(Debtwire) Selecta CFO pushes profitability message as new leadership takes the reins

03 December 2020 | 17:28 GMT

Selecta is aiming to reduce headcount, centralise decision-making and standardise systems and procedures across geographies as its new Zurich-based management team pushes an ambitious transformation plan. Philippe Gautier, the company’s new CFO, told Debtwire the company is focused on profitability.

Investors cheered the vending machine operator’s zero-based 2021 budget, but three sources—a buysider, a sellside analyst and a special situations firm—reserved some skepticism about the company’s strategy given its chequered history. A second buysider and a deep-dive research shop expressed a more constructive outlook.

In an investor call on Monday (30 November) after the company released its 3Q20 results, Executive Chairman Joe Plumeri, CEO Christian Schmitz and the newly-appointed Gautier pushed an upbeat message about the company’s post-restructuring path.

They laid out a transformation plan, under which a new management team in Zurich will have the authority to homogenise local operations across the company’s 16 geographies. Their motto for this vision is “One Selecta”, but the upbeat language did not end there.

“We don't think we are in the vending machine business,” Chairman Plumeri told investors. “We think we are in the business of making people happy, making people feel great, and creating millions of moments of joy and happiness every day.”

This positive emotional message is accompanied by hefty staff cuts. As part of its turnaround plan, management intends to reduce full-time employees by 30% to 7,000 by the end of next year. This is part of a new emphasis on organic growth and higher margins.

“Basically, this company needs to be managed tightly,” one buysider said. Several sources said they felt the company was under pressure to go public, and that sponsor KKR took little action to ease buyside concerns around previous management teams.

While Selecta’s new leadership is promising to deliver what their predecessors did not, some sources expressed skepticism after multiple quarters of lacklustre performance. Several noted that KKR—which injected fresh equity into the group this year—has owned the company since 2015.

“Management’s very upbeat message was weird to me,” said a second buysider. “They are saying that the new guys can suddenly make things work.” Even if past failures were simply the result of mismanagement, the company also faces structural challenges that have been accelerated by COVID-19, the source noted.

The company was touted as a restructuring candidate back in 2013. Its IPO plans never came to fruition, and it struggled with low growth, a heavy debt load, and more recently with working capital shortages—all before the pandemic struck this year.

“This is KKR’s third management team,” said a source at Sarria, an independent special situations firm. “It's a difficult sell that this time the story is different.”

The source welcomed the new focus on margins, and said more centralized management would enhance operational control, but warned that such changes might not be enough to solve the firm’s fundamental strategic issues even if demand recovers from the pandemic.

Sources said these fundamental issues included a focus on expanding footprint despite the cost implications of maintaining a sparse network in some cases, which has led the firm to enter into non-profitable contracts in the past. “They could make more margins out of one city than they do in an entire country,” said the source at Sarria.

The first buysider noted that management is renegotiating some of these contracts, and that many parts of the business had yet to be properly integrated. “They are cleaning things up so the company can grow organically,” he said.

Concentrating management decisions in Zurich may help break down resistance from regional leaders spread the burden of restructuring across the firm. But too much centralisation could prove tricky given Selecta’s large footprint, sources said.

Management will use a “glocal” approach to combine global resources with local expertise and delivery, according to Gautier, the new CFO. “We operate in a very fragmented market but our strength is that we can draw out synergies and build a great platform for distribution,” he said, noting that the company’s recent restructuring would aid this effort.

Moving forward

The debt workout completed in October resulted in a EUR 125m cash injection from KKR, a EUR 755m equity increase at the group level and a reduction in Selecta’s senior secured notes to EUR 973m from EUR 1.471bn. Further upside relies on the turnaround execution, as reported by Debtwire.

Selecta’s 3Q20 revenue declined 29.8% YoY to EUR 289.3m, and IFRS 16 adjusted EBITDA fell 58.1% to EUR 29.9m. On a pre IFRS 16 basis, the bottom line plunged 75.6% to EUR 17.4m. As pandemic-related restrictions were eased, results for the quarter ended September improved versus 2Q20, when sales dropped 47.3%.

The company’s post-restructuring notes climbed this week. The first lien EUR 693m 8% senior secured 2026s gained two points to 95.75-mid and the second lien EUR 240m 10% senior secured 2026s improved four points to 77.5-mid, according to Markit.

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The numbers are encouraging and better than expected, two of the sources noted. But it is still too early to estimate what normalised post-restructuring and post-pandemic revenues and EBITDA will look like, said the source at Sarria and the second buysider.

“Management will have to choose the company’s size based on the post-Covid rebound. But unless there is a bigger shift towards accentuating sales, we have trouble imagining comfortable free cashflows,” said the source at Sarria.

Overall, 3Q20 results do not reveal much about the longer-term recovery trajectory for Selecta, which is highly dependent on a recovery in traditional workplaces, according to independent deep-dive research firm Everest.

On the other hand, the move towards more flexible working arrangements could lead companies to shift from traditional canteens to micro-market models, which could benefit vending machines sales, said Gautier.

In 4Q20, management expects topline to decline some 35% YoY on the back of new lockdowns. The company will face some adverse working capital impact, and non-recurring expenses will have the biggest negative impact on cashflow, according to the sellside analyst.

“The restructuring has just begun and there are some clouds for 4Q,” the analyst said. The quarter will be worse than initially expected. But Selecta is in a stronger liquidity position for 4Q20 and 1Q21, and its zero-budgeting approach is a prudent way to face the crisis in 2021, he added.

Selecta had EUR 103.6m in cash and available liquidity of EUR 111.3m as of September, although that was before to the EUR 125m cash injection completed in October. Even allowing for some cash burn in October related to one-off costs, the company has over EUR 200m of available liquidity, which is ahead of expectations, according to Gautier.

“We are in a good position to face the short term headwinds and roll-out our plan,” he said, adding that the firm is not building a budget with expectations of a big recovery 2021, as coronavirus will still impact the business.

Which way from here?

During the investor call, Chairman Plumeri noted that in most markets where Selecta operates, it only has around 10%-12% of market share, despite being a leading player. That implies room for consolidation, sources said. “They hinted that there's still a lot of upside left,” the first buysider noted.

But that could be seen to run counter to talk of “right-sizing” the business, said the second buysider. Selecta consolidated its position by acquiring Pelican Rouge and Argenta but has been dogged by issues with integrating the two firms, said three sources.

“They seem to be focused on organic growth and prioritizing value customers over volume customers—but when you lay off so many people, will you put Selecta in an acquisition mode by early 2022?” questioned one analyst.

Management’s focus now is to deliver the One Selecta turnaround, but consolidation is possible down the road, said Gautier. “In the medium and long term we will continue to be a market consolidator, but there are no M&A plans for now,” he said.

By Mario Braga