Date: 03 March 2015 Cucina Acquisition (UK) Ltd 2014 results call Q

Date: 03 March 2015
Cucina Acquisition (UK) Ltd 2014 results call Q and A
The following provides a summary of the question and answer session that took place at the
end of the Q4 results call.
Question – Sweden showed strong margin performance in Q4, what further room for
improvement is there?
Answer – We are very pleased with Q4 performance in Sweden. Brakes has helped improve
procurement, distribution efficiencies, and own brand in Sweden. Improvement in margin is
coming through, with sensible price leadership from the market leader, who appears to be
trying to get an appropriate return on capital from its customers. We would not suggest
upgrading your view of 2015 margins based on Q4 performance, but we are confident that 3%
margin in 2014 should be improved upon in 2015. Long term, margins should structurally be
the same as the rest of Europe.
Question – The French market is challenging, but are you expecting any consolidation that you
have scope to participate in?
Answer - We have said before that we are very focused on our medium-term deleveraging
target of 5 times.
We have also said that we will look at all potentially meaningful M&A opportunities. We will
focus on accretive targets which are consistent with our deleveraging target; that is,
acquisitions with debt funding based on lower than 5x target EBITDA including synergies.
Synergies typically include cross sell opportunities, procurement savings, logistics efficiencies
and other cost saving upsides. Brakes has significant experience of achieving synergies of this
kind from acquisitions it has made in the past.
We can't comment on any specific opportunities by name. However, I can say that there are no
current live opportunities in UK or Sweden, but there are live opportunities in France.
As you know, and our results today have reinforced, our French business, which is the joint
number three player in the market, has been a very strong performer over recent years.
However, it would significantly benefit from greater scale which would fully optimise both its
sales force and its procurement and distribution infrastructure - we estimate that the right
acquisition in this market would add c300 basis points to margin.
Question – With leverage expected to approach the 5x target, do you have any plans to
refinance the capital structure?
Answer – We have said before our base case is a 2016 IPO to be the start of a Bain exit - this
assumption remains. However accretive M&A and resilient growth can enhance our
competitive position and EBITDA, and this could potentially shorten the base case.
Question – What EBITDA is Brakes contributing to the new Fresh Direct joint venture?
Answer – Brakes is contributing £6.5m EBITDA to the joint venture from M&J Seafood, Pauleys,
and Wild Harvest.
Question – When you talk about acquisitions does the 5x synergy adjusted EBITDA refer to
valuation or leverage?
Answer – In the context of overall leverage, debt would be no greater than 5x what we are
acquiring in terms of EBITDA including synergies.
Question – In the reconciliation of adjusted EBITDA you show £13.2m of business exit costs, can
you explain what is included here?
Answer – We have been through a strategic tidying up of the Group, to make us more aligned
and focused. We have mentioned before this has included exiting Creative Foods, our small
manufacturing business, the completion of the exit of our separate Browns meat business, and
Woodwards infrastructure close down costs. We also opened a pilot trial Foodmarket store in
Croydon in 2014 to drive access to fresh sales and better understand this market. The Fresh
Direct opportunity gives us a better value more efficient way to access this market so we have
closed this trial with no current plans to pursue it. A significant proportion of these exceptional
costs are non-cash being balance sheet items.
Question – In relation to financing an acquisition, there is speculation you are looking to
acquire Davigel, how might you finance that, given their standalone EBITDA is €35m before
synergies, so the rumoured target price could be €200m to €300m?
Answer – We cannot comment on specific opportunities by name. However commenting on
general M&A financing, there are a wide range of opportunities to finance an acquisition, with
our focus being on accretive targets which are consistent with our deleveraging target, so we
would focus on acquisitions with debt funding based on lower than 5x target EBITDA including
synergies.
Question - Is the Fresh Direct joint venture part of the restricted group?
Answer – Yes.
Question – Does the joint venture have any other debt over the £55m you refer to?
Answer – No.
Question – How will the three payments of £20m, £20m and £10m to the previous Fresh Direct
owners be funded?
Answer – The first two £20m payments are funded directly from debt drawings made by the
new Fresh Direct Group joint venture, the final £10m will be funded by an equity injection.
Question – Is there any amortisation of this debt, when does it mature, and what is the margin?
Answer – No amortisation, maturity in 4 years, and margin is competitive.
Question – You have said your investment plan would generate one third profits, how much of
this comes from price increases and how much from cost savings?
Answer – We have given guidance before that 33% of our Investment spend would turn into
EBITDA returns, of this 70% would be cost savings and 30% top line growth related. We have
been over delivering on the top line. The cost savings started in Q4, and we are still confident
in the 70% target.
While our revenue growth has been strong, our focus on ensuring we are earning appropriate
returns from all customers may or may not have an impact on top line growth. Where we
started to focus on this in Sweden it has had a positive effect, to be clear, we are having
targeted conversations with a very small number of customers.
Question – What is your capital expenditure budget for 2015?
Answer – Our medium term expectation for maintenance capex remains 1% of revenue,
although it has been lower in the past two years, and there may be some catch up in 2015. We
have spent 82% of our planned combined capex and exceptionals investment by the end of
2014, with the vast majority of the remainder to be spent this year.
Question – What effect has the exchange rate had?
Answer – Foreign exchange had a £3m impact on 2014 results in France and Sweden when
translated to Sterling.
End of Question and Answer session.
Contact for information:
John Legg, Group Treasury Manager, Brakes Group
Tel. 01233 206007; Mob. 07894 096749; email. [email protected]