Delhaize Group & SpartanNash - Global Credit Services€¦ · 6/5/2014 Proprietary & Confidential to Global Credit Services LLC DELHAIZE GROUP Firm Profile • A Belgian international

Jonathan Kanarek, CFA – Director of Analysis

Delhaize Group & SpartanNash

Webinar Presentation

June 5, 2014

Proprietary & Confidential to Global Credit Services LLC 6/5/2014

ECONOMIC OVERVIEW GDP Growth

Real GDP growth was -1.0% in Q1 ‘14 after rising 2.6% in Q4 ‘13

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ECONOMIC OVERVIEW Consumer Confidence Versus Unemployment

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DELHAIZE GROUP Firm Profile

• A Belgian international food retailer with operations in 7 countries • Adjusted for stores being held for sale, its network included 3,308

stores as of March 31, 2014 • Annualized revenue of $17.1B

• Roughly 41% of its stores are based in the U.S.

• Account for 62% of firmwide revenues • Account for 70% of firmwide underlying operating profits

• Leadership Team • Delhaize Group CEO - Frans Muller • Delhaize America CEO - ????

• Retail banners that you’re liking familiar with include: • Food Lion, Hannaford, and Bottom Dollar Food • Sweetbay, Harveys, and Reid’s are no longer part of Delhaize

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DELHAIZE GROUP U.S.-Based Retail Banners

Banner Market Count

Food Lion DE, FL, GA, KY, MD, NC,

PA, SC, TN, VA, WV 1,113

Hannaford ME, MA, NH, NY, VT 184

Bottom Dollar Food PA, NJ, OH 65

U.S. Total * 1,362

* - excludes 119 stores that been held for sale as of 3/31/2014 that have since been sold.

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Delhaize Group U.S. Store Map

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Delhaize Group Prior Strategy – “New Game Plan”

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• Among other things, this strategic plan guided Delhaize Group’s actions in 2009-2013 • Across the enterprise, this program yielded ~€500mm of

annualized cost savings • Growth, efficiency, and corporate responsibility were key

pillars of emphasis

• Converged and standardized several functions under

Delhaize America • Mainly done in 2010; affected areas included accounting,

financial analysis, business development, and legal

• Undertook a chain-wide effort to reposition the Food Lion

banner in the U.S. • As of November 2013, the fifth and final wave of Food Lions

were repositioned • Efforts were not overly capital intensive

• Expanded Bottom Dollar Food format and invested in price at Hannaford


Delhaize Group Food Lion’s Current Strategy - “Easy, Fresh & Affordable”

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• Roll-out of assortment changes impacting 50% of center store SKUs • Expanded product variety based upon consumer research

• Roll-out of improved check-out hardware and software

• Associates training

• More of customer-centric focus

• New pricing tool

• Refining its private brands architecture

• Market test of 77 stores for a cap-ex investment of $77mm

• Storewide remodels to be done over time; newest format will launch in 29 Wilmington, NC stores in Q3 2014


Delhaize Group High Profile Management Changes

• Top post in the U.S. has changed hands again • In October 2012, Roland Smith replaced Ron Hodge as CEO of

Delhaize America • In May 2013, Delhaize Group CEO Pierre Oliviers-Becker announced

he would be retiring by year-end • In September 2013, CEO Smith suddenly left the organization and

shortly thereafter surfaced at Office Depot. Some insiders have suggested that Smith’s departure was a function of him being passed over for the Group CEO slot, which went to Frans Muller

• Ever since, Delhaize America has reported into Delhaize Group CEO Muller

• More changes overseas

• In May 2014, Delhaize Belgium and Luxembourg CEO Dirk Van den Berghe resigned to take a new opportunity outside of the firm

• This unit’s recent struggles have partly undermined the in-process turnaround occuring in the U.S.

• In June 2014, 22-year Delhaize veteran Denis Knoops was appointed to this post

9


Delhaize Group Divestment Update

• In June 2014, the company completed the divestitures of its non-core grocery banners in the U.S. for ~$246mm • Sweetbay, Harveys, and Reid’s were all sold to Bi-Lo Holdings, a

private equity-owned grocer based in the southeastern U.S.

• Separately and also in June 2014, the firm also sold its

distribution center in Plant City, FL to C&S Wholesale Grocers for $28mm • There was little need to retain this DC after divesting the stores

above, most notably Sweetbay

10

DELHAIZE GROUP Latest Quarterly Results

$ in millions 13 Weeks 3/31/14

13 Weeks 3/31/13

Var.

Revenue €5,120 €5,104 0.3%

Adj. EBITDA €304 €337 (9.8%)

Adj. EBITDA Margin 5.94% 6.60% (66 bps)

Adj. Operating Profit €161 €193 (16.6%)

Adj. Operating Margin 3.14% 3.78% (64 bps)

RA Interest Coverage 3.11x 3.26x

Net Income From Continuing Operations €90 €99 (9.1%)

Average U.S. Dollar Per € Exchange Rate $1.3696 $1.3206 93.8%

Proprietary & Confidential to Global Credit Services LLC 6/5/2014 11


DELHAIZE GROUP U.S. Same Store Sales Growth

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14

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DELHAIZE GROUP U.S. Revenue & Store Count

$18,172$19,239 $18,994 $18,807 $19,230

$16,797 $17,117

$0

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FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13

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DELHAIZE GROUP U.S. Operating Profits & Margin

$1,023$1,060

$1,016 $998

$921

$676$639

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U.S. Operating Profits U.S. Operating Margin

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DELHAIZE GROUP Liquidity

• Cash, cash equivalents & current financial assets totaled €1.366B as of March 2014, up 13.7% • Affords the firm flexibility as it deals with performance challenges

on both sides of the Atlantic

• No borrowings on its €600mm multi-currency, unsecured revolving credit facility as of December 2013 • Only reported annually • No evidence to suggest this changing

• No borrowings on its remaining €170mm worth of European bank facilities as of December 31, 2013 • Also, only reported annually

• Liquidity is therefore on solid footing, and provides an important safety net

15


DELHAIZE GROUP Rent-Adjusted Leverage

0.0x

0.5x

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3.5x

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5.0x

FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 Q1 14

Rent-Adjusted Debt to EBITDAR

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DELHAIZE GROUP GCS Observations & Conclusions

• GCS Rating & Outlook: elevated risk, “D” credit with a stable outlook • Raised rating to an elevated risk, “D” from a “D-” on March 29, 2013

• Rationale considers: • Encouraging evidence that shoppers have taken notice of the Food

Lion repositioning • Continuing phenomenon of margin compression in the U.S. • Cost structure in need of rationalizing • Willingness to divest non-core assets • Weakening performance overseas • Recent leadership changes/voids • Firm’s ability to manage rent-adjusted leverage even as performance

has worsened • Solid liquidity position • External factors, which include competition and the reduction in SNAP

benefits

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SPARTANNASH COMPANY Firm Profile

• Formed from an all-stock merger on November 19, 2013 valued at $1.3B including existing debt at each firm

• More diversified, balanced revenue stream • Nearly $8.0B of annualized revenue • Retail segment of 172 stores

• 90 of which have pharmacies • 34 of which have fuel centers

• 21 distribution centers supporting business in 37 states • Leading position in distributing to 174 military commissaries and

more than 400 exchanges globally

• Leadership Team • President & CEO Dennis Eidson (Spartan) • CFO David Staples (Spartan) • President – Military, Edward Brunot (Nash Finch)

• Retail banners include: • Family Fare Supermarkets (54), Sun Mart (20), No Frills (17), VG’s

Food & Pharmacy (13), Bag ‘n Save (12), Econofoods (12), Glen’s Markets (11), D&W Fresh Markets (10), Valu Land (6), and others (17)

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SPARTANNASH COMPANY Retail Locations

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SPARTANNASH COMPANY Food Distribution & Military Locations

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SPARTANNASH COMPANY Merger Rationale

• Pressures to consolidate • Competition in food retail coming from numerous formats • Demand for food distribution services being outstripped by supply

• More diversified, balanced revenue stream

• 40% food distribution • 30% food retail • 30% military

• Nash Finch brings significant scale and geographic reach to the marriage

• Spartan Stores brings a strong management team and a familiarity with operating in markets many supermarket chains would not dare touch

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SPARTANNASH COMPANY Integration Proceeding As Planned

• Integration Update • On track to reach or perhaps exceed its $52mm synergy target by

fiscal 2016 • Year 1: $20mm • Year 2: $35mm • Year 3: $52mm

• Lots of heavy lifting yet to be done, including general ledger & retail stock ledger consolidation, as well as distribution and merchandising systems

• Synergy target is significant when considering size of adjusted EBITDA • $222mm in the new recast fiscal 2013 • $230mm to $239mm projection for fiscal 2014

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SPARTANNASH COMPANY Latest Quarterly Results

$ in millions 16 Weeks 4/19/14

16 Weeks 4/27/13

Var.

Revenue $2,334 $780 199.2%

Adj. EBITDA $65 $36 80.6%

Adj. EBITDA Margin 2.78% 4.62% (184 bps)

Adj. Operating Profit $37 $23 60.9%

Adj. Operating Margin 1.59% 2.95% (136 bps)

RA Interest Coverage 3.87x 3.40x

Net Income From Continuing Operations $12 $9 41.4%

Proprietary & Confidential to Global Credit Services LLC 6/5/2014 23


SPARTANNASH COMPANY Same Store Sales Growth

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q1 14

(new)24

Old New


SPARTANNASH COMPANY Same Store Sales Growth Explained

• Same store sales growth figures include currently only the legacy Spartan Stores retail locations • That subset of stores experienced a 0.7% benefit from the

typically slow post-Easter sales week moving into the firm’s new second quarter

• Foot traffic in these stores declined slightly, while average ticket was positive thanks to items per transaction increasing

• D&W outperforming rest of chain by ~200 bps

• Management intimated that the retail locations acquired in the

merger with Nash Finch were comping relatively similar to their recent history (see next slide) • Last reported quarter ending November 15, 2013 saw these

stores’ suffer a 3.9% comp decline • After Nash Finch increased its investment into the Omaha, NE

market in 2012 with its acquisitions of No Frills and Bag ‘n Save, the firm has since experienced the opening of a new Wal-Mart Neighborhood grocery store

• Management looking to implement a loyalty program in time, re-merchandise, and re-organize the flow of these stores over the next six months

• North Dakota properties seen as being particularly attractive given its 2.7% unemployment rate

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SPARTANNASH COMPANY Legacy Nash Finch Same Store Sales Growth

-4.5%

-4.0%

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13

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SPARTANNASH COMPANY Pro Forma Recast Quarterly Revenue

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Spartan Stores Nash Finch SpartanNash

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Revenue contributions: Spartan Stores – 35% & Nash Finch – 65%


SPARTANNASH COMPANY Pro Forma Recast Quarterly Adjusted EBITDA

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Adjusted EBITDA contributions: Spartan Stores – 57% & Nash Finch – 43%


SPARTANNASH COMPANY Retail Segment: Pro Forma Recast Quarterly Revenue

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Retail revenue contributions: Spartan Stores – 68% & Nash Finch – 32%


SPARTANNASH COMPANY Retail Segment: PF Recast Quarterly Adjusted EBITDA

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Retail adjusted EBITDA contributions: Spartan Stores – 74% & Nash Finch – 26%


SPARTANNASH COMPANY Retail Segment: PF Recast Quarterly Adjusted EBITDA Margin

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SPARTANNASH COMPANY Distribution Segment: Pro Forma Recast Quarterly Revenue

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Distribution revenue contributions: Spartan Stores – 36% & Nash Finch – 64%


SPARTANNASH COMPANY Distribution Segment: PF Recast Quarterly Adjusted EBITDA

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Distribution adj. EBITDA contributions: Spartan Stores – 65% & Nash Finch – 35%


SPARTANNASH COMPANY Distribution Segment: PF Recast Quarterly Adjusted EBITDA Margin

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SPARTANNASH COMPANY Military Segment: Pro Forma Recast Quarterly Revenue

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Military revenue contributions: Spartan Stores – 0% & Nash Finch – 100%


SPARTANNASH COMPANY Military Segment: PF Recast Quarterly Adjusted EBITDA

$0

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Military adjusted EBITDA contributions: Spartan Stores – 0% & Nash Finch – 100%


SPARTANNASH COMPANY Military Segment: PF Recast Quarterly Adjusted EBITDA Margin

37

Lingering effects of sequestration & harsh winter?


SPARTANNASH COMPANY Liquidity

• Cash & cash equivalents totaled $15.1mm as of April 2014, up 174.6% • Both Spartan Stores and Nash Finch historically kept fairly minimal

levels of cash on their respective books; we do not anticipate this changing with the merged entity

• $1.0B secured credit facility matures in November 2018 • Availability of $341.0mm as of April 2014 after considering

$482.5mm of direct borrowings, $11.0mm of letters of credit outstanding, and an excess availability covenant of 10% of the borrowing base

• Facility is secured by substantially all of SpartanNash’s assets

• Total liquidity of $356mm appeared to be sufficient for the combined entity this spring

38


SPARTANNASH COMPANY Rent-Adjusted Leverage – Last 8 Quarters

0.0x

1.0x

2.0x

3.0x

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5.0x

6.0x

Oldest Latest**

Rent-Adjusted Debt to EBITDAR

39

Latest period (pre-recast) of 12/28/2013 included minimal EBITDA contribution;

we estimate the true leverage run rate to be ~3.4x


SPARTANNASH COMPANY GCS Observations & Conclusions

• GCS Rating & Outlook: elevated risk, “D” credit with a stable outlook • Raised rating to an elevated risk, “D” from a “D-” on April 18, 2014

• Rationale considers: • Merger offers economies of scale, business and geographical

diversification, and attractive synergies • Integration risk, particularly given how dispersed Nash Finch

business is relative to legacy Spartan Stores operations • Military segment still struggling from government sequestration cuts

and more recently winter storms • Supply of food distribution continues to exceed demand • Leverage that is comfortable assuming fiscal 2014 adjusted EBITDA

projections are on the mark has recently moved in the right direction • Individual companies’ inability to generate significant levels of free

cash flow • Strong management team • Adequate liquidity for now • External factors, which include competition and the reduction in SNAP

benefits

40


ADMINISTRATIVE ITEMS Contact Information

• Jonathan Kanarek, CFA – Director of Analysis

– Phone: (917) 388-8809

– Email: [email protected]

41


ADMINISTRATIVE ITEMS Upcoming Webinars

• Toys “R” Us

• Thursday, June 19th

• Iwan Juwana, CFA - Senior Industry Analyst

42

Proprietary & Confidential to Global Credit Services LLC

ADMINISTRATIVE ITEMS GCS Ratings Definitions

6/5/2014 43


ADMINISTRATIVE ITEMS Map of GCS Scores & Ratings To Agencies

Global Credit Services

Score Rating

From To S&P / Fitch Moodys

- - 0 NR NR

1.00 1.32 A+ AAA Aaa

1.00 1.32 A+ AA+ Aa1

1.33 1.65 A AA Aa2

1.66 1.99 A- AA- Aa3

2.00 2.32 B+ A+ A1

2.33 2.65 B A A2

2.66 2.99 B- A- A3

3.00 3.32 C+ BBB+ Baa1

3.33 3.65 C BBB Baa2

3.66 3.99 C- BBB- Baa3

4.00 4.32 D+ BB+ Ba1

4.00 4.32 D+ BB Ba2

4.33 4.65 D BB- Ba3

4.66 4.99 D- B+ B1

5.00 5.32 E+ B B2

5.00 5.32 E+ B- B3

5.33 5.65 E CCC+ Caa1

5.33 5.65 E CCC Caa2

5.66 5.99 E- CCC- Caa3

6.00 6.32 F+ CC+ Ca1

6.00 6.32 F+ CC Ca2

6.33 6.65 F CC- Ca3

6.66 6.99 F- C C

6.66 6.99 F- D D

44

Delhaize Group & SpartanNash - Global Credit Services€¦ · 6/5/2014 Proprietary & Confidential to Global Credit Services LLC DELHAIZE GROUP Firm Profile • A Belgian international

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