medical care plans were 8.0% in 2012 and 8.5% in 2011, declining to an ultimate trend rate of 5.0% as of 2019. Because of the limited size of Ahold's medical care plans, the impact of a 1.0 percentage-point increase or decrease in assumed medical cost trend rates on the defined benefit obligations and net defined benefit cost would be negligible.
The pension plan asset allocation differs per plan. On a weighted average basis, the allocation was as follows:
| The Netherlands | ||||
|---|---|---|---|---|
| Percent | 2012 | 2011 | 2012 | 2011 |
| Equity securities | 21 | 22 | 40 | 32 |
| Debt securities | 58 | 56 | 44 | 59 |
| Real estate | 7 | 14 | 2 | 2 |
| Other | 14 | 8 | 14 | 7 |
| Total | 100 | 100 | 100 | 100 |
Ahold Annual Report 2012 115
Ahold at a glance Our strategy Our performance Governance Financials Investors
Notes to the consolidated
In the Netherlands, the plan assets are managed by outside investment managers following investment strategies based on the composition of the plan liabilities. With the aid of Asset Liability Management modeling, analyses are made of possible future economic scenarios and investment portfolios. Based on these analyses, investment strategies are determined for each plan to produce optimal investment returns at acceptable funding ratio risk levels. Less favorable years can be part of these scenarios. Currently the strategic targets for asset allocation of the Dutch pension plan are: 25% equity securities (including equity derivatives and forward currency contracts), 50% debt securities, 15% real estate investments and 10% other investments, cash included. To partially hedge against interest rate risk exposure on the pension liabilities, the Dutch pension plan uses interest rate swap contracts. The Dutch early retirement plan has a relatively short remaining term; therefore the plan assets are invested in fixed income securities and cash instruments only.
In the United States, the plan assets are generally managed by outside investment managers and rebalanced periodically. The committees for the various U.S. plans establish investment policies and strategies and regularly monitor the performance of the assets, including the selection of investment managers, setting long-term strategic targets and monitoring asset allocations. Target allocation ranges are guidelines, not limitations, subject to variation from time to time or as circumstances warrant. Occasionally, the committees may approve allocations above or below a target range. Pension plan assets are invested in a trust intended to comply with the Employee Retirement Income Security Act of 1974, as amended, (ERISA) and applicable fiduciary standards. The long-term investment objective for the plan's assets is to maintain an acceptable funding ratio between assets and plan liabilities without undue exposure to risk. Currently, the strategic targets are: 45% equity securities, 45% debt securities and 10% other investments. These strategic targets are followed by the ongoing plans; however the weighted average allocations presented above are impacted by the frozen plan, which has 70% of its investments in debt securities and 30% in cash in order to meet the remaining planned settlement in 2013.
In 2012 and 2011 neither the Dutch nor the U.S. plans had any plan assets invested in Ahold shares.
In the United States and Other Europe, there are defined contribution plans principally in the form of savings, incentive compensation and bonus plans. In connection with the Company's decision to transition its defined benefit pension plan for active salaried, non-union and certain union employees in the United States to a defined contribution pension plan, as further described above, a new 401(k) plan was introduced as of January 1, 2009.
During 2012 and 2011, the Company contributed €30 million and €28 million, respectively, to defined contribution plans. These contributions were recognized as an expense in the income statement and related entirely to continuing operations in 2012 and 2011.
A significant number of union employees in the United States are covered by multi-employer plans based on obligations arising from collective bargaining agreements. These plans provide retirement and other benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed in equal number by employers and unions and they are typically responsible for oversight of the investment of the assets and administration of the plan. Benefit levels are generally determined through the collective bargaining process by the participating employers and unions.
Most of these plans are defined contribution plans. All plans that are defined benefit plans, on the basis of the terms of the benefits provided, are accounted for as defined contribution plans because sufficient information is not available to account for these plans as defined benefit plans. These plans are generally flat dollar benefit plans. Ahold is only one of several employers participating in each of these plans and the financial information that is provided by the third-party managers of the plans on the basis of the contractual agreements is usually insufficient to reliably measure Ahold's proportionate share in the plan assets and liabilities on defined benefit accounting principles. Furthermore, the financial statements of the multi-employer plans are drawn up on the basis of other accounting policies than those applied by Ahold. Consequently, these multi-employer plans are not included in Ahold's balance sheet.
Ahold participated in 13 multi-employer pension plans that are defined benefit plans on the basis of the terms of the benefits provided. The following table presents Ahold's estimate of its proportionate share of each plan's deficit or surplus. Ahold's participation is the relative amount of its contributions during the year in relation to the total amount of contributions made to the plan. The estimate of Ahold's net proportionate share of the plans' deficits is based on the latest available information received from these plans, as indicated below, and updated for market trends and conditions through the end of 2012, and does not represent Ahold's direct obligation. While this is our best estimate, based upon information available to us, it is imprecise and not necessarily reliable.
Ahold Annual Report 2012 116
Ahold at a glance Our strategy Our performance Governance Financials Investors
Notes to the consolidated
| December 30, 2012 | January 1, 2012 | ||||||
|---|---|---|---|---|---|---|---|
| € million | Date of latest information |
Plan deficit / (surplus) |
Ahold's participation |
Ahold's proportionate share of deficit / (surplus) |
Plan deficit / (surplus) |
Ahold's participation |
Ahold's proportionate share of deficit / (surplus) |
| FELRA & UFCW Food Pension Fund | Jan. 1, 2012 | 828 | 60.3% | 499 | 862 | 57.8% | 499 |
| New England Teamsters & Trucking Industry Pension | Oct. 1, 2011 | 2,907 | 3.0% | 87 | 3,099 | 2.9% | 90 |
| UFCW Local 1262 & Employers Pension Fund | Jan. 1, 2011 | 224 | 21.5% | 48 | 197 | 19.5% | 38 |
| United Food & Commercial Workers Intl Union – Industry Pension Fund |
July 1, 2011 | (99) | 22.0% | (22) | (108) | 19.8% | (21) |
| UFCW Local 1500 Pension Plan | Jan. 1, 2012 | 138 | 25.8% | 36 | 138 | 24.8% | 34 |
| Warehouse Employees' Union Local 730 Pension Trust Fund | Jan. 1, 2012 | 87 | 53.7% | 47 | 71 | 80.7% | 58 |
| Other plans | various | 5,155 | 1.2% | 37 | 6,616 | 0.5% | 31 |
| Total | 9,240 | 732 | 10,875 | 729 |
During 2012, Ahold USA withdrew from the Central Pension Fund plan, which on January 1, 2012 had a deficit of €2,264 million of which Ahold's participation was 0.001%.
As part of Ahold USA's 2012 negotiation of a new collective bargaining agreement with UFCW Locals 400 and 27, a restructuring took place regarding the FELRA & UFCW Food Pension Fund. Under the restructuring, an agreement was reached to create a second pension plan for future service accruals for active Giant Landover employees. Both the existing plan, for past accrued benefits, and the new plan would be funded by Ahold USA and any other participating employers. Previous contribution levels under the existing plan will be comparable to new contribution levels for the existing and new plans. It is anticipated that the contribution levels of the new plan will be sufficient to fully fund benefits earned by the employees of Ahold USA and other participating employers.
During 2012 and 2011, the Company contributed €77 million and €69 million, respectively, to multi-employer defined benefit plans, which has been recognized as an expense in the consolidated income statement. If the underfunded liabilities of these plans are not reduced, either by improved market conditions or collective bargaining changes, increased future payments by the Company and the other participating employers may result. In 2013, the Company expects its contributions to increase to €82 million. Moreover, if the Company were to exit certain markets or otherwise cease making contributions to these funds, the Company could trigger a substantial withdrawal liability. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and the amount can be reasonably estimated. No withdrawal payments were incurred or included in the 2012 and 2011 contributions disclosed above. Ahold's risk of increased contributions and withdrawal liabilities may be greater if any of the participating employers in an underfunded multi-employer plan withdraw from the plan or, due to insolvency, are not able to contribute an amount sufficient to fund the underfunded liabilities associated with their participants in the plan.
Ahold also participates in over 39 multi-employer plans that are defined contribution plans on the basis of the terms of the benefits provided. The majority of these plans provide health and welfare benefits. The Company contributed €219 million to multi-employer defined contribution plans during both 2012 and 2011. These contributions are recognized as an expense in the consolidated income statement and related entirely to continuing operations in 2012 and 2011. These plans vary significantly in size, with contributions to the three largest plans representing 59% of total contributions.
Notes to the consolidated financial statements 24 Provisions
Ahold at a glance Our strategy Our performance Governance Financials Investors
The table below specifies the changes in total provisions (current and non-current):
| Self | Claims | ||||||
|---|---|---|---|---|---|---|---|
| € million | insurance program |
Loyalty programs |
and legal disputes |
Restructuring | Onerous contracts |
Other | Total |
| As of January 1, 2012 | |||||||
| Current portion | 102 | 12 | 103 | 13 | 18 | 5 | 253 |
| Non-current portion | 404 | 39 | 41 | 41 | 89 | 50 | 664 |
| Carrying amount | 506 | 51 | 144 | 54 | 107 | 55 | 917 |
| Year ended December 30, 2012 | |||||||
| Additions charged to income | 138 | 17 | 8 | 1 | 10 | 9 | 183 |
| Used during the year | (109) | (18) | (22) | (9) | (29) | (4) | (191) |
| Brought in through business combinations | – | – | – | – | 5 | – | 5 |
| Released to income | (1) | (3) | (6) | (3) | (11) | (2) | (26) |
| Interest accretion | 3 | 2 | 1 | 2 | 4 | 1 | 13 |
| Effect of changes in discount rates | 1 | – | – | 1 | 2 | 2 | 6 |
| Other movements | 3 | – | (2) | – | 10 | – | 11 |
| Exchange rate differences | (12) | – | (3) | – | (1) | – | (16) |
| Closing carrying amount | 529 | 49 | 120 | 46 | 97 | 61 | 902 |
| As of December 30, 2012 | |||||||
| Current portion | 105 | 12 | 101 | 10 | 22 | 6 | 256 |
| Non-current portion | 424 | 37 | 19 | 36 | 75 | 55 | 646 |
| Maturities of total provisions as of December 30, 2012, are as follows: | |||||||
| Self | Claims | ||||||
| € million | insurance program |
Loyalty programs |
and legal disputes |
Restructuring | Onerous contracts |
Other | Total |
| Amount due within one year | 105 | 12 | 101 | 10 | 22 | 6 | 256 |
| Amount due between two and five years | 253 | 37 | 17 | 21 | 45 | 12 | 385 |
Ahold is self-insured for certain potential losses, mainly relating to general liability, vehicle liability, workers' compensation and property losses relating to its subsidiaries. The maximum selfinsurance retention per occurrence, including defense costs, is \$2 million (€1 million) for general liability, \$5 million (€4 million) for commercial vehicle liability, \$5 million (€4 million) for workers' compensation, and effective as of December 1, 2012, \$17.5 million (€13 million) for property losses. For property losses the maximum self-insurance retention per occurrence, including defense costs, was \$8 million (€6 million) before December 1, 2012.
Amount due after five years 171 – 2 15 30 43 261 Total 529 49 120 46 97 61 902
Measurement of the provision for the self-insurance program requires significant estimates. These estimates and assumptions include an estimate of claims incurred but not yet reported, historical loss experience, projected loss development factors, estimated changes in claim reporting patterns, claim settlement patterns, judicial decisions and legislation.
Notes to the consolidated financial statements 24 Provisions (continued)
This provision relates to a third-party customer loyalty program in the Netherlands and reflects the estimated cost of benefits to which customers participating in the loyalty program are entitled.
The Company is a party to a number of legal proceedings arising out of its business operations. Such legal proceedings are subject to inherent uncertainties. Management, supported by internal and external legal counsel, where appropriate, determines whether it is more likely than not that an outflow of resources will be required to settle an obligation. If this is the case, the best estimate of the outflow of resources is recognized. The balance of the provision as of December 30, 2012, included €94 million (January 1, 2012: €92 million) related to an adverse judgment received in Stop & Shop's legal proceedings against Vornado. For more information, see Note 34.
In 2012, Ahold recognized restructuring provisions of €1 million, mainly related to Ahold's U.S. operations. The provisions are based on formal and approved plans using the best information available at the time. The amounts that are ultimately incurred may change as the plans are executed. The balance of the provision as of December 30, 2012, consisted of €30 million related to rent and closing costs for Ahold's former Tops stores and €14 million and €2 million for restructurings within Ahold's Czech and U.S. operations, respectively.
Onerous contract provisions mainly relate to unfavorable lease contracts and include the excess of the unavoidable costs of meeting the obligations under the contracts over the benefits expected to be received under such contracts.
Other provisions include asset retirement obligations, provisions for environmental risks and supplemental and severance payments, other than those resulting from restructurings.
| € million | December 30, 2012 |
January 1, 2012 |
|---|---|---|
| Step rent accruals | 211 | 187 |
| Deferred income | 26 | 29 |
| Other | 14 | 14 |
| Total other non-current liabilities | 251 | 230 |
Step rent accruals relate to the equalization of rent payments from lease contracts with scheduled fixed rent increases throughout the life of the contract.
Deferred income predominantly represents the non-current portions of deferred income on vendor allowances and deferred gains on sale and leaseback transactions.
| € million | December 30, 2012 |
January 1, 2012 |
|---|---|---|
| Finance lease liabilities – current portion (see Note 22) | 75 | 67 |
| Interest payable | 25 | 45 |
| Short-term borrowings | 42 | 41 |
| Dividend cumulative preferred financing shares | 24 | 24 |
| Reinsurance liabilities – current portion (see Note 15) | 45 | 41 |
| Loans – current portion (see Note 21) | 22 | 429 |
| Other | 3 | 1 |
| Total other current financial liabilities | 236 | 648 |
| € million | December 30, 2012 |
January 1, 2012 |
|---|---|---|
| Accrued expenses | 533 | 584 |
| Compensated absences | 247 | 241 |
| Payroll taxes, social security and VAT | 249 | 225 |
| Deferred income | 27 | 38 |
| Deposit liabilities | 69 | 48 |
| Other | 9 | 5 |
| Total other current liabilities | 1,134 | 1,141 |
The following table presents the reconciliation between the statement of cash flows and the cash and cash equivalents as presented on the balance sheet:
| € million | 2012 2011 |
|---|---|
| Cash and cash equivalents at the beginning of the year 2,438 |
2,600 |
| Restricted cash | (31) (21) |
| Cash and cash equivalents at the beginning of the year, excluding restricted cash 2,407 |
2,579 |
| Net cash from operating, investing and financing activities | (511) (226) |
| Effect of exchange rate differences on cash and cash equivalents | (32) 54 |
| Restricted cash | 22 31 |
| Cash and cash equivalents at the end of the year 1,886 |
2,438 |
The following table presents additional cash flow information:
| € million | 2012 | 2011 |
|---|---|---|
| Non-cash investing activities | ||
| Accounts payable at year end related to purchased non-current assets | 117 | 109 |
| Assets acquired under finance leases from continuing operations | 39 | 68 |
| Non-cash financing activities | ||
| Finance lease liabilities originated from continuing operations | (39) | (68) |
| Acquisition of businesses | ||
| Fair value of assets acquired | (587) | (36) |
| Goodwill | (372) | (24) |
| Less: Liabilities assumed | 234 | 30 |
| Total consideration paid | (725) | (30) |
| Cash acquired | 24 | – |
| Acquisition of businesses, net of cash acquired | (701) | (30) |
| Result on divestments of discontinued operations before income taxes | (3) | (22) |
|---|---|---|
| Changes in accounts receivable / payable and provisions – net | (40) | 9 |
| Divestment of businesses, net of cash divested | (43) | (13) |
The calculation of basic and diluted net income per share attributable to common shareholders is based on the following data:
| 2012 | 2011 | |
|---|---|---|
| Earnings (€ million) | ||
| Net income attributable to common shareholders for the purposes of basic earnings per share | 827 | 1,017 |
| Effect of dilutive potential common shares – reversal of preferred dividends from earnings | 25 | 25 |
| Net income attributable to common shareholders for the purposes of diluted earnings per share | 852 | 1,042 |
| Number of shares (in millions) | ||
| Weighted average number of common shares for the purposes of basic earnings per share | 1,040 | 1,111 |
| Effect of dilutive potential common shares: | ||
| Share options and conditional shares | 11 | 11 |
| Cumulative preferred financing shares | 49 | 49 |
| Weighted average number of common shares for the purposes of diluted earnings per share | 1,100 | 1,171 |
The calculation of the basic and diluted income from continuing operations per share attributable to common shareholders is based on the same number of shares as detailed above and the following earnings data:
| € million | 2012 | 2011 |
|---|---|---|
| Income from continuing operations, attributable to common shareholders for the purposes of basic earnings per share | 830 | 1,032 |
| Effect of dilutive potential common shares – reversal of preferred dividends from earnings | 25 | 25 |
| Income from continuing operations, attributable to common shareholders for the purposes of diluted earnings per share | 855 | 1,057 |
Basic and diluted income per share from discontinued operations attributable to common shareholders amounted to €0.00 and negative €0.01, respectively (2011: negative €0.01 basic and negative €0.01 diluted). They are based on the loss from discontinued operations attributable to common shareholders of €3 million (2011: loss €15 million) and the denominators detailed above.
The Treasury function provides a centralized service to the Company for funding, foreign exchange, interest rate, liquidity and counterparty risk management. Treasury operates in a centralized function within a framework of policies and procedures that is reviewed regularly. The Treasury function is not operated as a profit center. Treasury's function is to manage the financial risks that arise in relation to underlying business needs. Ahold's Corporate Executive Board has overall responsibility for the establishment and oversight of the Treasury risk management framework. Ahold's management reviews material changes to Treasury policies and receives information related to Treasury activities.
In accordance with its Treasury policies, Ahold uses derivative instruments solely for the purpose of hedging exposures. These exposures are mainly connected with the interest rate and currency risks arising from the Company's operations and its sources of finance. Ahold does not enter into derivative financial instruments for speculative purposes. The transaction of derivative instruments is restricted to Treasury personnel only and Ahold's Internal Control and Internal Audit departments review the Treasury internal control environment regularly. Relationships with the credit rating agencies and monitoring of key credit ratios are also managed by the Treasury department.
Ahold's primary market risk exposures relate to foreign currency exchange rates and interest rates. In order to manage the risks arising from these exposures, various financial instruments may be utilized.
Ahold operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the U.S. dollar. Since Ahold's subsidiaries primarily purchase and sell in local currencies, the Company's exposure to exchange rate movements in commercial operations is naturally limited. The Company is subject to foreign currency exchange risks due to exchange rate movements in connection with the translation of its foreign subsidiaries' income, assets and liabilities into euros for inclusion in its consolidated financial statements. To protect the value of future foreign currency cash flows, including loan and interest payments, lease payments, dividends and firm purchase commitments, and the value of assets and liabilities denominated in foreign currency, Ahold seeks to mitigate its foreign currency exchange exposure by borrowing in local currency and entering into various financial instruments, including forward contracts and currency swaps. It is Ahold's policy to cover foreign exchange transaction exposure in relation to existing assets, liabilities and firm purchase commitments. Translation risk related to Ahold's foreign subsidiaries, joint ventures and associates is not actively hedged, except for cash flows from dividends not denominated in euro that are hedged using net investment hedges.
Approximately 66% of Ahold's net sales is generated by subsidiaries whose activities are conducted in a currency other than the euro (2011: 65%) – mainly in the U.S. dollar. Assuming the euro had strengthened (weakened) by 10% against the U.S. dollar in 2012 compared to the actual 2012 rate, with all other variables held constant, the hypothetical result on income before income taxes would be a decrease (increase) of €42 million (2011: €22 million).
Notes to the consolidated
Ahold's interest rate risk arises primarily from its debt. To manage interest rate risk, Ahold has an interest rate management policy aimed at reducing volatility in its interest expense and maintaining a target percentage of its debt in fixed rate instruments. Ahold's financial position is largely fixed by long-term debt issues and the use of derivative financial instruments such as interest rate swaps and cross-currency interest rate swaps. As of December 30, 2012, after taking into account the effect of interest rate swaps and cross-currency swaps, approximately 97% of Ahold's interest bearing debt was at fixed rates of interest (2011: 96%).
The total interest expense recognized in the 2012 income statement related to the variable rates of long-term debt, net of swaps, amounted to €7 million (2011: €8 million). The Company estimates that with a possible increase (decrease) of euro and U.S. dollar market interest rates of 25 basis points with all other variables (including foreign exchange rates) held constant, this would result in a hypothetical effect on income before income taxes of a loss (gain) of nil (2011: nil). In addition, a hypothetical result relating to fair value movements of derivative hedges that do not qualify for hedge accounting would have been a loss of €4 million or a gain of €4 million, respectively (2011: a loss of €5 million or a gain of €5 million, respectively). In performing this analysis, the effect was limited to a point where the absolute value of the reference interest would not decrease below 0%.
The total interest income recognized in the 2012 income statement amounted to €10 million (2011: €20 million) related mainly to variable rate money market fund investments and deposits. The Company estimates that with a possible increase (decrease) of euro and U.S. dollar market interest rates of 25 basis points with all other variables (including foreign exchange rates) held constant, this would result in a hypothetical effect on income before income taxes of a gain of €3 million or a loss of €2 million, respectively (2011: a gain (loss) of €5 million). In performing this analysis, the effect was limited to a point where the absolute value of the reference interest would not decrease below 0%.
The above sensitivity analyses are for illustrative purposes only as, in practice, market rates rarely change in isolation from other factors that also affect Ahold's financial position and results.
Ahold has no significant concentrations of credit risk. Sales to retail customers are made in cash, checks and debit cards, or via major credit cards. Sales to franchisees are done on credit. Derivative counterparties and cash transactions are limited to high-credit-quality financial institutions' products. Ahold invests in funds with a minimum rating of A- (Standard & Poor's), and predominantly AAA. With respect to credit risk, derivative contracts with counterparties are entered into primarily under the standard terms and conditions of the International Swap and Derivatives Association. The counterparties have an externally validated investment grade credit rating. Ahold has policies that limit the amount of counterparty credit exposure to any single financial institution or investment vehicle and continually monitors these exposures. The maximum exposure to credit risk is represented by the carrying amounts of the financial assets on the balance sheet (refer to the table on fair values of financial instruments below in this note). The maximum net amount of a credit risk loss that Ahold would incur if financial institutions that are parties to the derivative instruments completely failed to perform according to the terms of the contracts is €106 million as of December 30, 2012 (January 1, 2012: €290 million).
The majority of Ahold's past due but not impaired financial assets as of December 30, 2012, consists of receivables and is past due less than three months. The concentration of credit risk with respect to receivables is limited as the Company's customer base and vendor base are large and unrelated. As a result, management believes there is no further credit risk provision required in excess of the normal individual and collective impairment, based on an aging analysis performed as of December 30, 2012. For further discussion on Ahold's receivables, see Notes 15 and 17.
Ahold manages its liquidity risk on a consolidated basis with cash provided from operating activities being the primary source of liquidity, in addition to debt and equity issuances in the capital markets, committed and uncommitted credit facilities, letters of credit under credit facilities, and available cash. Ahold manages short-term liquidity based on projected cash flows over rolling periods of six months. As of December 30, 2012, Ahold had €1 billion of committed undrawn bank facilities, which can be drawn on for working capital and general corporate purposes and €1.9 billion of cash balances available to manage its liquidity.
Based on the current operating performance and liquidity position, the Company believes that cash provided by operating activities and available cash balances will be sufficient for working capital, capital expenditures, interest payments, dividends and scheduled debt repayment requirements for the next 12 months and the foreseeable future.
The following tables summarize the expected maturity profile of the Company's derivative financial instruments and non-derivative financial liabilities as of December 30, 2012, and January 1, 2012, respectively, based on contractual undiscounted payments:
| Contractual cash flows | |||||
|---|---|---|---|---|---|
| Between | |||||
| Net carrying | Within | 1 and 5 | After | ||
| € million | amount | 1 year | years | 5 years | Total |
| Non-derivative financial liabilities | |||||
| Notes | (1,056) | (66) | (566) | (1,205) | (1,837) |
| Other loans | (5) | (1) | (1) | (3) | (5) |
| Financing obligations | (381) | (73) | (298) | (243) | (614) |
| Mortgages payable | (11) | (3) | (7) | (2) | (12) |
| Finance lease liabilities | (1,254) | (218) | (879) | (778) | (1,875) |
| Cumulative preferred financing shares1 | (497) | (24) | (79) | (54) | (157) |
| Short-term borrowings | (42) | (42) | – | – | (42) |
| Reinsurance liabilities | (121) | (45) | (67) | (10) | (122) |
| Accounts payable | (2,667) | (2,667) | – | – | (2,667) |
| Other | (2) | – | – | (2) | (2) |
| Derivative financial assets and liabilities | |||||
| Cross-currency derivatives and interest flows | 46 | (34) | 190 | (151) | 5 |
| Interest derivatives and interest flows | 59 | 11 | 49 | – | 60 |
1 Cumulative preferred financing shares have no maturity. For the purpose of the table above, the future dividend cash flows were calculated until the coupon reset date of each of the four share-series (2013, 2016, 2018 and 2020). No liability redemption was assumed.
| Contractual cash flows | ||||||
|---|---|---|---|---|---|---|
| € million | Net carrying amount |
Within 1 year |
Between 1 and 5 years |
After 5 years |
Total | |
| Non-derivative financial liabilities | ||||||
| Notes | (1,509) | (496) | (270) | (1,652) | (2,418) | |
| Other loans | (3) | – | (2) | (1) | (3) | |
| Financing obligations | (399) | (67) | (271) | (266) | (604) | |
| Mortgages payable | (7) | (3) | (5) | – | (8) | |
| Finance lease liabilities | (1,225) | (214) | (857) | (805) | (1,876) | |
| Cumulative preferred financing shares1 | (497) | (24) | (86) | (68) | (178) | |
| Short-term borrowings | (41) | (41) | – | – | (41) | |
| Reinsurance liabilities | (108) | (42) | (58) | (9) | (109) | |
| Accounts payable | (2,436) | (2,436) | – | – | (2,436) | |
| Other | (2) | – | – | (2) | (2) | |
| Derivative financial assets and liabilities | ||||||
| Cross-currency derivatives and interest flows | 234 | 117 | (119) | 193 | 191 | |
| Interest derivatives and interest flows | 57 | 9 | 36 | 13 | 58 |
1 Cumulative preferred financing shares have no maturity. For the purpose of the table above, the future dividend cash flows were calculated until the coupon reset date of each of the four share-series (2013, 2016, 2018 and 2020). No liability redemption was assumed.
All derivative financial instruments and non-derivative financial liabilities held at the reporting date, for which payments are already contractually agreed, have been included. Amounts in foreign currency have been translated using the reporting date closing rate. Cash flows arising from financial instruments carrying variable interest payments have been calculated using the forward curve interest rates as of December 30, 2012, and January 1, 2012, respectively. Refer to Note 34 for the liquidity risk related to guarantees.
As of December 30, 2012, Moody's Long Term Issuer Rating on Ahold was Baa3, with a stable outlook, both unchanged during 2012. Standard & Poor's Corporate Credit Rating assigned to Ahold was BBB with a stable outlook, both unchanged during 2012.
Maintaining investment grade credit ratings is a cornerstone of the Company's strategy as they serve to lower the cost of funds and to facilitate access to a variety of lenders and markets.
The Company's primary objective in terms of managing capital is the optimization of its debt and equity balances in order to sustain the future development of the business, maintain an investment grade credit rating and maximize shareholder value.
The capital structure of the Company consists of net lease adjusted debt, which includes borrowings, cash, cash equivalents and short-term deposits, equity, and the present value of the operating lease commitments. Ahold may balance its overall capital structure in a number of ways, including through the payment of dividends, capital reduction, new share issues and share buybacks as well as the issuance of new debt or the redemption of existing debt.
The following table presents the fair values of financial instruments, based on Ahold's categories of financial instruments, including current portions, compared to the carrying amounts at which these instruments are included on the balance sheet:
| December 30, 2012 | January 1, 2012 | ||||
|---|---|---|---|---|---|
| Carrying | Fair | Carrying | Fair | ||
| € million | amount | value | amount | value | |
| Loans receivable | 38 | 54 | 36 | 51 | |
| Accounts receivable | 800 | 800 | 770 | 770 | |
| Reinsurance assets | 109 | 109 | 103 | 103 | |
| Total loans and receivables | 947 | 963 | 909 | 924 | |
| Cash and cash equivalents | 1,886 | 1,886 | 2,438 | 2,438 | |
| Short-term deposits held to maturity | – | – | 154 | 154 | |
| Derivatives | 282 | 282 | 381 | 381 | |
| Available for sale | 4 | 4 | 3 | 3 | |
| Total financial assets | 3,119 | 3,135 | 3,885 | 3,900 | |
| Notes | (1,056) | (1,348) | (1,509) | (1,767) | |
| Other loans | (5) | (4) | (3) | (3) | |
| Financing obligations | (381) | (573) | (399) | (545) | |
| Mortgages payable | (11) | (12) | (7) | (8) | |
| Finance lease liabilities | (1,254) | (1,731) | (1,225) | (1,683) | |
| Cumulative preferred financing shares | (497) | (535) | (497) | (544) | |
| Dividend cumulative preferred financing shares | (24) | (24) | (24) | (24) | |
| Accounts payable | (2,667) | (2,667) | (2,436) | (2,436) | |
| Short-term borrowings | (42) | (42) | (41) | (41) | |
| Interest payable | (25) | (25) | (45) | (45) | |
| Reinsurance liabilities | (121) | (121) | (108) | (108) | |
| Other | (2) | (2) | (3) | (3) | |
| Total financial liabilities at amortized cost | (6,085) | (7,084) | (6,297) | (7,207) | |
| Derivatives | (177) | (177) | (90) | (90) | |
| Total financial liabilities | (6,262) | (7,261) | (6,387) | (7,297) |
Of Ahold's categories of financial instruments, only derivatives and assets available for sale are measured at fair value using Level 2 inputs. These are inputs other than quoted prices that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). The fair value of derivative instruments is calculated based on discounted expected future cash flows. Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates which match the maturity of the contracts. Interest rate swaps are measured at the present value of expected future cash flows and discounted based on the applicable yield curves derived from quoted interest rates.
The carrying amount of receivables, cash and cash equivalents, accounts payable, short-term deposits held to maturity, and other current financial assets and liabilities approximate their fair values because of the short-term nature of these instruments and, for receivables, because of the fact that any recoverability loss is reflected in an impairment loss. The fair values of quoted borrowings are based on year-end ask-market quoted prices. The fair value of other non-derivative financial assets and liabilities that are not traded in an active market are estimated using discounted cash flow analyses based on market rates prevailing at year end. The fair value calculation method and the conditions for redemption and conversion of the cumulative preferred financing shares are disclosed in Note 22. The accrued interest is included in other current financial liabilities (see Note 26) and not in the carrying amounts of non-derivative financial assets and liabilities.
The fair values, notional amounts, the maturities and the qualification of the derivative financial instruments for accounting purposes are presented in the table below:
| December 30, 2012 | January 1, 2012 | ||||||
|---|---|---|---|---|---|---|---|
| Fair value | Fair value | ||||||
| € million | Maturity | Assets | Liabilities | Notional amount |
Assets | Liabilities | Notional amount |
| Forward foreign currency contracts1 | Within 1 year | 2 | 129 | 1 | – | 140 | |
| Cross-currency swap | Within 1 year | – | – | – | 1412 | – | 407 |
| Cross-currency swap3 | After 5 years | – | (175) | 290 | – | (89) | 331 |
| Total cash flow hedges | 2 | (175) | 419 | 142 | (89) | 878 | |
| Forward foreign currency contracts4 | Within 1 year | – | (2) | 64 | – | (1) | 63 |
| Total net investment hedges | – | (2) | 64 | – | (1) | 63 | |
| Interest rate swap | After 5 years | 59 | – | 3066 | 57 | – | 3006 |
| Cross-currency swap5 | After 5 years | 221 | – | 3066 | 182 | – | 3006 |
| Total derivatives – no hedge accounting treatment | 280 | – | 3066 | 239 | – | 3006 | |
| Total derivative financial instruments | 282 | (177) | 789 | 381 | (90) | 1,241 |
1 Foreign currency forwards designated as cash flow hedges are used to hedge the future cash flows denominated in foreign currencies.
2 Cross-currency swap accounted for as cash flow hedges used to hedge currency and cash flow risk on fixed debt denominated in foreign currency related to EUR 600 notes (see Note 21 for additional information), which matured as of March 14, 2012.
3 Cross-currency swap accounted for as cash flow hedges used to hedge currency and cash flow risk on floating debt denominated in foreign currency, related to JPY 33,000 notes (see Note 21 for additional information).
4 Foreign currency forwards accounted for as net investment hedges are used to hedge cash flow currency risk on a dividend flow from ICA.
5 As of December 30, 2012, the valuation of the GBP 250 cross-currency swap, related to the GBP 250 notes (see Note 21 for additional information) includes the impact of the mark-to-market valuation of an embedded credit clause in the amount of €5 million. The volatility in the financial markets resulted in a €8 million gain related to this credit clause in the year 2012 (€3 million loss in 2011). Ahold is required under these swap contracts to redeem the U.S. dollar notional amount through semiannual installments that commenced in September 2004. \$232 million has been paid down as of December 30, 2012.
6 Interest rate swap and cross-currency interest rate swap relate to the same notional amount of GBP 250 million.
Gains and losses recognized in cash flow hedging reserve in equity as of December 30, 2012, mainly relate to the swap on the JPY 33,000 notes and will be released to the income statement over a period lasting until 2031.
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company as a whole. The Company determined that key management personnel consist of the members of the Corporate Executive Board (CEB) and the members of the Supervisory Board as of the year the members' appointment was approved by the General Meeting of Shareholders. The total compensation of key management personnel amounts to €8,596 thousand (2011: €4,936 thousand). This includes a one-off crisis levy in The Netherlands of €773 thousand (2011: nil) following the Budget Agreement 2013 Tax Measures Implementation Act. The one-off crisis levy is €773 thousand for members of the CEB and nil for the members of the Supervisory Board.
In 2012, the Company provided Dick Boer with a base salary of €965,000 on an annual basis, participation in the annual cash incentive plan and participation in the Company's equitybased long-term incentive plan (GRO – see Note 32). The at-target payout under the annual cash incentive plan is 100% of base salary and is capped at 125% in case of extraordinary performance. Unless Boer's employment agreement is otherwise terminated, he will be eligible for reappointment at the annual General Meeting of Shareholders in April 2015. In the event that the Company terminates his employment agreement for reasons other than cause or because he is not reappointed by the shareholders, Boer is entitled to a severance payment equal to one year's base salary. His employment agreement may be terminated by the Company with a notice period of 12 months and by Boer with a notice period of six months. Boer participates in Ahold's Dutch Pension Plan.
In 2012, the Company provided Jeff Carr with a base salary of €600,000 on an annual basis, participation in the annual cash incentive plan and participation in the Company's equity-based long-term incentive plan (GRO – see Note 32). The at-target payout under the annual cash incentive plan is 100% of base salary and is capped at 125% in case of extraordinary performance. Furthermore, Carr receives a housing allowance of €7,000 net per month for the first term of four years. Unless Carr's employment agreement is otherwise terminated, he will be eligible for reappointment at the annual General Meeting of Shareholders in April 2015. In the event that the Company terminates his employment agreement for reasons other than cause or because he is not reappointed by the shareholders, Carr is entitled to a severance payment equal to one year's base salary. His employment agreement may be terminated by the Company with a notice period of 12 months and by Carr with a notice period of six months. Carr participates in Ahold's Dutch Pension Plan.
In 2012, the Company provided Lodewijk Hijmans van den Bergh with a base salary of €530,000 on an annual basis, participation in the annual cash incentive plan and participation in the Company's equity-based long-term incentive plan (GRO – see Note 32). The at-target payout under the annual cash incentive plan is 100% of base salary and is capped at 125% in case of extraordinary performance. Unless Hijmans van den Bergh's employment agreement is otherwise terminated, he will be eligible for reappointment in 2014. In the event that the Company terminates his employment agreement for reasons other than cause or because he is not reappointed by the shareholders, Hijmans van den Bergh is entitled to a severance payment equal to one year's base salary. His employment agreement may be terminated by the Company with a notice period of 12 months and by Hijmans van den Bergh with a notice period of six months. Hijmans van den Bergh participates in Ahold's Dutch Pension Plan.
In 2012, the Company provided James McCann with a base salary of €600,000 on an annual basis, participation in the annual cash incentive plan and participation in the Company's equity-based long-term incentive plan (GRO – see Note 32). The at-target payout under the annual cash incentive plan is 100% of base salary and is capped at 125% in case of extraordinary performance. Furthermore, McCann receives a housing allowance of €7,000 net per month for the first term of four years. Unless McCann's employment agreement is otherwise terminated, he will be eligible for reappointment at the annual General Meeting of Shareholders in April 2015. In the event that the Company terminates his employment agreement for reasons other than cause or because he is not reappointed by the shareholders, McCann is entitled to a severance payment equal to one year's base salary. His employment agreement may be terminated by the Company with a notice period of 12 months and by McCann with a notice period of six months. McCann participates in Ahold's Dutch Pension Plan.
The remuneration of the individual Corporate Executive Board members, which is disclosed as of the year the members' appointment was approved by the General Meeting of Shareholders, can be specified as follows:
| Direct remuneration | Deferred remuneration | |||||||
|---|---|---|---|---|---|---|---|---|
| Total direct | Share-based | Total | ||||||
| € thousand | Base salary | Bonuses1 | Other2 | remuneration | Compensation3 | Pensions4 | Remuneration5 | |
| Dick Boer | ||||||||
| 2012 | 965 | 478 | 13 | 1,456 | 890 | 95 | 2,441 | |
| 2011 | 898 | 907 | 23 | 1,828 | 771 | 131 | 2,730 | |
| Jeff Carr | ||||||||
| 2012 | 600 | 330 | 155 | 1,085 | 386 | 175 | 1,646 | |
| 2011 | – | – | – | – | – | – | – | |
| Lodewijk Hijmans van den Bergh | ||||||||
| 2012 | 530 | 292 | 49 | 871 | 412 | 120 | 1,403 | |
| 2011 | 500 | 505 | 11 | 1,016 | 239 | 120 | 1,375 | |
| James McCann | ||||||||
| 2012 | 600 | 330 | 153 | 1,083 | 386 | 138 | 1,607 | |
| 2011 | – | – | – | – | – | – | – | |
| John Rishton6 | ||||||||
| 2012 | – | – | – | – | – | – | – | |
| 2011 | 149 | – | 57 | 206 | 93 | 38 | 337 | |
| Kimberly Ross7 | ||||||||
| 2012 | – | – | – | – | – | – | – | |
| 2011 | 491 | – | 246 | 737 | (611) | (454) | (328) | |
| Lawrence Benjamin8 | ||||||||
| 2012 | – | – | – | – | – | – | – | |
| 2011 | 59 | 64 | 127 | 250 | – | (113) | 137 | |
| Total 2012 | 2,695 | 1,430 | 370 | 4,495 | 2,074 | 528 | 7,097 | |
| Total 2011 | 2,097 | 1,476 | 464 | 4,037 | 492 | (278) | 4,251 |
1 Bonuses represent accrued bonuses to be paid in the following year.
2 "Other" mainly includes allowances for housing expenses, international school fees, employer's contributions to social security plans, benefits in kind such as tax advice, tax compensation (for company car), medical expenses, and the associated tax gross up.
3 The amounts represent the share-based compensation expense calculated under IFRS 2. The fair value of each year's grant is determined on the grant date and expensed on a straight-line basis over the vesting period. The expense for 2012 reflects this year's portion of the share grants over the previous five years (2008 to 2012).
4 Pension costs are the total net periodic pension costs.
5 On July 18, 2012, the Budget Agreement 2013 Tax Measures Implementation Act came into effect. One of the amendments concerns a one-off crisis levy of 16% of the wages from current employment (including any bonuses) that employers paid their employees during 2012, insofar such wages exceeded €150,000. The total crisis levy accrued for the CEB members in 2012 was €773,000 and is excluded from 'Total remuneration' as presented in the table above. The crisis levy was €472,000, €67,000, €151,000 and €83,000 for Dick Boer, Jeff Carr, Lodewijk Hijmans van den Bergh and James McCann, respectively.
6 John Rishton voluntarily resigned from the Corporate Executive Board on February 28, 2011. The share-based compensation expense related to John Rishton's service period during 2011 was €93,000 (relating to shares vesting in 2011).
7 Kimberly Ross voluntarily resigned from the Corporate Executive Board on November 22, 2011. The share-based compensation expense related to Kimberly Ross' service period during 2011 was €43,000 (relating to shares vesting in 2011). In addition, an amount of €654,000 was reversed, representing the share-based compensation expense recognized in the previous years related to shares that were forfeited (the three-year grants for 2009 and 2010, the five-year grants for 2007, 2008, 2009, and 2010 and the matching shares related to the 2007 grant).
8 Lawrence Benjamin retired from the Corporate Executive Board as of January 31, 2011.
| € thousand | 2012 | 2011 |
|---|---|---|
| René Dahan (reappointed in 2012) | 102 | 90 |
| Tom de Swaan (reappointed in 2011) | 88 | 89 |
| Derk C. Doijer (reappointed in 2009) | 84 | 80 |
| Stephanie M. Shern (reappointed in 2009) | 89 | 85 |
| Judith Sprieser (reappointed in 2010) | 94 | 88 |
| Mark McGrath (reappointed in 2012) | 101 | 88 |
| Ben Noteboom (appointed in 2009) | 81 | 79 |
| Rob van den Bergh (appointed in 2011) | 87 | 62 |
| Karen de Segundo (resigned on April 20, 2011) | – | 24 |
| Total | 726 | 685 |
As of December 30, 2012, Corporate Executive Board members held the following shares and other interests in Ahold:
| € million | Common shares subject to additional holding requirement1 |
Other common shares |
Total common shares |
|---|---|---|---|
| Dick Boer | 51,541 | 195,310 | 246,851 |
| Jeff Carr | – | 10,000 | 10,000 |
| Lodewijk Hijmans van den Bergh | – | – | – |
| James McCann | – | 110,000 | 110,000 |
| Total | 51,541 | 315,310 | 366,851 |
1 In line with best practice II.2.5 of the Dutch Corporate Governance Code, mid-term (three-year) shares granted and vested under the GRO program to Corporate Executive Board members will have to be retained for a period of at least five years after granting, except to finance tax due at the vesting date, or at least until the end of a member's employment by the Company, if this period is shorter.
As of December 30, 2012, René Dahan held 112,000 Ahold common shares and Rob van den Bergh held 15,000 Ahold common shares. None of the other Supervisory Board members held Ahold shares.
Ahold does not provide loans or advances to members of the Corporate Executive Board or the Supervisory Board. There are no loans or advances outstanding. Ahold does not issue guarantees to the benefit of members of the Corporate Executive Board or the Supervisory Board. There have been no such guarantees issued.
| Notes to the consolidated |
|---|
Ahold has entered into arrangements with a number of its subsidiaries and affiliated companies in the course of its business. These arrangements relate to service transactions and financing agreements. Transactions were conducted at market prices.
During 2012 and 2011, the Company entered into the following transactions with unconsolidated related parties:
| € million | Sales to related parties |
Purchases from related parties |
Amounts owed by related parties |
Amounts owed to related parties |
Commitments to related parties |
|---|---|---|---|---|---|
| ICA | 32 | 1 | 12 | 8 | – |
| Stationsdrogisterijen | 15 | – | – | 5 | – |
| JMR | 6 | – | 2 | 1 | – |
| Accounting Plaza B.V. | – | 8 | – | – | – |
| Other | 1 | 2 | 15 | 2 | 31 |
| Total | 54 | 11 | 29 | 16 | 31 |
| € million | Sales to related parties |
Purchases from related parties |
Amounts owed by related parties |
Amounts owed to related parties |
Commitments to related parties |
|---|---|---|---|---|---|
| ICA | 35 | 1 | 11 | 10 | – |
| Stationsdrogisterijen | 15 | – | – | 5 | – |
| JMR | 6 | – | 1 | 2 | – |
| Accounting Plaza B.V. | 1 | 30 | – | 1 | – |
| Other | 1 | 2 | 10 | – | 39 |
| Total | 58 | 33 | 22 | 18 | 39 |
These unconsolidated related parties consist of:
Furthermore, the Company's post-employment benefit plans in the Netherlands and the United States are considered related parties. For more information on these plans, see Note 23.
In 2012, Ahold's share-based compensation program consisted of a conditional share grant program called Global Reward Opportunity (GRO). This program, introduced in 2006, replaced the Company's share option plans. In principle, plan rules will not be altered during the term of the plans. Total 2012 GRO share-based compensation expenses were €40 million (2011: €29 million). Ahold's share-based compensation programs are equity-settled.
The fair value of the shares granted under the GRO program in 2012 at grant date was €61 million, of which €3 million related to Corporate Executive Board members. This fair value is expensed over the vesting period of the grants adjusted for assumed annual forfeitures of 5% (2011: 6%). For the share-based compensation expenses allocable to the individual Corporate Executive Board members, see Note 31.
Under the GRO program, Ahold shares are granted through a mid-term (three-year) and a long-term (five-year) program. The number of conditional shares to be granted depends on the attarget value, the annual incentive multiplier of the preceding year and the average share price for six months preceding the date of the grant. The shares are granted on the day after the annual General Meeting of Shareholders and vest on the day after the publication of Ahold's full-year results in the third year (mid-term component) or fifth year (long-term component) after the grant, provided the participant is still employed by Ahold. Shares granted to Corporate Executive Board members vest on the day after the annual General Meeting of Shareholders in the third year (mid-term component) or fifth year (long-term component) after the grant, subject to continued employment. Corporate Executive Board members are not allowed to sell their shares within a period of five years from the grant date, except to finance tax due at the date of vesting. For participants other than the Corporate Executive Board members, the mid-term component of the program contains a matching feature. For every five shares a participant holds for an additional two years after the vesting date, the participant will receive one additional share.
The conditional shares granted through the long-term component are subject to a performance condition. The number of shares that will ultimately vest depends on Ahold's performance compared to 11 other retail companies (refer to the Remuneration section for the composition of the peer group), measured over a five-year period using Total Shareholder Return (TSR), which is the sum of share price growth and dividends paid. The table below indicates the percentage of conditional shares that could vest based on the ranking of Ahold within the peer group:
| Rank | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Corporate Executive Board | 150% | 130% | 110% | 90% | 70% | 50% | 25% | 0% | 0% | 0% | 0% | 0% |
| Other participants | 150% | 135% | 120% | 105% | 90% | 75% | 60% | 45% | 30% | 15% | 7.5% | 0% |
As of the end of 2012, Ahold held the third position with respect to the 2008 share grant, the fourth position for the 2009, 2010 and 2012 share grant and the fifth position for the 2011 share grant. The 2008 grant's long-term component vests on the day after the publication of the 2012 annual results. The final TSR ranking for this component is the third position (110% for Corporate Executive Board members and 120% other participants). The positions with respect to the 2009, 2010, 2011 and 2012 share grants are not an indication of Ahold's final ranking at the end of the performance periods, nor do they provide any information related to the vesting of shares.
Upon termination of employment due to retirement, disability or death, the same vesting conditions as described above apply. Upon termination of employment without cause (e.g. restructuring or divestment), a pro rata part of the granted shares will vest on the date of termination of employment.
The following table summarizes the status of the GRO program during 2012 for the individual Corporate Executive Board members and for all other employees in the aggregate.
| Outstanding at the beginning |
Outstanding at the end |
Minimum number of |
Maximum number of |
Fair value per share at the |
||||
|---|---|---|---|---|---|---|---|---|
| of 2012 | Granted1 | Vested2 | Forfeited | of 2012 | shares3 | shares4 | grant date (€) | |
| Dick Boer | ||||||||
| Five-year 2007 grant | 39,779 | 3,977 | 43,756 | – | – | – | – | 8.03 |
| Five-year 2008 grant | 52,674 | – | – | – | 52,674 | – | 79,011 | 8.04 |
| Three-year 2009 grant | 54,706 | – | 54,706 | – | – | – | – | 8.04 |
| Five-year 2009 grant | 54,706 | – | – | – | 54,706 | – | 82,059 | 7.02 |
| Three-year 2010 grant | 33,671 | – | – | – | 33,671 | 33,671 | 33,671 | 9.50 |
| Five-year 2010 grant | 33,671 | – | – | – | 33,671 | – | 50,506 | 7.29 |
| Three-year 2011 grant | 65,965 | – | – | – | 65,965 | 65,965 | 65,965 | 8.59 |
| Five-year 2011 grant | 65,965 | – | – | – | 65,965 | – | 98,947 | 6.00 |
| Three-year 2012 grant | – | 73,026 | – | – | 73,026 | 73,026 | 73,026 | 9.23 |
| Five-year 2012 grant | – | 73,026 | – | – | 73,026 | – | 109,539 | 7.81 |
| Jeff Carr | ||||||||
| Three-year 2011 grant | 49,889 | 499 | – | – | 50,388 | 50,388 | 50,388 | 8.31 |
| Five-year 2011 grant | 49,889 | 499 | – | – | 50,388 | – | 75,582 | 5.80 |
| Three-year 2012 grant | – | 45,405 | – | – | 45,405 | 45,405 | 45,405 | 9.23 |
| Five-year 2012 grant | – | 45,405 | – | – | 45,405 | – | 68,107 | 7.81 |
| Lodewijk Hijmans van den Bergh | ||||||||
| Three-year 2010 grant | 30,472 | – | – | – | 30,472 | 30,472 | 30,472 | 9.50 |
| Five-year 2010 grant | 30,472 | – | – | – | 30,472 | – | 45,708 | 7.29 |
| Three-year 2011 grant | 34,902 | – | – | – | 34,902 | 34,902 | 34,902 | 8.59 |
| Five-year 2011 grant | 34,902 | – | – | – | 34,902 | – | 52,353 | 6.00 |
| Three-year 2012 grant | – | 40,108 | – | – | 40,108 | 40,108 | 40,108 | 9.23 |
| Five-year 2012 grant | – | 40,108 | – | – | 40,108 | – | 60,162 | 7.81 |
| James McCann | ||||||||
| Three-year 2011 grant | 49,889 | 499 | – | – | 50,388 | 50,388 | 50,388 | 8.31 |
| Five-year 2011 grant | 49,889 | 499 | – | – | 50,388 | – | 75,582 | 5.80 |
| Three-year 2012 grant | – | 45,405 | – | – | 45,405 | 45,405 | 45,405 | 9.23 |
| Five-year 2012 grant | – | 45,405 | – | – | 45,405 | – | 68,107 | 7.81 |
| Subtotal CEB members | 731,441 | 413,861 | 98,462 | – | 1,046,840 | 469,730 | 1,335,393 |
1 Represents the number of shares originally granted for the 2012 grant. For the five-year 2007 grant, the number of shares granted in 2012 represents the additional number of shares granted based on the final TSR ranking. For the 2011 grant, the additional shares granted to Jeff Carr and James McCann relate to the final annual cash incentive plan multiplier for the year 2011 as determined in the year 2012.
2 The vesting date of the five-year 2007 grant and the three year 2009 grant was on April 18, 2012. The Euronext closing share price was €10.41 as of April 18, 2012.
3 For the three-year grants, the minimum number of shares equals the number of outstanding shares. For the five-year grants, the minimum number of shares would be nil if Ahold's ranking was eight or lower (as explained in the section Main characteristics above).
4 For the three-year grants, the maximum number of shares equals the number of outstanding shares. For the five-year grants, the maximum number of shares equals 150% of outstanding shares if Ahold's ranking is one (as explained in the section Main characteristics above).
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| Outstanding at the beginning |
Outstanding at the end |
||||
|---|---|---|---|---|---|
| of 2012 | Granted1 | Vested2 | Forfeited | of 2012 | |
| Other employees | |||||
| 2007 grant | 1,447,223 | 370,615 | 1,806,060 | 11,778 | – |
| 2008 grant | 1,834,339 | – | 13,824 | 44,827 | 1,775,688 |
| 2009 grant | 4,965,558 | – | 2,479,338 | 102,753 | 2,383,467 |
| 2010 grant | 2,786,839 | – | 14,377 | 103,672 | 2,668,790 |
| 2011 grant | 5,292,671 | – | 12,780 | 158,957 | 5,120,934 |
| 2012 grant | – | 5,972,913 | 1,452 | 127,499 | 5,843,962 |
| Subtotal CEB members | 731,441 | 413,861 | 98,462 | – | 1,046,840 |
| Total number of shares | 17,058,071 | 6,757,389 | 4,426,293 | 549,486 | 18,839,681 |
1 Represents the number of shares originally granted for the 2012 grant. For the five-year 2007 grant the number of shares granted in 2012 represents the additional number of shares granted based on the final TSR ranking and the matching shares related to the 2007 grant.
2 The vesting date of the five-year 2007 grant, the matching shares related to the 2007 grant and the three-year 2009 grant was March 2, 2012. The Euronext closing share price was €10.07 as of March 2, 2012.
The weighted average fair value of the conditional shares granted in 2012, for all eligible participants including Corporate Executive Board members, amounted to €9.19 and €8.84 per share for the three-year and five-year components, respectively (2011: €8.60 and €7.06, respectively). The fair value of the three-year component is based on the share price on the grant date, reduced by the present value of dividends expected to be paid during the vesting period. The fair value of the five-year component is determined using a Monte Carlo simulation model. The most important assumptions used in the valuations of the three- and five-year components were as follows (expressed as weighted averages):
| Percent | 2012 | 2011 |
|---|---|---|
| Risk-free interest rate | 1.0 | 2.4 |
| Volatility | 23.1 | 27.6 |
| Assumed dividend yield | 4.6 | 4.2 |
Expected volatility has been determined based on historical volatilities.
In 2005, Ahold had one global share option plan with a uniform set of rules and conditions for all participants, except members of the Corporate Executive Board, to whom a separate plan applied. The term of the 2005 share options for all participants except Corporate Executive Board members is eight years and the exercise of these options is conditional upon continued employment during a three-year vesting period. Upon termination of employment, share options that have vested can be exercised during the four weeks following termination and are forfeited thereafter. The share option grant made in 2005 to members of the Corporate Executive Board had a five- and a 10-year term and was subject to a performance criterion at vesting: the average economic value-added improvement versus targeted improvement over the three financial years prior to vesting. In 2008, the final vesting percentage was set at 96%.
Until January 2, 2005, Ahold had three share option plans (the Dutch, U.S. and International Share Option Plans – collectively the "Plans"). Under these Plans, participants were granted share options with either a five- or 10-year term. In addition, a limited number of share options were granted in 2006 under the 2005 global share option plan rules with a five- or 10-year term. After the introduction of GRO, options were discontinued as a remuneration component. All options vested by the end of 2009.
The following table summarizes the status of the share option plans during 2012 for the individual Corporate Executive Board members and for all other employees in the aggregate.
| Outstanding | Outstanding at | ||||||
|---|---|---|---|---|---|---|---|
| Description of grant | at the beginning of 2012 |
Exercised | Forfeited | Expired | the end of 2012 |
Exercise price | Expiration date |
| Dick Boer | |||||||
| Eight-year 2005 grant | 70,200 | 70,200 | – | – | – | 6.36 | 04/03/2013 |
| Ten-year 2003 grant | 21,000 | – | – | 21,000 | – | 11.65 | 12/29/2012 |
| Ten-year 2004 grant | 21,000 | – | – | – | 21,000 | 5.83 | 12/28/2013 |
| Subtotal CEB members | 112,200 | 70,200 | – | 21,000 | 21,000 | ||
| Weighted average exercise price | 7.25 | 5.83 | |||||
| Other employees | |||||||
| Eight-year | 1,632,560 | 678,370 | – | 25,638 | 928,552 | 6.36 | |
| Ten-year | 2,442,648 | 270,901 | – | 1,630,615 | 541,132 | 5.89 | |
| Subtotal other employees | 4,075,208 | 949,271 | – | 1,656,253 | 1,469,684 | ||
| Total options | 4,187,408 | 1,019,471 | – | 1,677,253 | 1,490,684 | ||
| Weighted average exercise price | 8.39 | 6.27 | 11.63 | 6.18 | |||
| Weighted average share price at date of exercise | 10.22 |
The following table summarizes information about the total number of outstanding share options as of December 30, 2012:
| Number outstanding | Weighted average | ||
|---|---|---|---|
| and exercisable at | Weighted average | remaining contractual | |
| Exercise price (range) | December 30, 2012 | exercise price | years |
| 5.83-6.36 | 1,490,684 | 6.18 | 0.61 |
Ahold leases a significant number of its stores, as well as distribution centers, offices and other assets, under operating lease arrangements. The aggregate amounts of Ahold's minimum lease commitments payable to third parties under non-cancelable operating lease contracts are as follows:
| € million | December 30, 2012 |
January 1, 2012 |
|---|---|---|
| Within one year | 692 | 677 |
| Between one and five years | 2,217 | 2,245 |
| After five years | 2,767 | 3,016 |
| Total | 5,676 | 5,938 |
Certain store leases provide for contingent additional rentals based on a percentage of sales and consumer price indices. Substantially all of the store leases have renewal options for additional terms. None of Ahold's leases impose restrictions on Ahold's ability to pay dividends, incur additional debt or enter into additional leasing arrangements.
The annual costs of Ahold's operating leases from continuing operations, net of sublease income, are as follows:
| € million | 2012 | 2011 |
|---|---|---|
| Minimum rentals | 689 | 635 |
| Contingent rentals | 28 | 25 |
| Sublease income | (106) | (100) |
| Total | 611 | 560 |
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In addition to the operating lease commitments disclosed above, Ahold has signed lease agreements for properties under development of which it has not yet taken possession. The total future minimum lease payments for these agreements amount to approximately €195 million (2011: €233 million). These lease contracts are subject to conditions precedent to the rent commencement date.
Ahold rents out its investment properties (mainly retail units in shopping centers containing an Ahold store) and also (partially) subleases various other properties that are leased by Ahold under operating leases. The aggregate amounts of the related future minimum lease and sublease payments receivable under non-cancelable lease contracts are as follows:
| December 30, € million 2012 |
January 1, 2012 |
|---|---|
| Within one year 180 |
174 |
| Between one and five years 493 |
491 |
| After five years 417 |
421 |
| Total 1,090 |
1,086 |
The total contingent rental income recognized during the year on all leases where Ahold is the lessor was €3 million (2011: €4 million).
As of December 30, 2012, Ahold had outstanding capital investment commitments for property, plant and equipment and investment property, and for intangible assets of approximately €124 million and €3 million, respectively (January 1, 2012: €133 million and €1 million, respectively). Ahold's share in the capital investment commitments of its unconsolidated joint ventures ICA and JMR amounted to €38 million as of December 30, 2012 (January 1, 2012: €30 million).
Ahold enters into purchase commitments with vendors in the ordinary course of business. Ahold has purchase contracts with some vendors for varying terms that require Ahold to buy services and predetermined volumes of goods and goods not-for-resale at fixed prices. As of December 30, 2012, the Company's purchase commitments were approximately €1,509 million (January 1, 2012: €2,424 million). The significant decrease in 2012 is due to the expiry of a single purchase commitment with a three-year term. Not included in the purchase commitments are those purchase contracts for which Ahold has received advance vendor allowances, such as up-front signing payments in consideration of its purchase commitments. These contracts generally may be terminated without satisfying the purchase commitments upon the repayment of the unearned portions of the advance vendor allowances. The unearned portion of these advance vendor allowances is recorded as a liability on the balance sheet.
Guarantees to third parties issued by Ahold can be summarized as follows:
| € million | December 30, 2012 |
January 1, 2012 |
|---|---|---|
| Lease guarantees | 579 | 686 |
| Lease guarantees backed by letters of credit | 78 | 94 |
| Corporate and buyback guarantees | 52 | 49 |
| Loan guarantees | 5 | 6 |
| Total | 714 | 835 |
The amounts included in the table above are the maximum undiscounted amounts the Group could be forced to settle under the arrangement for the full guaranteed amount, if that amount is claimed by the counterparty to the guarantee. As part of the divestment of U.S. Foodservice in 2007, Ahold received an irrevocable standby letter of credit for \$216 million (€163 million), which was reduced to \$103 million (€78 million) as of December 30, 2012. As part of the divestment of Ahold's Polish retail operations, Ahold received a guarantee from Carrefour for €152 million in June 2007, which matured during 2012.
Ahold is contingently liable for leases that have been assigned to third parties in connection with facility closings and asset disposals. Ahold could be required to assume the financial obligations under these leases if any of the assignees are unable to fulfill their lease obligations. The lease guarantees are based on the nominal value of future minimum lease payments of the assigned leases, which extend through 2040. The amounts of the lease guarantees exclude the cost of common area maintenance and real estate taxes; such amounts may vary in time, per region, and per property. Of the €579 million in the undiscounted lease guarantees, €282 million relates to the BI-LO / Bruno's divestment and €220 million to the Tops divestment. On a discounted basis those lease guarantees amount to €485 million and €552 million as of December 30, 2012, and January 1, 2012, respectively.
On February 5, 2009, and March 23, 2009, Bruno's Supermarkets, LLC and BI-LO, LLC, respectively, filed for protection under Chapter 11 of the U.S. Bankruptcy Code (the filings). As a result of the filings, Ahold has made an assessment of its potential obligations under the lease guarantees based upon the remaining initial term of each lease, an assessment of the possibility that Ahold would have to pay under a guarantee and any potential remedies that Ahold may have to limit future lease payments. Consequently, in 2009, Ahold recognized provisions of €109 million and related tax benefit offsets of €47 million within results on divestments.
On May 12, 2010, the reorganized BI-LO exited bankruptcy protection, BI-LO assumed 149 operating locations that are guaranteed by Ahold. During the BI-LO bankruptcy, BI-LO rejected a total of 16 leases which are guaranteed by Ahold and Ahold also took assignment of 12 other BI-LO leases with Ahold guarantees. Based on the foregoing developments, Ahold recognized a reduction of €23 million in its provision, after tax, within results on divestments in the first half of 2010. Since the end of the second quarter of 2010, Ahold has entered into settlements with a number of landlords relating to leases of former BI-LO or Bruno's stores that are guaranteed by Ahold.
At the end of 2012, the remaining provision relating to BI-LO and Bruno's was €35 million (2011: €61 million) with a related tax benefit offset of €15 million (2011: €26 million). This amount represents Ahold's best estimate of the discounted aggregate amount of the remaining lease obligations and associated charges, net of known mitigation offsets, which could result in cash outflows for Ahold under the various lease guarantees. Ahold continues to pursue its mitigation efforts with respect to these lease guarantee liabilities and to closely monitor any developments with respect to Bruno's and BI-LO.
Ahold has provided corporate guarantees to certain suppliers of Ahold's franchisees or non-consolidated entities. Ahold would be required to perform under the guarantee if the franchisee or non-consolidated entity failed to meet its financial obligations, as described in the guarantee. Buyback guarantees relate to Ahold's commitment to repurchase stores or inventory from certain franchisees at predetermined prices. The buyback guarantees reflect the maximum committed repurchase value under the guarantees. The last of the corporate and buyback guarantees expire in 2017.
Ahold Annual Report 2012 137
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Notes to the consolidated
Loan guarantees relate to the principal amounts of certain loans payable by Ahold's franchisees, non-consolidated real estate development entities and joint ventures. The term of most guarantees is equal to the term of the related loan, the last of which matures in 2016. Ahold's maximum liability under the guarantees equals the total amount of the related loans plus, in most cases, reasonable costs of enforcement of the guarantee.
Ahold has provided, in the relevant sales agreements, certain customary representations and warranties including, but not limited to, completeness of books and records, title to assets, schedule of material contracts and arrangements, litigation, permits, labor matters, and employee benefits and taxes. These representations and warranties will generally terminate, depending on their specific features, one to seven years after the date of the relevant transaction completion date.
| Contingent liability cap | |||
|---|---|---|---|
| Closing date | Local currency million |
€ million | |
| Disco | November 1, 2004 | €151 | 151 |
| BI-LO / Bruno's | January 31, 2005 | \$33 | 25 |
| Deli XL | September 12, 2005 | €40 | 40 |
| U.S. Foodservice | July 3, 2007 | None2 | None2 |
| Tops Markets | December 3, 2007 | \$70 | 53 |
| Tops' Wilson Farms / Sugarcreek | December 3, 2007 | \$5 | 4 |
| Accounting Plaza3 | April 25, 2012 | €12 | 12 |
1 Ahold assesses the likelihood to be liable up to the amount of the contingent liability cap to be remote. The cap does not include Ahold's indemnification obligation relating to the litigation described below.
2 No cap on contingent liability, but Ahold has an indemnification obligation if a \$40 million threshold is exceeded. The threshold was exceeded in 2009.
3 Contingent liability cap for title-to-share type of warranties only
The most significant sales of operations are described below. In addition, specific, limited representations and warranties exist for certain of Ahold's smaller divestments in 2004, 2005, 2007 and 2012. The aggregate impact of a claim under such representations and warranties is not expected to be material.
In 1992, Stop & Shop spun off Bradlees Stores, Inc. (Bradlees) as a public company (the Bradlees Spin-off). In connection with the Bradlees Spin-off, Stop & Shop assigned to Bradlees certain commercial real property leases. Pursuant to a 1995 reorganization of Bradlees and a subsequent wind-down and liquidation of Bradlees following a bankruptcy protection filing in 2000 (collectively, the Bradlees Bankruptcies), a number of such real property leases were assumed and assigned to third parties. Pursuant to applicable law, Stop & Shop may be contingently liable to landlords under certain of the leases assigned in connection with the Bradlees Spin-off and subsequently assumed and assigned to third parties in connection with the Bradlees Bankruptcies.
Ahold is required to indemnify the buyers of Disco S.A. (Disco) and Disco for certain claims made by alleged creditors of certain Uruguayan and other banks. For additional information, see the Uruguayan litigation described in the Legal proceedings section below. Ahold's indemnification obligation relating to this litigation is not capped at a certain amount nor restricted to a certain time period.
In connection with the sale of BI-LO and Bruno's, Ahold may be contingently liable to landlords under guarantees of some 200 BI-LO or Bruno's operating or finance leases that existed at the time of the sale in the event of a future default by the tenant under such leases. As a result of the bankruptcy filings by BI-LO and Bruno's during 2009, a provision was recognized in 2009. BI-LO exited bankruptcy in May 2010 and the Company has re-evaluated its estimate of liability. For more information, refer to the Guarantees section above in this Note.
In connection with the sale of U.S. Foodservice, which closed on July 3, 2007 (the Completion), Ahold indemnified U.S. Foodservice against damages incurred after the Completion relating to matters including (i) the putative class actions filed in 2006 and 2007 and referred to below under "Waterbury litigation" and any actions that might be brought by any current or former U.S. Foodservice customers that concern the pricing practices at issue in such litigation for sales made by U.S. Foodservice prior to the Completion and (ii) the investigation by the Civil Division of the U.S. Department of Justice into U.S. Foodservice's pricing practices for sales made to the U.S. Government prior to the Completion. See also below.
In connection with the sale of Tops in 2007, Ahold has certain post-closing indemnification obligations under the sale agreement (the 2007 Tops Sale Agreement) that Ahold believes are customary for transactions of this nature. Ahold retained certain liabilities in the sale, including contingent liability for 47 leases that carry Ahold guarantees. Additionally, Ahold retained liabilities related to stores previously sold, including guarantees on five Tops stores in eastern New York state, as well as liabilities related to the Tops convenience stores and the stores in northeast Ohio as outlined below.
Pursuant to applicable law, Tops may be contingently liable to landlords under 193 leases assigned in connection with the sale of the Tops' Wilson Farms and Sugarcreek convenience stores in the event of a future default by the tenant under such leases. Ahold may also be contingently liable to landlords under the guarantees of 71 such leases in the event of a future default by the tenant under these leases.
Tops closed all of its locations in northeast Ohio prior to year-end 2006. As of January 1, 2013, 34 of the total 55 closed locations in northeast Ohio have been sold, subleased or partially subleased. An additional 15 leases have been terminated or have terms due to expire within one year. Six stores continue to be marketed. In connection with the store sales, Tops and Ahold have certain post-closing indemnification obligations under the sale agreements, which Ahold believes are customary for transactions of this nature. Pursuant to applicable law, Ahold may be contingently liable to landlords under guarantees of 14 of such leases in the event of a future default by the tenant under such leases. In the event Ahold is able to assign the leases for the remaining northeast Ohio stores, then pursuant to applicable law, Ahold also may be contingently liable to landlords under guarantees of certain of such remaining leases in the event of a future default by the tenant under such leases. Additionally, under U.S. pension law, the buyers of certain Tops stores assumed the pension withdrawal liability associated with the underfunding of certain pension funds and Tops remains secondarily liable in the event the buyer defaults within five years as described in the relevant pension plan.
In January 2011, Tops Holdings, LLC, an Ahold subsidiary, was notified that a mass withdrawal had occurred under the International Brotherhood of Teamsters Local 400 Food Terminal Employees' Pension Plan, which covered workers of a warehouse in northeast Ohio previously owned by Tops Markets LLC and divested to Erie Logistics, LLC in 2002. This warehouse was closed in 2006 in connection with the closing of the Tops stores in northeast Ohio. Ahold earlier assessed that Tops Markets, LLC might have contractual liability to Erie Logistics, LLC for this mass withdrawal liability and, pursuant to the 2007 Tops Sale Agreement, Tops Holdings, LLC might have also indemnified Tops Markets, LLC for this liability. Based on Ahold's assessment of this potential loss contingency, at year end 2010 Ahold recognized a provision of \$27 million (€20 million) relating to this potential liability. In 2012, this matter has been resolved and a payment in the amount of \$21 million (€17 million) was made to the fund in full and final settlement of all claims.
The Swedish Tax Authority decided in 2008 to disallow deductions related to intra-Group interest payments during 2004-2008. After an appeal to the County Administrative Court, the Administrative Court of Appeal announced its final ruling in the Tax Authority's favor in October 2012. ICA recognized a tax expense of SEK 1.3 billion (€150 million) in 2012 in accordance with the ruling. Ahold's share is €90 million and is reflected in share in income of joint ventures.
Ahold Annual Report 2012 139
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Notes to the consolidated
Ahold and certain of its former or current subsidiaries are involved in a number of legal proceedings, which include litigation as a result of divestments, tax, employment, and other litigation and inquiries. The legal proceedings discussed below, whether pending, threatened or unasserted, if decided adversely or settled, may result in liability material to Ahold's financial condition, results of operations or cash flows. Ahold may enter into discussions regarding settlement of these and other proceedings, and may enter into settlement agreements, if it believes settlement is in the best interests of Ahold's shareholders. In accordance with IAS 37 "Provisions, Contingent Liabilities, and Contingent Assets," Ahold has recognized provisions with respect to these proceedings, where appropriate, which are reflected on its balance sheet.
In October 2006, a putative class action was filed against U.S. Foodservice by Waterbury Hospital and Cason, Inc. and Frankie's Franchise Systems Inc. with the United States District Court for the District of Connecticut in relation to certain U.S. Foodservice pricing practices (the Waterbury Litigation). Two additional putative class actions were filed in 2007 by customers of U.S. Foodservice, Catholic Healthcare West and Thomas & King, Inc., in the U.S. District Courts for the Northern District of California and the Southern District of Illinois, respectively. These two new actions involved the same pricing practices as those in the Waterbury Litigation. The new actions also named Ahold and two individuals as defendants. In accordance with the decision of the Judicial Panel on Multidistrict Litigation, in 2008 the actions were consolidated with the Waterbury litigation before the U.S. District Court in Connecticut. Ahold was (among other parties) named as defendant. In July 2009, the Plaintiffs filed a motion to certify a Plaintiff class in the action. Both Ahold and U.S. Foodservice filed a motion to dismiss against the complaint and also filed motions opposing the certification of a class in the action. In December 2009, the Court in Connecticut granted Ahold's motion to dismiss, as a result of which Ahold is no longer party in the proceedings. U.S. Foodservice's motion to dismiss was partially rejected by the Court, as a result of which U.S. Foodservice remains defendant in the ongoing proceedings. On November 30, 2011, the U.S. District Court granted the Plaintiffs' motion to certify a class in the action which, if not reversed during the proceedings, would increase the potential liability exposure. The Court certified a class consisting of any person in the United States who purchased products from U.S. Foodservice pursuant to an arrangement that defined a sale price in terms of a cost component plus a markup ("cost-plus contract"), and for which U.S. Foodservice used a so-called "Value Added Service Provider" or "VASP" transaction to calculate the cost component. On December 14, 2011, U.S. Foodservice filed a petition with the Second Circuit Court of Appeals seeking permission to appeal the class certification order and that petition was granted on April 3, 2012. U.S. Foodservice's appeal of the class certification order is now pending. Parties are currently conducting discovery pursuant to a joint scheduling order entered by the Court on January 10, 2013. The trial is currently scheduled to begin on February 3, 2014. Ahold cannot at this time provide a reasonable estimate of any of its potential liability in connection with the indemnification obligation mentioned in the table above. Ahold will continue to vigorously defend its interests in these proceedings.
The Civil Division of the U.S. Department of Justice was conducting an investigation, which related to certain past pricing practices of U.S. Foodservice for sales made to the U.S. government prior to the date of completion of the divestment of U.S. Foodservice (July 3, 2007).
In September 2010, a settlement was reached with the Department of Justice under which U.S. Foodservice was obliged to pay an amount of \$33 million (€24 million) to the U.S. government. Ahold paid, under its indemnification agreement with U.S. Foodservice, an amount of \$23 million (€17 million), of which \$12 million (€9 million) had already been provided for in 2009. Ahold cannot exclude the possibility of further indemnification obligations resulting from other governmental or regulatory actions.
Ahold, together with Disco and Disco Ahold International Holdings N.V. (DAIH), is a party to or bears the risk of three legal proceedings in Uruguay related to Ahold's 2002 acquisition of Velox Retail Holdings' shares in the capital of DAIH. The damages alleged by the plaintiffs, alleged creditors of certain Uruguayan and other banks, amount to approximately \$70 million (€53 million) plus interest and costs. As part of the sale of Disco to Cencosud in 2004, Ahold has indemnified Cencosud and Disco against the outcome of these legal proceedings. The proceedings are ongoing. Ahold continues to believe that the plaintiffs' claims are without merit and will continue to vigorously oppose such claims.
In connection with the spin-off of Bradlees in May 1992, discussed under Contingent Liabilities above, Stop & Shop, Bradlees and Vornado (or certain of its affiliates, collectively Vornado) entered into a Master Agreement and Guaranty (the Master Agreement) relating to 18 leases for which Vornado was the landlord. Pursuant to the Bradlees Bankruptcies, Bradlees either rejected or assumed and assigned the leases subject to the Master Agreement. In 2002, Vornado sent a written demand to Stop & Shop to pay certain rental increases under the Master Agreement in connection with certain leases, comprised of \$5 million (€4 million) annually through 2012, and, if certain renewal options are exercised, \$6 million (€5 million) annually thereafter through the expiration of the last lease covered by the Master Agreement, which Vornado alleged could extend until 2031, depending upon whether renewal options are exercised. In 2002, Stop & Shop filed a Court claim that it is not obligated to pay the rental increases demanded by Vornado. In 2005, Vornado filed a counterclaim seeking unpaid rental increases and a declaration that Stop & Shop is obligated to pay rental increases in the future. On November 4, 2011, the Supreme Court of the State of New York issued its judgment in respect of this litigation. Under the judgment, the court ordered Stop & Shop to pay \$37.4 million in rental increases plus certain other accrued rental increases and statutory interest thereon and attorney's fees and held Stop & Shop liable for future rental increases in the amount of \$6 million per annum thereafter until the date of expiration of the last lease covered by the Master Agreement (which could be as late as 2031). In connection with the judgment, in 2011, a provision of \$124 million (€92 million) for claims and legal disputes was recorded (against "Other financial income (expense))", see Note 24. Stop & Shop appealed the judgment to the New York Supreme Court Appellate Division. On February 4, 2013, prior to the issuance of a decision on the appeal, Stop & Shop and Vornado entered into a Settlement Agreement under which Stop & Shop agreed to pay Vornado a settlement payment of \$124 million. On February 6, 2013 Stop & Shop made the settlement payment to Vornado and the appeal has been withdrawn and the litigation ended.
In addition to the legal proceedings described above, Ahold and its former or current subsidiaries are parties to a number of other legal proceedings arising out of their business operations. Ahold believes that the ultimate resolution of these other proceedings will not, in the aggregate, have a material adverse effect on Ahold's financial position, results of operations or cash flows. Such other legal proceedings, however, are subject to inherent uncertainties and the outcome of individual matters is unpredictable. It is possible that Ahold could be required to make expenditures, in excess of established provisions, in amounts that cannot reasonably be estimated.
On February 4, 2013, Stop & Shop and Vornado entered into a settlement agreement with regards to the legal proceedings against each other. Under the agreement, Stop & Shop agreed to pay Vornado a settlement payment of \$124 million, which was the same amount that was provided for as of December 30, 2012. On February 6, 2013 Stop & Shop made the settlement payment to Vornado and the appeal has been withdrawn and the litigation ended.
On February 11, 2013, Ahold announced that it has reached an agreement with Hakon Invest of Sweden regarding the sale of Ahold's 60% holding in ICA for SEK 21.2 billion in cash, which includes ICA's 2012 dividend of SEK 1.2 billion. The transaction is subject to regulatory approvals, as well as approval by the ICA Retailers' Association (ICA Forbundet) for the financing of the transaction. The transaction is expected to be completed in the middle of this year.
On February 28, 2013, Ahold announced its decision to return €500 million to its shareholders by way of a share buyback program, to be completed over the next 12 months.
The following are Ahold's significant subsidiaries, joint ventures and associates as of December 30, 2012:
Unless otherwise indicated, these are, directly or indirectly, wholly or virtually wholly-owned subsidiaries. Subsidiaries not important to providing an insight into the Ahold group as required under Dutch law are omitted from this list. With respect to the separate financial statements of the Dutch legal entities included in the consolidation, the Company availed itself of the exemption laid down in section 403, subsection 1 of Book 2 of the Netherlands Civil Code. Pursuant to said section 403, Ahold has assumed joint and several liabilities for the debts arising out of the legal acts of a number of subsidiaries in the Netherlands, which form part of the consolidation. The names of the subsidiaries for which Ahold has issued 403 declarations are open for inspection at the trade register as managed by the Netherlands Chamber of Commerce.
Albert Heijn B.V., Zaandam, the Netherlands Albert Heijn Franchising B.V., Zaandam, the Netherlands Gall & Gall B.V., Zaandam, the Netherlands Etos B.V., Zaandam, the Netherlands bol.com B.V., Utrecht, the Netherlands AHOLD Czech Republic, a.s., Prague, Czech Republic AHOLD Retail Slovakia, k.s., Bratislava, Slovak Republic Albert Heijn België N.V, Antwerp, Belgium Ahold Germany GmbH, Düsseldorf, Germany
The Stop & Shop Supermarket Company LLC, Boston, Massachusetts Giant Food Stores, LLC, Carlisle, Pennsylvania Giant of Maryland LLC, Landover, Maryland Peapod, LLC, Skokie, Illinois
Ahold Coffee Company B.V., Zaandam, the Netherlands Ahold Nederland B.V., Amsterdam, the Netherlands Ahold Europe Real Estate & Construction B.V., Zaandam, the Netherlands Ahold Finance U.S.A., LLC, Amsterdam, the Netherlands Ahold Financial Services, LLC, Carlisle, Pennsylvania, United States Ahold Information Services, Inc., Greenville, South Carolina, United States Ahold International Sàrl, Zug, Switzerland Ahold Lease U.S.A., Inc., Boston, Massachusetts, United States Ahold Licensing Sàrl, Geneva, Switzerland Ahold U.S.A., Inc., Boston, Massachusetts, United States American Sales Company, LLC, Lancaster, New York, United States MAC Risk Management, Inc., Canton, Massachusetts, United States The MollyAnna Company, Montpelier, Vermont, United States Ahold Insurance N.V., Willemstad, Curaçao Ahold Finance Company N.V., Curaçao – Geneva branch, Geneva, Switzerland Ahold Finance Company N.V., Curaçao – Zurich branch, Zurich, Switzerland
ICA AB, Stockholm, Sweden (60% owned by Ahold's indirect subsidiary Ahold JV B.V.) JMR – Gestão de Empresas de Retalho, SGPS, S.A., Lisbon, Portugal (49% owned by Ahold's subsidiary Ahold International Sarl) Jerónimo Martins Retail Services S.A., Klosters, Switzerland (49% owned by Ahold's subsidiary Ahold International Sarl)
| € million | 2012 | 2011 |
|---|---|---|
| Income from subsidiaries and investments in joint ventures after income taxes | 713 | 905 |
| Other gains and losses after income taxes | 114 | 112 |
| Net income | 827 | 1,017 |
Before appropriation of current year result.
| € million | Note | December 30, 2012 |
January 1, 2012 |
|---|---|---|---|
| Assets | |||
| Property, plant and equipment | 2 | 2 | |
| Deferred tax assets | 23 | 30 | |
| Financial assets | 4 | 11,998 | 11,009 |
| Total non-current assets | 12,023 | 11,041 | |
| Receivables | 5 | 15 | 198 |
| Cash and cash equivalents | 544 | 189 | |
| Total current assets | 559 | 387 | |
| Total assets | 12, 582 | 11,428 | |
| Liabilities and shareholders' equity | |||
| Issued and paid-in share capital | 318 | 330 | |
| Additional paid-in capital | 8,713 | 9,094 | |
| Currency translation reserve | (298) | (265) | |
| Cash flow hedging reserve | (126) | (93) | |
| Reserve participations | 324 | 402 | |
| Accumulated deficit | (3,763) | (4,608) | |
| Net income | 827 | 1,017 | |
| Shareholders' equity | 6 | 5,995 | 5,877 |
| Provisions | 7 | 26 | 58 |
| Loans | 8 | 1,636 | 331 |
| Cumulative preferred financing shares | 8 | 497 | 497 |
| Other non-current liabilities | 9 | 455 | 329 |
| Total non-current liabilities | 2,588 | 1,157 | |
| Current liabilities | 10 | 3,973 | 4,336 |
| Total liabilities and shareholders' equity | 12,582 | 11,428 |
The accompanying notes are an integral part of these parent company financial statements.
The parent company financial statements of Ahold have been prepared in accordance with Part 9, Book 2 of the Netherlands Civil Code. In accordance with subsection 8 of section 362, Book 2 of the Netherlands Civil Code, the recognition and measurement principles applied in these parent company financial statements are the same as those applied in the consolidated financial statements (see Note 3 to the consolidated financial statements).
Investments in subsidiaries, joint ventures and associates are accounted for using the net equity value. Ahold calculates the net equity value using the accounting policies as described in Note 3 to the consolidated financial statements. The net equity value of subsidiaries comprises the cost, excluding goodwill, of Ahold's share in the net assets of the subsidiary, plus Ahold's share in income or losses since acquisition, less dividends received. Goodwill paid upon acquisition of an investment in a joint venture or associate is included in the net equity value of the investment and is not shown separately on the face of the balance sheet.
The average number of employees of Koninklijke Ahold N.V. in full-time equivalents during 2012 was 156 (2011: 143). Salaries, social security charges and pension expenses amounted to €29 million, €4 million and a recovery of €1 million, respectively, for 2012 (2011: expenses of €24 million, €1 million and €2 million, respectively).
For information on the parent company's defined benefit pension plan, the remuneration of the Corporate Executive Board and the Supervisory Board and the parent company's share-based compensation plans, see Notes 23, 31 and 32, respectively, to the consolidated financial statements.
The net pension assets and the net pension expense are calculated on the basis of the parent company's active employees only.
Expenses for services provided by the parent company's independent auditor, Deloitte Accountants B.V., and its member firms and / or affiliates to Ahold and its subsidiaries are specified as follows:
| € thousand | Deloitte Accountants B.V. |
Member firms / affiliates |
Total 2012 |
Deloitte Accountants B.V. |
Member firms / affiliates |
Total 2011 |
|---|---|---|---|---|---|---|
| Audit fees | 2,244 | 2,381 | 4,625 | 2,233 | 2,314 | 4,547 |
| Audit-related fees | 67 | 52 | 119 | 74 | 6 | 80 |
| Tax advisory fees | – | – | – | – | – | – |
| Other non-audit fees | – | – | – | – | – | – |
| Total | 2,311 | 2,433 | 4,744 | 2,307 | 2,320 | 4,627 |
Notes to the parent company financial statements 4 Financial assets
| € million | December 30, 2012 |
January 1, 2012 |
|---|---|---|
| Investments in subsidiaries | 8,901 | 8,000 |
| Loans receivable from subsidiaries | 2,797 | 2,753 |
| Other derivatives external | 280 | 239 |
| Pensions and other post-employment benefits | 16 | 12 |
| Deferred financing cost | 4 | 5 |
| Total financial assets | 11,998 | 11,009 |
For more information on derivatives, see Note 11 to these parent company financial statements.
| € million | 2012 | 2011 |
|---|---|---|
| Beginning of year | 8,000 | 7,649 |
| Share in income | 713 | 905 |
| Dividends | (463) | (635) |
| Intercompany transfers | 700 | 50 |
| Share of other comprehensive income (loss) and other changes in equity | (13) | (19) |
| Transfers to loans receivable | (8) | – |
| Transfers (to) / from provisions | (38) | 4 |
| Exchange rate differences | 10 | 46 |
| End of year | 8,901 | 8,000 |
Intercompany transfers include share premium contributions. For a list of subsidiaries, joint ventures and associates, see Note 36 to the consolidated financial statements.
| € million | 2012 | 2011 |
|---|---|---|
| Beginning of year | 2,753 | 2,553 |
| Issued | 76 | 193 |
| Redemptions | – | (59) |
| Transfers from investments | 8 | – |
| Exchange rate differences | (40) | 66 |
| End of year | 2,797 | 2,753 |
| Current portion | – | – |
| Non-current portion of loans | 2,797 | 2,753 |
The loans receivable are related to loans with subsidiaries. The parent company has granted subordinated loan facilities for a total amount of €3.9 billion (\$5.2 billion) to subsidiaries. As of December 30, 2012, three loans have been issued for a total amount of €2.0 billion (\$2.6 billion).
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Notes to the parent company financial statements 5 Receivables
| € million | December 30, 2012 |
January 1, 2012 |
|---|---|---|
| Receivables from subsidiaries | 6 | 28 |
| Receivables from joint ventures | 2 | 2 |
| Hedging derivatives external | – | 141 |
| Hedging derivatives intercompany | 1 | – |
| Prepaid expenses | 1 | 24 |
| Income tax receivable | 1 | – |
| Other receivables | 4 | 3 |
| Total receivables | 15 | 198 |
In 2011, external hedging derivatives of €141 million were reclassified from financial assets to current assets (see Note 11 to these parent company financial statements).
The shareholders' equity in the parent company financial statements equals the shareholders' equity presented in the consolidated financial statements, except that legal reserve participations and accumulated deficit are presented separately.
The currency translation reserve, cash flow hedging reserve and legal reserve participations are legal reserves that are required by Dutch law. The legal reserve participations include the net increases in net asset value of joint ventures and associates since their first inclusion, less any amounts that can be distributed without legal restrictions.
If the currency translation reserve or the cash flow hedging reserve has a negative balance, distributions to the Company's shareholders are restricted to the extent of the negative balance. From the total equity as per December 30, 2012, of €5,995 million, an amount of €642 million is non-distributable (January 1, 2012: €732 million from €5,877 million). For more information on the dividends on common shares, see Note 20 to the consolidated financial statements.
| Legal reserves | |||||||
|---|---|---|---|---|---|---|---|
| Additional | Currency | Cash flow | Accumulated | Equity attributable | |||
| € million | Share capital |
paid-in capital |
translation reserve |
hedging reserve |
Reserve participations |
deficit including result for the year |
to common shareholders |
| Balance as of January 2, 2011 | 358 | 9,916 | (385) | (63) | 396 | (4,312) | 5,910 |
| Dividends | – | – | – | – | – | (328) | (328) |
| Total comprehensive income | – | – | 123 | (36) | – | 1,014 | 1,101 |
| Share buyback | – | – | – | – | – | (837) | (837) |
| Cancellation of treasury shares | (28) | (822) | – | – | – | 850 | – |
| Share-based payments | – | – | – | – | – | 31 | 31 |
| Other changes in reserves | – | – | (3) | 6 | 6 | (9) | – |
| Balance as of January 1, 2012 | 330 | 9,094 | (265) | (93) | 402 | (3,591) | 5,877 |
| Dividends | – | – | – | – | – | (415) | (415) |
| Total comprehensive income | – | – | (33) | (33) | – | 823 | 757 |
| Share buyback | – | – | – | – | – | (277) | (277) |
| Cancellation of treasury shares | (12) | (381) | – | – | – | 393 | – |
| Share-based payments | – | – | – | – | – | 53 | 53 |
| Other changes in reserves | – | – | – | – | (78) | 78 | – |
| Balance as of December 30, 2012 | 318 | 8,713 | (298) | (126) | 324 | (2,936) | 5,995 |
The movements in equity can be specified as follows:
Notes to the parent company financial statements 7 Provisions
| € million | December 30, 2012 |
January 1, 2012 |
|---|---|---|
| Provision for negative equity subsidiaries | 7 | 45 |
| Other provisions | 19 | 13 |
| Total provisions | 26 | 58 |
As of December 30, 2012, €7 million is expected to be utilized within one year.
| December 30, 2012 | January 1, 2012 | |||
|---|---|---|---|---|
| € million | Non-current portion |
Current portion |
Non-current portion |
Current portion |
| JPY 33,000 notes LIBOR plus 1.5%, due May 2031 | 290 | – | 331 | – |
| Loans from subsidiaries | 1,346 | – | – | – |
| Total loans | 1,636 | – | 331 | – |
The loans from subsidiaries mature in 2015 (€ 750 million), 2017 (€ 125 million) and 2022 (€ 471 million). For more information on the external loans, see Note 21 to the consolidated financial statements. For information on the cumulative preferred financing shares, see Note 22 to the consolidated financial statements.
| December 30, € million 2012 |
January 1, 2012 |
|---|---|
| Hedging derivatives external 175 |
89 |
| Other derivatives intercompany 280 |
239 |
| Finance lease liabilities – |
1 |
| Total other non-current liabilities 455 |
329 |
For more information on derivatives, see Note 11 to these parent company financial statements.
| Ahold Annual Report 2012 | 146 | |||
|---|---|---|---|---|
Notes to the parent company financial statements 10 Current liabilities
| € million | December 30, 2012 |
January 1, 2012 |
|---|---|---|
| Short-term borrowings from subsidiaries | 3,920 | 4,111 |
| Income taxes payable | – | 9 |
| Dividend cumulative preferred financing shares | 24 | 24 |
| Payables to subsidiaries | 2 | 3 |
| Payables to joint ventures | 2 | 2 |
| Interest payable | 1 | 1 |
| Hedging derivatives intercompany | – | 143 |
| Other current liabilities | 24 | 43 |
| Total current liabilities | 3,973 | 4,336 |
The current liabilities are liabilities that mature within one year. In 2011, €141 million of hedging derivatives intercompany was reclassified to current liabilities from other non-current liabilities (see Note 11 to these parent company financial statements).
The parent company regularly enters into derivative contracts with banks to hedge foreign currency and interest exposures of the parent company or its subsidiaries. Derivative contracts that are entered into to hedge exposures of subsidiaries are generally mirrored with intercompany derivative contracts with the subsidiaries that are exposed to the hedged risks on substantially identical terms as the external derivative contracts. In these parent company financial statements, the external derivative contracts and the intercompany derivative contracts are presented separately on the balance sheet. In situations where the external derivative contract qualifies for hedge accounting treatment in the consolidated financial statements, the external derivative contract and the intercompany derivative contract are presented as "Hedging derivatives external" and "Hedging derivatives intercompany," respectively. In situations where the external derivative contract does not qualify for hedge accounting treatment in the consolidated financial statements, the external derivative contract and the intercompany derivative contract are presented as "Other derivatives external" and "Other derivatives intercompany," respectively.
Fair value movements of external derivative contracts that were entered into to hedge the exposures of subsidiaries are recorded directly in income, where they effectively offset the fair value movements of the mirroring intercompany derivatives that are also recorded directly in income. Details of these derivative contracts, other financial instruments and the parent company's risk management strategies are included in Note 30 to the consolidated financial statements and in the tables presented below.
| € million | 2012 Total |
2011 Total |
|---|---|---|
| Beginning of year | 239 | 347 |
| Reclassification to current assets | – | (141) |
| Fair value changes | 41 | 33 |
| End of year | 280 | 239 |
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Notes to the parent company financial statements 11 Derivatives (continued)
| € million | Hedging derivatives external |
Other derivatives intercompany |
2012 Total |
2011 Total |
|---|---|---|---|---|
| Beginning of year | 89 | 239 | 328 | 416 |
| Reclassification to current liabilities | – | – | – | (141) |
| Fair value changes | 86 | 41 | 127 | 53 |
| End of year | 175 | 280 | 455 | 328 |
Fair value changes include exchange rate differences and installments paid on a cross-currency swap that was entered into on behalf of one of the parent company's subsidiaries.
Koninklijke Ahold N.V. has entered into arrangements with a number of its subsidiaries and affiliated companies in the course of its business. These arrangements relate to service transactions and financing agreements and were conducted at market prices.
Notes to the parent company
Notes and loans issued by certain subsidiaries are guaranteed by the parent company, as disclosed in Note 21 to the consolidated financial statements. The parent company also guarantees certain lease obligations and other obligations of subsidiaries. Guarantees issued by the parent company regarding the financial obligations of third parties and non-consolidated entities amount to €654 million as of December 30, 2012 (January 1, 2012: €777 million).
As part of the divestment of U.S. Foodservice in 2007, Ahold received an irrevocable standby letter of credit for \$216 million (€167 million), which was reduced to \$103 million (€78 million) as of December 30, 2012. As part of the divestment of Ahold's Polish retail operations, Ahold received a guarantee from Carrefour for €152 million in June 2007, which matured during 2012.
Under customary provisions, the parent company guarantees certain representations and warranties made in agreements of asset disposals. Guarantees and legal proceedings are further disclosed in Note 34 to the consolidated financial statements. The parent company forms a fiscal unity with Ahold's major Dutch and certain other subsidiaries for Dutch corporate income tax and Dutch VAT purposes and, for that reason, it is jointly and severally liable for the Dutch corporate income tax liabilities and Dutch VAT liabilities of the whole fiscal unity. Assumptions of liability pursuant to section 403, Book 2 of the Netherlands Civil Code are disclosed in Note 36 to the consolidated financial statements.
Amsterdam, the Netherlands
February 27, 2013
Dick Boer
Jeff Carr
Lodewijk Hijmans van den Bergh
James McCann
René Dahan (Chairman) Tom de Swaan (Vice Chairman) Derk Doijer Stephanie Shern Judith Sprieser Mark McGrath Ben Noteboom Rob van den Bergh
Ahold Annual Report 2012 150
Ahold at a glance Our strategy Our performance Governance Financials Investors
Other information
To: the Shareholders, Supervisory Board and Corporate Executive Board of Koninklijke Ahold N.V.
We have audited the accompanying financial statements for the year ended December 30, 2012 of Koninklijke Ahold N.V., Zaandam. The financial statements include the consolidated financial statements and the parent company financial statements. The consolidated financial statements comprise the consolidated balance sheet as at December 30, 2012, the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes, comprising a summary of the significant accounting policies and other explanatory information. The parent company financial statements comprise the parent company balance sheet as at December 30, 2012, the parent company income statement for the year then ended and the notes, comprising a summary of the accounting policies and other explanatory information.
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code, and for the preparation of the management report in accordance with Part 9 of Book 2 of the Dutch Civil Code. Furthermore management is responsible for such internal control as it determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error.
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.
In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the consolidated financial statements give a true and fair view of the financial position of Koninklijke Ahold N.V. as at December 30, 2012 and of its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code.
In our opinion, the parent company financial statements give a true and fair view of the financial position of Koninklijke Ahold N.V. as at December 30, 2012 and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code.
Pursuant to the legal requirement under Section 2:393 sub 5 at e and f of the Dutch Civil Code, we have no deficiencies to report as a result of our examination whether the management report, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required under Section 2:392 sub 1 at b-h has been annexed. Further we report that the management report, to the extent we can assess, is consistent with the financial statements as required by Section 2:391 sub 4 of the Dutch Civil Code.
Amsterdam, February 27, 2013
Deloitte Accountants B.V.
P.J.M.A. van de Goor
The holders of common shares are entitled to one vote per share and to participate in the distribution of dividends and liquidation proceeds. Pursuant to section 39 of the Articles of Association, a dividend will first be declared out of net income on cumulative preferred shares and cumulative preferred financing shares. Any net income remaining after reservations deemed necessary by the Supervisory Board, in consultation with the Corporate Executive Board, will then be available for distribution to the common shareholders subject to approval at the General Meeting of Shareholders. The Corporate Executive Board, with the approval of the Supervisory Board, may propose that the General Meeting of Shareholders make distributions wholly or partly in the form of common shares. Amounts of net income not paid in the form of dividends will be added to the accumulated deficit. In the financial statements, the dividend on cumulative preferred financing shares is included in the income statement. Consequently, net income according to the parent company income statement is fully attributable to common shareholders.
The Corporate Executive Board, with the approval of the Supervisory Board, proposes that a final dividend of €0.44 per common share be paid in 2013 with respect to 2012 (2011: €0.40).
For information regarding subsequent events, see Note 35 to the consolidated financial statements.
Share
Ahold's authorized share capital as of December 30, 2012, was comprised of the following:
For additional information about Ahold's share capital, see Notes 20 and 22 to the consolidated financial statements. Ahold is a public limited liability company registered in the Netherlands with a listing of shares (symbol: AH) on Euronext's Amsterdam Stock Exchange (AEX). Ahold's common shares trade in the United States on the over-the-counter (OTC) market through www.otcmarkets.com (symbol: AHONY) in the form of American Depositary Shares (ADSs) and are evidenced by American Depositary Receipts (ADRs).
Ahold's Depositary for its ADSs is Citibank. Each ADS entitles the holder to receive one common share deposited under an amended and restated deposit agreement between Ahold and the Depositary dated July 2, 2010. Ahold has been informed by the Depositary that as of December 30, 2012, there were 50,347,861 ADSs outstanding in the United States, compared with 48,656,053 as of January 1, 2012.
Closing share prices for Ahold's common shares on Euronext Amsterdam for the periods indicated below were:
| € million | 2012 | 2011 |
|---|---|---|
| Closing common share price at year end (in €) | 10.16 | 10.41 |
| Average closing common share price (in €) | 9.93 | 9.31 |
| Highest closing common share price (in €) | 11.05 | 10.41 |
| Lowest closing common share price (in €) | 9.04 | 7.83 |
| Average daily trading volume | 3,315,165 | 4,453,813 |
Source: Euronext
The development of the closing prices for Ahold's common shares on Euronext Amsterdam during calendar years 2008–2012 relative to the AEX index (base 100 = January 2, 2008) was as follows:
| Ahold Annual Report 2012 | 153 | |||
|---|---|---|---|---|
Dividend
| Geographic spread of shareholdings: | |||
|---|---|---|---|
| -- | -- | ------------------------------------- | -- |
| Percent February 2012 |
February 2011 |
|---|---|
| North America 28.4 |
28.9 |
| UK / Ireland 18.5 |
12.0 |
| The Netherlands 10.5 |
14.3 |
| Rest of Europe 7.4 |
6.8 |
| France 5.2 |
6.2 |
| Germany 2.8 |
1.5 |
| Rest of the world 2.3 |
2.7 |
| Switzerland 1.4 |
1.1 |
| Undisclosed1 23.5 |
26.5 |
1 The undisclosed percentage of shareholdings includes all retail holdings.
Ahold reinstated its annual dividend in 2007 and announced that it intended to increase future annual dividends while meeting the capital needs of the business and maintaining an efficient investment grade capital structure.
For the 2011 financial year, a cash dividend of €0.40 per common share was approved by the annual General Meeting of Shareholders on April 17, 2012, and paid on May 2, 2012.
The announced common stock dividend of €0.44 for the financial year 2012 is up €0.04 or 10% from last year and will be proposed to shareholders at the annual General Meeting of Shareholders to be held on April 17, 2013. The recommended dividend is in line with our dividend policy to target a payout ratio in the range of 40-50% of adjusted income from continuing operations.
Ahold paid an annual dividend on cumulative preferred financing shares in 2012 and plans to pay dividends on these shares in 2013 as required by the terms of the shares.
On February 28, 2013, Ahold announced its decision to return €500 million to its shareholders by way of a share buyback program, to be completed over the next 12 months.
| € million, except per share data | 2012 | 2011 | 2010 | 2009 | 2008 |
|---|---|---|---|---|---|
| Net sales | 32,841 | 30,271 | 29,530 | 27,925 | 25,648 |
| Net sales growth at constant exchange rates1 | 3.5% | 5.5% | 4.4% | 3.9% | 6.9% |
| Operating income | 1,187 | 1,347 | 1,336 | 1,297 | 1,202 |
| Underlying operating margin | 4.3% | 4.5% | 4.7% | 4.8% | 4.7% |
| Net interest expense | (226) | (225) | (270) | (289) | (233) |
| Income (loss) from continuing operations | 830 | 1,032 | 863 | 972 | 887 |
| Income (loss) from discontinued operations | (3) | (15) | (10) | (78) | 195 |
| Net income | 827 | 1,017 | 853 | 894 | 1,082 |
| Net income per common share (basic) | 0.80 | 0.92 | 0.73 | 0.76 | 0.92 |
| Net income per common share (diluted) | 0.77 | 0.89 | 0.72 | 0.74 | 0.90 |
| Income from continuing operations per common share (basic) | 0.80 | 0.93 | 0.74 | 0.82 | 0.76 |
| Income from continuing operations per common share (diluted) | 0.78 | 0.90 | 0.73 | 0.81 | 0.74 |
| Dividend per common share | 0.44 | 0.40 | 0.29 | 0.23 | 0.18 |
| Free cash flow | 1,188 | 965 | 1,112 | 948 | 638 |
| Net cash from operating, investing and financing activities | (511) | (226) | (157) | (169) | (445) |
| Capital expenditures (including acquisitions)2 | 1,876 | 881 | 1,117 | 788 | 1,094 |
| Capital expenditures as % of net sales | 5.7% | 2.9% | 3.8% | 2.8% | 4.3% |
| Regular capital expenditures | 930 | 808 | 859 | 779 | 955 |
| Regular capital expenditures as % of net sales | 2.8% | 2.7% | 2.9% | 2.8% | 3.7% |
| Average exchange rate (€ per \$) | 0.7782 | 0.7189 | 0.7555 | 0.7194 | 0.6828 |
1 Net sales growth in 2010 and 2009 is adjusted for the impact of week 53 in 2009.
2 The amounts represent additions to property, plant and equipment, investment property and intangible assets. The amounts include assets acquired through business combinations and exclude discontinued operations.
| € million | December 30, 2012 |
January 1, 2012 |
January 2, 2011 |
January 3, 2010 |
December 28, 2008 |
|---|---|---|---|---|---|
| Equity1 | 5,995 | 5,877 | 5,910 | 5,440 | 4,687 |
| Gross debt | 3,246 | 3,680 | 3,561 | 3,700 | 4,241 |
| Cash, cash equivalents and short-term deposits | 1,886 | 2,592 | 2,824 | 2,983 | 2,863 |
| Net debt | 1,360 | 1,088 | 737 | 717 | 1,378 |
| Total assets | 15,082 | 14,980 | 14,725 | 13,933 | 13,603 |
| Number of stores | 3,074 | 3,008 | 2,970 | 2,909 | 2,897 |
| Number of employees (in thousand FTEs) | 125 | 121 | 128 | 118 | 119 |
| Number of employees (in thousands headcount) | 225 | 218 | 213 | 206 | 203 |
| Common shares outstanding (in millions)1 | 1,039 | 1,060 | 1,145 | 1,181 | 1,177 |
| Share price at Euronext (€) | 10.16 | 10.41 | 9.88 | 9.26 | 8.83 |
| Market capitalization1 | 10,551 | 11,033 | 11,314 | 10,938 | 10,390 |
| Year-end exchange rate (€ per \$) | 0.7566 | 0.7724 | 0.7474 | 0.6980 | 0.7111 |
1 In 2012 €277 million was returned to shareholders through a share buyback (2011: €837 and 2010: €386 million).
Ahold Group Communications P.O. Box 985 1000 AZ Amsterdam The Netherlands Telephone: +31 88 659 5100 Email: [email protected] www.ahold.com Trade Register No. 35000363
Ahold Investor Relations P.O. Box 985 1000 AZ Amsterdam The Netherlands Telephone: +31 88 659 5213 Email: [email protected]
Ahold Corporate Center Piet Heinkade 167–173 1019 GM Amsterdam The Netherlands
Citibank Shareholder Services P.O. Box 43077 Providence, Rhode Island 02940-3077 USA Telephone: +1 800 649 4134 (toll free) Telephone: +1 781 585 4555 (outside the United States) Fax: +1 201 324 3284 Email: [email protected] www.citi.com/dr
| Ahold Annual Report 2012 | 157 | |||
|---|---|---|---|---|
| Cautionary notice |
This Annual Report contains forward-looking statements, which do not refer to historical facts but refer to expectations based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those included in such statements. Many of these risks and uncertainties relate to factors that are beyond Ahold's ability to control or estimate precisely, including but not limited to, Ahold's ability to successfully implement and complete its plans and strategies and to meet its targets, the benefits from Ahold's plans and strategies being less than anticipated, the effect of general economic or political conditions, the actions of competitors and other third parties, increases or changes in competition, Ahold's ability to retain and attract employees who are integral to the success of the business, acquisition and integration and risks related to large strategic projects, collective bargaining, information security, business and IT continuity, food and non-food safety, social compliance, responsible retailing, social media, insurance programs, the euro, contingent liabilities associated with lease guarantees, Ahold's liquidity needs (including but not limited to health care and pension funding requirements) exceeding expected levels, foreign currency translation risk, credit risk, interest rate risk, unforeseen tax liabilities and legislative and regulatory environment and litigation risks, and other factors discussed in this Annual Report, in particular the paragraphs on How we manage risk and in Ahold's other public filings and disclosures. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. Ahold does not assume any obligation to update any public information or forward-looking statement in this Annual Report to reflect events or circumstances after the date of this Annual Report, except as may be required by applicable laws. Outside the Netherlands, Ahold presents itself under the name of "Royal Ahold" or simply "Ahold." For the reader's convenience, "Ahold," "the Company," "Ahold group," or "the Group" are also used throughout this Annual Report. The Company's registered name is "Koninklijke Ahold N.V.". Nielsen's information as included in this Annual Report does not constitute a reliable independent basis for investment advice or Nielsen's opinion as to the value of any security or the advisability of investing in, purchasing or selling any security. |
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