Carrefour S.A.

Alexandre Bompard - Chairman & CEO Pierre-Jean Sivignon - CFO

Maxime Mallet - Deutsche Bank Cedric Lecasble - Raymond James Arnaud Joly - Societe Generale Edouard Aubin - Morgan Stanley Andrew Gwynn - Exane Sreedhar Mahamkali - Macquarie Daniel Ekstein - UBS Bruno Monteyne - Bernstein David McCarthy - HSBC Andrew Porteous - HSBC

Good evening, everyone. This is Alexandre Bompard, and I'm very pleased to be with you today to say a few words to introduce this call.

After these few words, I will leave you with Pierre-Jean for the presentation of Carrefour Group's first half numbers. As you know, it has now been six weeks since I've taken over as CEO of Carrefour.

Since then, I started visiting stores, logistic centers and e-commerce sites. I met the top executive of the Group, and I organized detailed business reviews of all of our operations.

This allows me to start gaining a deep understanding of the Group, its culture and to learn more about its people, which is of extreme importance for me. I will continue this work in the coming weeks, notably by visiting the countries in which Carrefour is present.

I've also have started working on constituting my management team and on the transformation plan of the Group. Six weeks is a short amount of time but it's enough time to confirm my initial impression that Carrefour is a great company with tremendous potential to further improve its performance.

That's why I accepted with great enthusiasm the position that was offered to me. Carrefour has many strong assets.

I will not list all of them, but let me name a few: the leading competitive position of Carrefour in its key markets; the strong expertise of the Carrefour teams, notably in food; its unparalleled multi-format model that allows us to address a broad range of customer needs in food but also in nonfood; a recognized brand that stands for quality; a commitment to sustainable business practices; and last but not least, a sound financial structure. I'm working on leveraging on these extraordinary assets to transform the Group.

Needless to say that Carrefour also faces a number of challenges, which I already identified. Let me start with the need to accelerate the digital transformation of the Group.

The frontiers between online and offline are indeed positively growing in all of our countries and in all our businesses as illustrated by the recent acceleration of partnerships between brick and mortars and e-commerce players. In such a context, Carrefour needs to accelerate the digital transformation and become truly omni-channel in order to compete in the new retail landscape.

We also need to breathe new life into our hypermarkets, notably in France. The hypermarket has been the leading format in most of our markets over the past decades.

However, it needs to be reshaped on the rapid changing customer behavior and to the ongoing switch to online of our businesses. To win in the new retail landscape, I mentioned earlier we also have to raise our profitability and our cash flow generation to leave us closer to our competitors in order to improve our return on capital -- on invested capital.

We also need to work on simplifying our organization on processes to gain an agility and flexibility. This is particularly the case for the countries in which we are facing a difficult macroeconomic environment like Argentina, but efforts have to be made at each level and in each country of the Group.

Last but not least, we will not address these challenges without making our teams work together towards a common goal in order to fully leverage on the fantastic strength of the Group to increase the synergies and sharing best practices between our countries and within each of our countries between our businesses and formats. I know that addressing these challenges is an extraordinarily difficult task, but be assured that I and all Carrefour teams will be focusing relentlessly on addressing these challenges in the months ahead in order to increase Carrefour's operational performance in the short and medium term and unleash Carrefour's potential to meet the market's expectation.

We will have, of course, the opportunity to come back to the market in greater detail by the end of the year. For now, I'm going to leave the call and ask Pierre-Jean to present to you Carrefour Group's first half results which, as you will see, emphasize the need to rapidly address the challenges I just mentioned.

Thank you for your attention, and I look forward to our exchanges. Pierre-Jean, the floor is yours.

Thank you, Alexander. I am Pierre-Jean Sivignon, the CFO of Carrefour.

I'm joined on this call by our Investor Relations team that is Mathilde, Anne-Sophie, Louis, and Alexander. Let us start on Slide number 3 with the key highlights of our first half performance.

We posted solid sales growth of plus 6.2% this half and 2.1% on a like-for-like basis with net sales of €38.5 billion. This reflects continued expansion with 352 openings in the half, mainly geared towards convenience formats as well as the integration of 31 Eroski hypermarkets in Spain and 86 Billa supermarkets in Romania.

This half provides another evidence of the continued rollout of our multi-format model. Our profitability decreased in the half, with EBITDA reaching €1.43 billion, down 1.2% at current exchange rates and 7% at constant exchange rates.

The recurring income, recurring operating income is down 12.1% at current exchange rate and 21.5% at constant exchange rate, reaching €621 million. This represents, respectively, an EBITDA margin of 3.7% and a recurring operating margin of 1.6%.

This growth in recurring operating income mainly reflects two key factors: first of all, a 70-basis point growth in recurring operating income in France, reflecting a strongly competitive and promotional market and greater losses at our ex-DIA stores compared to H1 2016. Secondly, higher losses in Argentina where the economic recovery is slower than expected.

At the same time, we saw, firstly, a pause in the improvement of profitability in other European countries linked in particular to the nonrecurring impact of the integration of our acquisitions; secondly, a continuing solid performance in Brazil, notwithstanding a recent change in regulation on consumer credit that impacted our financial solutions activities. Our retail and cash & carry activities continue to show margin growth.

Thirdly, a return to recurring operating income profitability in Asia, reflecting cost reductions in China and continued solid performance in Taiwan. Our free cash flow, excluding cargo and exceptional items, in the half stands at minus €2.59 billion due to short-term variation of our working capital requirements.

Finally, let me highlight two post closing transactions. Firstly, we successfully completed the IPO of our Brazilian operations on July 20, raising BRL5 billion in the largest Brazilian IPO since July 2013.

Carrefour remains a big majority shareholder in Brazil largest food retailer with a stake of 71.8%. Also in July, our commercial real estate subsidiary, Carmila, successfully raised €629 million to finance its development.

Let's now turn to Slide number 5, the details of sales growth in H1. Reported first half sales reached €38.5 billion, up 6.2%.

On a like-for-like basis, excluding calendar and petrol, sales were up 2.1% in the half. When adding the 0.5% impact of store openings, organic sales for the first six months were up 2.6%.

This half was marked by an unfavorable 0.6% calendar effect. Overall sales growth in the first half that includes acquisitions, favorable foreign exchange and petrol impacts reached a strong 6.2%.

On Slide 6, you see that our H1 revenue increased built on several years of continued organic sales growth since 2012. Over that period, our compound annual growth rate is a solid 2.6%.

On Slide 7, we look at our gross margin from recurring operations. As you can see on the slide, gross margin in value increased by 1.9% at constant exchange rates to over €8.8 billion, as a percentage of net sales, gross margin from recurring operations was down 34 basis points down to 22.9 percentage points.

Half of this comes from the shift in our mix between formats, notably the increased contribution of our cash & carry business, in a context that remains strongly promotional in several of our markets. Moving to Slide number 8, we observe that operating costs were controlled this half.

As a percentage of net sales, operating costs were down six basis points to 17.9%. Operating costs were down in France.

They were stable in Europe, offsetting the inflation of cost in Latin America. On Slide number 9, we turn to our asset cost in the half.

They were up seven basis points as a percentage of net sales, reflecting the investments we made over the previous years, both in stores renovation as well as in IT infrastructure. Let's now turn to our performance that is to say this time by geography, starting with slide on France, which is Slide number 10.

Net sales in our domestic market at €17.3 billion were up 0.7% and 1.3% on a like-for-like basis, excluding petrol and calendar. This is notable performance given that it occurred in a slow consumption market, which was both highly competitive as well as increasingly promotional.

This half, recurring operating income stood at €199 million, down 36.1%. Expressed as a percentage of net sales, recurring operating income margin fell by 70 basis points.

The drop in profitability reflected the tough environment I described previously as well as greater losses at ex-DIA stores compared to the first half of 2016. We have also invested locally in prices starting in late Q2, as I mentioned during the Q2 sales call.

Finally, we increased our efforts in terms of digital transformation which comes with cost. On Slide number 11, we moved to other European countries where we continue to see strong sales growth, up 6.2% in total and up 6% at constant exchange rates.

Our like-for-like sales in the regions were up 2.2%. Recurring operating income at €149 million was down 10 basis points as a percentage of net sales to 1.5%.

This half in a market which was more promotional in several countries, our margin reflect the integration of the Eroski hypermarkets in Spain and Billa supermarkets in Romania, both acquired in the second half of 2016. The semester also saw an increase in digital expenses.

We are currently investing in this region to maintain its growth potential in the years to come. Let's turn on Slide number 12 to Latin America, where Carrefour continues to register very strong sales growth.

This half -- our net sales in the region were up 25.1% at current exchange rates and up 9.4% at constant exchange rates. Like-for-like growth was also strong at plus 7.3%.

As you know, when we released our Q2 sales in early July, we did not provide detailed information on the rest of the world region as we were in a quiet period ahead of our Carrefour Brasil's IPO. So let me take this opportunity today to give you a bit more color on our Latin American and Asian sales.

You will find the full details in the appendices of the press release. Firstly, in Brazil, second quarter gross sales stood at €3.64 billion, up 23.2% and up 9.5% at constant exchange rates.

This is a notable performance given that we are operating in an environment marked by a sharply lower food inflation, down from double digits to low single digits and still continuing to decline, as we speak. Our sales growth was balanced between like-for-like growth of plus 4.5% and expansion, leading to a total organic growth ex-petrol, ex-calendar of plus 9.4%.

During the second quarter, Argentina posted 14.9% like-for-like growth in an environment marked by inflation levels above 20%. This reflects the second consecutive year of declining volumes of food consumption in an economy which has still not rebounded from that perspective.

Recurring operating income, which stood at €293 million, rose by 7.5% on a reported basis but was down 15.5% at constant exchange rates. This reflects the evolution of the Brazilian real and of the Argentinian peso over the period.

Recurring operating income margin was down 60 basis points in the period to 3.6%. This drop reflects, first of all, in Brazil the change in consumer credit regulations as well as startup costs linked to the launch of our Atacadão credit card in our cash & carry stores.

Both impacted the profitability of our financial solutions activity, while profitability of our retail and cash & carry operations continued to remain solid in the half. Secondly, in Argentina, higher costs in a consumption environment that continues to be very challenging as previously described.

Moving on to Slide number 13 where we look at our performance in Asia. As I just did for Latin America, let me provide more details on second quarter Asian gross sales performance.

In China, firstly, the second quarter gross sales stood at €1.04 billion, down 8% at current exchange rates and 5.9% at constant exchange rates. Like-for-like sales were down 6.6%.

We continued the repositioning of our model in that country as well as our action plans. Taiwan posted a 10th consecutive quarter of like-for-like growth at plus 0.6%.

We continue to see the benefit of our ongoing store renovation program as well those of the rollouts of our multi-format model. With our next opening, we will reach the symbolic mark of 100 stores in that country.

Net sales in the region stood at 3.5 -- excuse me, €3.1 billion, down 2.9% in total and down 4.3%, both at constant exchange rates and on a like-for-like basis. This half was marked by an improvement in profitability in the region, underscoring positive effects of the initiatives that we have been implementing to improve performance in China, notably cost reductions.

It also included the benefits of the continued profit growth in Taiwan. Recurring operating income was a positive €12 million, reversing a loss of €7 million in the same period of last year.

As a result, recurring operating margin was a positive 0.4%, growing by 60 basis points. Let's now move to Slide number 14 where we take a look at the Group income statement.

Adjusted net income group share stood at €154 million, down from €235 million during the same period last year. Nonrecurring income was an outflow of €150 million this half.

This takes into account reorganization costs in France resulting from the supply chain Caravelle project as well as our program to improve efficiency in our supply chain -- excuse me, Caravelle, which is our program to improve our efficiency in our supply chain as well as in Spain with the acquisition of Eroski hypermarkets. Our net financial expense is stable compared to last year at €247 million.

Lastly, our income tax expense was down to €89 million from €101 million in the first half of 2016 with an effective tax rate of 37.5% in the half. On Slide 15, we take a look at our investments in the first half.

Capital expenditures are down year-on-year in H1. They stand at €904 million, excluding the Cargo project, and this €904 million compare to €968 million during the same period of last year.

By nature, the share of investments in remodeling and maintenance was reduced compared to 2016 through the benefit of investments in IT and expansions. By region, France accounted for 41% of CapEx versus 47% in the full year 2016, partly due to the completion of the DIA transformation program.

Latin America and Europe roughly represents 1/3 and 1/4, respectively. On Slide number 16, we now turn to free cash flow.

Free cash flow from continuing operations, excluding exceptional items, was an outflow of €2.6 billion versus €2.1 billion during the same period of 2016. This results from slightly lower gross cash flow and a variation of approximately €500 million in working capital requirements.

This includes several items, which covers a temporary increase in inventories as well as continued impact of the reduction of the shopping cart inventory in China. The Group aims at generating a 26 -- 2017 free cash flow at the same level as the one of 2016.

Slide number 17 presents our net debt in the half which, at the end of the period, stood at slightly over €7.7 billion, up from €7.37 billion in the first half 2016. This rise mostly reflects lower free cash flow, as explained earlier, and is, of course, the debt balance ahead of the cash proceeds of our IPO in Brazil.

Keep in mind that our net debt is highly seasonal, maintaining our BBB+ credit rating is part of our financial discipline. On Slide number 17 -- I should say Slide number 18, we continue to see this year a strong take-up for our dividend paid in shares.

71.3% of our shareholders opted for this form of payment, representing supplementary resources for the company of €372 million. Please note that the cash portion of the dividend will be paid out in the second half this year while it was paid out last year in the first half.

On Slide number 19, we look at our debt repayment schedule and credit rating. Over the half, we redeemed €250 million in bonds.

And on June 14, we issued $500 million in non-dilutive cash settled convertible bonds swapped in euros with a maturity of six years at a zero coupon. Our debt maturity now stands at 3.9 years and our credit rating is maintained at BBB+.

Finally, on Slide 20, we turn to the outlook for full year 2017. Firstly, we now expect group sales to grow by 2% to 4% at constant exchange rates.

Second, our 2017 results will be impacted by the performance recorded in H1, which I just detailed, and by an operating environment that we expect to remain difficult in the second half in some countries. As a result, at current exchange rates, the evolution of our full year 2017 recurring operating income versus 2016 should be roughly in line with the evolution we saw in the first half of 2017.

This is due to several items: firstly, the DIA losses that will remain flat year-on-year; secondly, the market that will continue to be promotional and highly competitive in France; thirdly, the slower-than-expected recovery in Argentina; fourthly, a year of investment in Europe in digital transformation as well as an integration of newly acquired businesses. This aims, as mentioned, at maintaining this region's growth potential for the years to come.

Thirdly, Carrefour will strengthen its financial discipline with CapEx between €2.2 billion and €2.3 billion for the year, excluding the project Cargo Property. This compares to an initial forecast of €2.4 billion.

The Group aims at maintaining free cash flow in 2017 at around the same level as in 2016, i.e., around €1 billion. Net debt at the end of 2017 will improve versus 2016.

That concludes my review of the first half of 2017. As Alexandre Bompard said, we have a lot on our plate and are fully focused on addressing the challenges that we have identified and on improving performance.

I thank you for your attention. I will be now happy to answer your questions.

Let me remind you that we will begin with the questions from the analysts, and then we will take some questions from the journalists.

Okay. I thank you very much for your time.

And again, I leave it to you to contact the team to answer any questions you might have in addition to the one you've already asked. Thank you very much, and goodbye.