EV Retail Limited, B&M European Value Retail S.A., Heron Food Group Ltd - M&A Call

Aug 02, 2017 AM CEST
BME.L - B&M European Value Retail SA
EV Retail Limited, B&M European Value Retail S.A., Heron Food Group Ltd - M&A Call
Aug 02, 2017 / 10:00AM GMT 

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Corporate Participants
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   *  Paul Andrew McDonald
      B&M European Value Retail S.A. - CFO & Executive Director
   *  Sundeep Arora
      B&M European Value Retail S.A. - CEO & Executive Director

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Conference Call Participants
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   *  Andrew Ian Porteous
      HSBC, Research Division - Analyst, European Retail
   *  Borja Olcese
      JP Morgan Chase & Co, Research Division - Analyst
   *  David McCarthy
   *  Jonathan Pritchard
      Peel Hunt LLP, Research Division - Retail Analyst
   *  Pradeep Pratti
      Crédit Suisse AG, Research Division - VP and Equity Analyst
   *  Tushar Jain
      Goldman Sachs Group Inc., Research Division - Research Analyst

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Presentation
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Operator   [1]
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 Good day, and welcome to the acquisition of Haron Foods by B&M Conference Call. Today's conference is being recorded.

 At this time, I would like to turn the conference over to Simon Arora, Chief Executive, B&M. Please go ahead, sir.

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 Sundeep Arora,  B&M European Value Retail S.A. - CEO & Executive Director   [2]
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 Good morning to you all, and thank you for your interest this morning. For those who aren't aware, this analyst call is being supported by a webcast, of a presentation, a short deck on the transaction that we're about to discuss. Please do log into that webcast so that you can see the slides. They contain some numbers and facts and figures that you'll find useful. And if you can't access that webcast, please do feel free to go to our website. Our corporate website is bandmretail.com. If you then turn to the Investor tab and the Presentations tab underneath that, you'll see the deck and -- on our website, under the title of Acquisition of Haron Foods.

 So just to pause for a little moment whilst (inaudible) and prepare yourself for the presentation for those who haven't already done so.

 Very good. I'd like to start. So in summary, we here at B&M are very excited by this highly positive developments in terms of our long-term strategic growth. Many of you [designators] will know that we consider ourselves to be a highly disruptive retail business.

 In general, merchandising in the U.K., 10 years ago, we were approximately 30 or 40 shops based in Lancashire. Whereas today, we have over 540 U.K. stop shops and enjoy U.K. revenues in excess of GBP 2.3 billion last year. That disruption is, of course, based on our value proposition. And when we think about the Convenience Grocery sector, we see that as being a market where similar disruption provides us with great opportunity.

 The transaction was an off-market transaction that absolutely plays to our sweet spots. In the occasion by the retirement of one of our shareholders of the business. It's a family-owned business. And the last 5 months, we have worked closely with the shareholders, aimed to get to know the business and be to come to the transaction that took place early hours of this morning.

 So if we turn to Slide 1 of the deck, we share with you an overview of how we believe Heron fits in the U.K. grocery market. The way we would categorize the U.K. grocery market is in 3 different ways: Following supermarkets, such as the Big 4, the Convenience Store channel, where you have, in particular, Tescos and Sainsbury's, but also, of course, the co-op and other banners such as Nisa, Premier and Londis. And then we have a third channel, which is a Discount channel, which has been much reported and is, of course, dominated by ALDI and LiDL. Now Heron Food sits between the second 2 of those characterizations. It is a discount convenience store and fits firmly in that space between discounts and convenience.

 The point that, obviously, needed to be made here is that, as one looks at U.K. grocery returning, the growth profiles of those 3 different channels are very different. According to [Kemtar], and most commentators will agree on this, the sector that is the full-service supermarkets, last year pretty much achieved only flat year-on-year growth. The convenience channel grew by 3% year-on-year according to the Kemtar July 2017 market reports. And of course, discounts grew by an even stronger 5% year-on-year. And I've explained, Heron fits nicely in that intersection between discount and convenience.

 Turning the page to Slide 2. You have here some facts and figures on the business at a glance. So the business has been established 40 years. And very successfully run by the Heuck family from a space in Hull. There are 251 stores, and it's operated by the company, and these stores average 2,500 square foot of space, created primarily across the North and the Midlands. That contrasts, of course, with the B&M model, which is very different. Our store size is, on average, 19,000 square feet. Heron stores are located and in Town-Centres on the High-Street or your local neighborhood (inaudible) in a suburb of such a town or city and, to a lesser degree, in some regional, smaller shopping centers.

 Heron only sells food, and that food is 50% ambient, 25% frozen and 25% chilled. Heron's history and its origins arise from a very strong expertise and reputation in its catchments for frozen food. And that, of course, is a catch [phrase] that B&M, hitherto has not been involved in.

 Another interesting element to the Heron model, as opposed to the B&M one is that being a convenience proposition, most of its shoppers are pedestrian, visit very regularly and the average spend is only GBP 5. I'm sure most people will be familiar with this Convenience channel as being one that particularly challenges its shoppers today.

 Finally, the business benefits from its own distribution center and its own transport fleet, that, in both cases, have multi-temperature facilities.

 I now turn to Slide 3, where we showed you our strategic rationale for this morning's transaction. So on Slide 3, we set out what we believe the transaction adds to our existing business. It points out the resonances between the 2 models; it talks to the synergies that we expect to achieve through this transaction; and finally, gives you an insight into our growth plans for that Heron business.

 So I think the first thing I would emphasize is that we are gaining an additional U.K. discount brand as well as the format for our allowance. The plan is to retain the Heron brand as a separate business unit within the group. As I've mentioned previously, the group now enters complementary product ranges. Previously, we were only in ambient food, but we now will be participating in the frozen food sector and indeed, the chilled food sector.

 I would share with you that for some time now, frozen food has been a category that we have been considering. As you would expect, we conduct regular focus groups amongst existing B&M shoppers. One of the consistent pieces of feedback from those focus groups and in the exit surveys from our existing shoppers is that they wonder why we do not sell frozen food. They're attracted to our big brand, big savings proposition, and they themselves have been saying to us, that, that would appeal to them in the frozen food category.

 And the final thing I'd say about what it adds to the growth is, of course, the fact that the store format is very different and the store type is very different to a conventional B&M. The fact that it's just 2,500 square foot, serving a very local immediate catchment that typically is no more than a kilometer away from the actual store. That's a very different proposition to the B&M retail model.

 But on the question of similarities between the model, as you can see on the slide, both businesses share this discipline around limited assortments. Our ability to be discounters is predicted on the fact that we, as a business model, only carry the key best-selling lines, reference the fact that Heron only sells about 1,200 stock keeping units in its stores. Both businesses understand culturing the importance of being low-cost operators and driving simplicity throughout the business and stamping out, where possible, any costs arriving from complexity. We like to keep things simple.

 I think the other thing I'd emphasize is that, both Heron and B&M, in terms of grocery, are focused on the primal brands. Above the door of B&M, just below the B&M sign, we typically have our strap line: Big brands, Big savings. In exactly the same way, Heron's role in the market is based on selling the key brands rather than an [unlabeled] proposition that you might see at ALDI, LiDL, or indeed, Iceland and Farmfoods. Probably worth mentioning that a lot of the suppliers of those lending brands are already B&M suppliers and indeed, are keen to work with us and at a group level as we have now entered those categories.

 So in the question of synergies, just to run through those as we see them, there is an obvious opportunity around the shared buying on ambient food that both businesses sell. There's also some optionality and opportunity around climbing some of B&M's bestsellers that perhaps lend themselves to a convenience format that Heron previously has not sold. The obvious examples of that are our beer, wine and spirit ranges, or indeed, some of our best-selling FMCG ranges, such as toiletries or household cleaning goods. At the margin, there might, of course, be opportunities on general merchandises as well.

 And finally, those of us who -- those of you who follow our business will know that we take great pride in the behind-the-scenes technology at B&M, around auto replenishments, the ability to roll up stores, opening a new store every single week, and (inaudible) the IT systems that provide the backbone to our supply chain. We do see there being opportunity to transfer some of that know-how to the Heron business as it continues to deliver its growth. And absolutely, the plan is to continue to grow the Heron business. We fully accept that it's a regional player with 251 stores in a market where all the retailers have demonstrated that you can have a multiple higher than all those stores as you go national. The business is already open 10 to 20 stores per annum, and we see that's at least continuing.

 So to summarize, we see the opportunity to grow Heron as an appropriate position to take in the market that is going through some consolidation and going through some change. I think it's true to say that in any market where there's change or consolidation, there will be opportunity for growth.

 And in the final thing I'd say to you is that the Heron business is in good health, very good health. And on a year-to-date basis, its lifelike is very nicely positive. Indeed, not dissimilar to the lifelike performance of the B&M business, which I think serves to reaffirm our earlier observations on prior quarter's analysts and investors that actually the British macroeconomic climate is very supportive of discount retail propositions.

 I'll now turn the page to Slide 4, which gives you some granular detail on the financial profile of Heron foods.

 Last year the business enjoyed revenues of GBP 274 million from its 251 stores, and generated just slight of 7% EBITDA margin on that revenue. Because it is a growth business with new stores opening every year. It has a CapEx requirements running at approximately 3% of revenues for the year that we have recorded on, i.e. full year 2016.

 Turning to Page -- to the summary of the transaction. I actually [defer] to Slide 5, where we set out the features of the deal done this morning. The key bullet points are as follows: We've agreed an enterprise value of GBP 152 million, which represents 8x the 2016 EBITDA of GBP 19 million. The equity price that's derived from that enterprise value is GBP 125 million as up to 2 August, and that equity price gets us a balance sheet of the company as of 31 December 2016, its last audited accounts on the Locked Box basis. You'll see that we have taken on net financial debt of GBP 23 million as part of the funding of the enterprise value, and that's existing financial debt that was in the business that is being assumed by the group.

 As a point of detail I'd also shared with you that the Heron group, on its balance sheet, has GBP 24 million of free-held property, which is being acquired as part of the corporate transaction, and that asset is primarily being noted in distribution center in whole, which is referenced on the earlier slide and on in-house company-owned and operated distribution facilities.

 Of that equity price, we have this morning paid today more than GBP 12 million. That's being funded from existing cash resources, and a further deferred consideration is expected to be paid in the sum of GBP 12.8 million in a couple of years' time.

 Finally, I'd mentioned that we've been working closely with the family shareholders of the business for 5 months now, and I'm delighted to confirm that both Andrew and David Hueck, who are respectively Buying and Finance Director of the business are remaining with the group, whilst Michael is retiring as had been originally termed.

 So that's all I have to say on the deck. Let's turn to Q&A. I should clarify I am joined by our CFO, Paul McDonald, and indeed, Stephen (inaudible), our IR colleague, and both of whom are available later in the day for follow-up calls if needed.

 Moderator, could we go to Q&A please.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) And now we'll take our first question from the queue, Jonathan Pritchard from Peel Hunt.

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 Jonathan Pritchard,  Peel Hunt LLP, Research Division - Retail Analyst   [2]
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 Would you care to put a number on the potential synergies? That's the first one. Secondly, figure out a long-term vision. I mentioned there's a sort of our multiple of 250 stores. What do you think you can get to in the shorter term? What sort of -- what vintage of stores are you opening High Street neighborhood retail park? And then finally, just looking at Slide 4, the sort of historics. Can you just talk us through, I guess, financial '15 free store closures, sounds like that a bit? Was there a change in strategy? What happened there? Is there anything to note in that sort of (inaudible)

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 Sundeep Arora,  B&M European Value Retail S.A. - CEO & Executive Director   [3]
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 Good morning, Jonathan. Thank you for those questions. So in terms of synergies, we've set out the areas in which we expect to achieve those, but we aren't quantifying those at this stage. And I think part of the reason behind that is, of course, the transaction is already immediately earnings-accretive. The business is already a very healthy one that has its own healthy growth; prospects, and where the likes to have reached what we think is a fair and sensible price of the business that is attractive for both B&M shareholders and also for the existing shareholders. In terms of your second question on the 250 stores and how we see that evolving as we open new stores, the phrase, "if it's not broken, don't fix it," and comes to mind. So to answer your question directly, we continue to look for sites that are on High Streets or indeed, local neighborhood grades where there is a catchment that is attracted to Heron's highly compelling value proposition. To answer your question on 2015 and the history of the business, I can clarify that a few years ago, one of the strategic steps that the shareholders took very successfully was to acquire a chain of stores under the brand, Cool Trader, and as part of that transaction, it was always envisaged that some of those stores would be closed as leases would expire et cetera where there was some geographic overlap in terms of immediate catchments. So that was always part of the plan. And of course, once that had been achieved, the financial performance improved accordingly.

 I also mentioned, of course, that 2015 and perhaps the early year was slightly hampered by the fact that the grocery market as a whole went through a period of price deflation, which is always a little bit painful at the margin for any grocery retailer.

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Operator   [4]
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 And now we'll take our next question from the queue, David McCarthy from HSBC.

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 David McCarthy,    [5]
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 Three questions. One is the business, so it has been expanding at 10 to 20 stores per annum. What's your view on that going forward? Are you going to accelerate that, and by how much? Secondly, you talk about consolidation exploitation, but I'm not sure where these opportunities may lie because you've got a unique format, it seems, both in terms of location and the offer. You don't have a fresh food offer. So do you think that you will develop a fresh food offer in the future, which will then allow greater opportunity to expand into other areas and other high-cost occupancy areas as opposed to the type of sites that Heron is in currently? And then thirdly, a delicate question, but are there opportunities for reducing central costs?

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 Sundeep Arora,  B&M European Value Retail S.A. - CEO & Executive Director   [6]
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 Good morning, David, and thanks for those questions. So the business, the last year or 2 has been opening 10 to 20 stores. And clearly, we as a business, have both the financial resources and the experience and the ambition to open more than those number of stores if the opportunities exist. But our base case is to carry on as it's been doing because just as a B&M, we are discerning when it comes to real estate that we sign up to, okay? On to your second question around consolidation. I think the point that I would make is that at the moment, the convenience store channel is one that is not differentiated by price. I would categorize it as being an area where the major players seek to obtain premium pricing, and that's where there's room for a discounter. I can share with you that already, across the estate, within the catchments that Heron trades in, there are already, typically, 2 to 3 competitors of the existing larger players, and yet Heron finds its share of wallets in those catchments based on its compelling price proposition.

 In terms of the specifics of fresh, you're quite right that Heron does not sell fresh foods and vegetables. We take the view that this is actually a part of the proposition that we don't need to sell. Where we trade, there's many already frankly a green grocery there nearby. And if you ask any of the grocers, that fresh arena is probably the lowest margin and the most problematic in which to compete. And then finally, happy to -- I'll be very clear in terms of reducing central costs, that absolutely isn't part of our plans of the business. The business will continue to be headquartered and managed from its head office in Hull, and the team there do a great job, and we don't see that as being part of our business case at all.

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 David McCarthy,    [7]
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 Okay. So on that latter point. That's all very helpful. From that latter point, how will you then extract the synergies if you've got 2 separate buying teams putting in 2 separate orders to deliveries to 2 separate depots between what's the core chain in the Heron acquisition.

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 Sundeep Arora,  B&M European Value Retail S.A. - CEO & Executive Director   [8]
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 So I would suggest that rather than reducing headcount, the actual opportunity comes from shared buying power, an exchange of information between the 2 sister companies. And I can probably share with you that certainly, the Heron business has run very much on -- as a tight ship. So there isn't any compelling reason to want to make any savings in terms of central overheads.

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Operator   [9]
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 And now we take our next question in the queue, (inaudible) from (inaudible).

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 Unidentified Analyst,    [10]
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 Two questions for me, very simple ones. Could you share with us the payback period on the Heron Stores? And secondly, does this deal make you less interested in doing deals in continental Europe?

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 Sundeep Arora,  B&M European Value Retail S.A. - CEO & Executive Director   [11]
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 Paul, would you like to take these questions?

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 Paul Andrew McDonald,  B&M European Value Retail S.A. - CFO & Executive Director   [12]
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 Yes. I was going to say. Certainly, in terms of the payback period, actually, I think we can refer to the B&M business model. You've got to pay it back within 14 months in there, including working capital. If you look at the Heron Stores, not surprisingly, they clearly have a bit more CapEx, and in terms of (inaudible) that they clearly have chilling and refrigeration equipments, et cetera. Although, equally, they do have a negative working capital position as well. So typically, a Heron Store will pay back in 24 months. So yes, it is a little bit longer than a B&M store but equally, it still is certainly a very good kind of return from those new store opportunities and those investments in new stores. Can you ask the second question? I actually (inaudible)

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 Unidentified Analyst,    [13]
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 Does making this deal make you less interested in making deals in Continental Europe?

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 Paul Andrew McDonald,  B&M European Value Retail S.A. - CFO & Executive Director   [14]
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 No. I mean, it hasn't changed us -- our aspiration at all in the retail areas. If the right opportunity comes along in Europe, we'd certainly like to do it. And we've certainly got aspiration to continue to invest in Europe and look for opportunities in Europe. But yes, if the right one comes along and it fits the kind of our strategic fit, yes, we'll certainly look in there as well.

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 Sundeep Arora,  B&M European Value Retail S.A. - CEO & Executive Director   [15]
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 Thank you for the question. I'm going to reaffirm that sentiment. I think some investors might find this acquisition in our home market a little bit of a surprise given that we have recently been talking about the possibility of in-field M&A in Europe, but the reality is it's such a good strategic fit in our mind that it was a no-brainer. And obviously, of course, for commercially sensitive reasons it was inappropriate to talk too much about the opportunity over last 5 months given that it was an off-market transaction.

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Operator   [16]
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 We take our next question Pradeep Pratti from Crédit Suisse.

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 Pradeep Pratti,  Crédit Suisse AG, Research Division - VP and Equity Analyst   [17]
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 A couple of questions for me. First one, can you tell us on like-for-like in the ambient food side, how your pricing is in your B&M stores versus Heron Stores, and Heron versus the rest of the market; second question is, presumably, this doesn't change your 950 stores target for B&M and you would consider going national with Heron? That's the second question.

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 Sundeep Arora,  B&M European Value Retail S.A. - CEO & Executive Director   [18]
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 Thank you. Yes. Well, in terms of the ambient food, whether there's a direct overlap, the selling prices are remarkably similar. But obviously, we are keen to explore what synergies might be achieved through buying together 250 companies rather than 2 separate entities. And turning to your second question around the B&M facia and it's 950 store target, that is entirely changed in terms of the B&M brand, this is with Heron, an entirely different proposition, totally different shop permission. And we actually do see this as being accretive and additional to that store target rather than it being part of it. You asked the question about price difference between a Heron basket and other convenience retailers. I'd rather not give a number. I'd like for you to probably go out there and exercise for yourself. But I think the fact that Heron exists and that's it such as it is, is because there was a genuine price gap between the Heron basket and one of mainstream convenience store charges.

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Operator   [19]
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 So we'll take our next question from the queue, Andrew Porteous from HSBC.

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 Andrew Ian Porteous,  HSBC, Research Division - Analyst, European Retail   [20]
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 Good tail again, just to echo the previous sentiments. Just a one from that as most might have been answered already. In terms of new stores, could you perhaps just talk about what sort of catchments you're looking for in terms of local population demographics, and where do you come for similar work that you have with the [core] B&M (inaudible) on long-term potential?

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 Sundeep Arora,  B&M European Value Retail S.A. - CEO & Executive Director   [21]
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 Yes, certainly. So the existing customer banks of Heron is mostly C1C2DE, and that's reflective of type of catchment in which it trades. Because the business is only 250 stores and is, at the moment, only pretty much in the north of the U.K., we feel that there hasn't been -- there isn't actually a compelling need to stop strain into a different type of local demographic because there are a few [sways] in the country where those catchments exist, but Heron isn't going to be trading, the Midlands, the east of the country, South Wales, and South Coast -- Southwest et cetera. But having said that, if we are able to maintain standards in our stores, if the shopping experience is clean and easy for a shopper, the reality is that I don't think even a "middle-class shopper" would want to pay more than they need to. And certainly, the growth of B&M over the last few years, as we have perhaps moved further south or opened larger stores, our experience has been that, that middle-class shopper is just as keen to save money as anybody else in the U.K. at that market.

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 Pradeep Pratti,  Crédit Suisse AG, Research Division - VP and Equity Analyst   [22]
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 Okay. Just in terms of catchment numbers, I mean, I think, the (inaudible) family shopper were operating on a sort of 2,500 feet, 3,000 feet local catchment, would that be similar for Heron.

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 Sundeep Arora,  B&M European Value Retail S.A. - CEO & Executive Director   [23]
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 The way we think about is sort of a travel time. So within the business, the general rule of thumb is certainly 1 kilometer.

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 Andrew Ian Porteous,  HSBC, Research Division - Analyst, European Retail   [24]
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 That's very helpful. And then if I could just have one quick follow-up on working capital. You talked about sort of synergies in buying et cetera, but are there any opportunities in working capital in terms of just to improve that they're an improving catch payback on the deal?

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 Sundeep Arora,  B&M European Value Retail S.A. - CEO & Executive Director   [25]
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 Paul, are you going to answer that question?

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 Paul Andrew McDonald,  B&M European Value Retail S.A. - CFO & Executive Director   [26]
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 Yes, sure. In terms of working capital, I mean, if you look at the stock, and as you can imagine, it's very tight in terms of the -- on the core products where the pre-frozen and chilled or ambient, actually. It's probably not a huge opportunity. And if you look at them at the moment, if you look at the (inaudible), they are, as I've mentioned before, they do have a negative working capital position, which is approximately about 3.5% of sales actually. As so they do (inaudible) Grocery Sector full stop. And we do have a working capital position, so there's probably no big significant opportunities in that [avenue]

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Operator   [27]
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 And now we take our next question from the queue Tushar Jain from Goldman Sachs.

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 Tushar Jain,  Goldman Sachs Group Inc., Research Division - Research Analyst   [28]
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 Just 2 questions for me. Just in terms of how should we be thinking about frozen and chilled going over in the B&M store. Do you think the existing supply chain of Herons or there would be accelerated CapEx probably in the near term to roll that thing out. Second thing is this could be a good cost OpEx structure of Heron. It does look like -- I'm assuming it's a low-gross margin business than B&M. When the cost structure is pretty tight, do you think -- is that sustainable over the time? Or you might need to invest a bit in OpEx? Those are 2 questions.

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 Sundeep Arora,  B&M European Value Retail S.A. - CEO & Executive Director   [29]
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 So I think the way I'd asked you to think about frozen and chilled within the B&M state is that clearly, there is some optionality around that. There's some upside around that. But actually, it doesn't need to form part of our base case for doing this transaction. As long as the things about retail, of course, we can trial things rather than having to make an all-or-nothing decision. In terms of your question around gross margin, I can share with you some direction that actually you'd be pleasantly surprised by the gross margins within Convenience retail. They're actually not particularly dissimilar to the B&M gross margin, and that's because actually, frozen, in particular, is an attractive gross margin category relative to, for example, fresh fruits and vegetables that we talked about earlier.

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 Tushar Jain,  Goldman Sachs Group Inc., Research Division - Research Analyst   [30]
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 Can I just ask one more question? What is the average lever on the stores?

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 Sundeep Arora,  B&M European Value Retail S.A. - CEO & Executive Director   [31]
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 Good question. Paul, do you have that to your end?

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 Paul Andrew McDonald,  B&M European Value Retail S.A. - CFO & Executive Director   [32]
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 I don't, actually. I don't know how much it is. I think it's not dissimilar to B&M's, actually, kind of around 8 to 9 years-or-so. So it's relatively similar, actually.

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 Sundeep Arora,  B&M European Value Retail S.A. - CEO & Executive Director   [33]
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 And usually it is within 10 years for that transaction.

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Operator   [34]
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 We take our next question from (inaudible) from RBC.

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 Unidentified Analyst,    [35]
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 Just a couple of questions. I'm wondering about what's the overlap is with Heron stores and any existing B&M bargain stores? I understand that (inaudible) grocers are different, but just wondering what the overlap is there? And what are the incremental CapEx can we expect to be spent on Heron, if any?

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 Sundeep Arora,  B&M European Value Retail S.A. - CEO & Executive Director   [36]
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 Thanks for the questions. So to save any one of you having to go out there and map the overlap, I'm happy to share it with you. It's approximately 80 stores, but the fascinating thing is that those 80 stores don't enjoy any particularly worse store contribution margin than the rest of the state. So I think that reaffirms what I said earlier around these 2 formats being able to coexist because, of those 80 stores, while, say, might be within, should we say, a kilometer or mile of each other. They'll be serving different shopper missions. And the B&M store, for example, might be a drive-to location that's trading; primarily off its general merchandise, and the grocery sales in that store are just in bulk buys, remembering of course that only overlap at the moment is purely on the ambient grocery. And so the -- we're comfortable that there are no negatives around geographical overlap on this transaction. And on the second question around CapEx, we don't envisage any major items. The business already has its own fully functioning and efficient modern purpose built distribution facility. The CapEx profile of the Heron business will probably remain unchanged in terms of expense of revenues, and that's driven, primarily, by just new store openings.

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Operator   [37]
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 Thank you and now we take our next question from Borja Olcese from JP Morgan.

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 Borja Olcese,  JP Morgan Chase & Co, Research Division - Analyst   [38]
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 Coming back to the gross margin, can you give us an indication of the level effectively of the gross margin of this business I'm seeing. And very quickly flipping through the company (inaudible), I'm seeing a surprisingly low gross margin, actually. And here, I wonder if I'm looking at the wrong accounts or something. Should the level be somewhere between your own gross margin on the grocery's gross margins? Or effectively, a lower gross margin than -- than that of the Groceries as this is a more Discount proposition? Or another way to put it, should we -- how should we think about the loop gross margin going forward? Do you know (inaudible) that kind of gross margin going forward as the market expects?

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 Sundeep Arora,  B&M European Value Retail S.A. - CEO & Executive Director   [39]
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 Thanks for your question. So you hopefully sympathize with me that it would not be appropriate for me to share too much granular detail around this on the basis that when one looks at this sector, very few of the players break out gross margin by format type. I would also share with you that particularly, within this sector, there are different ways of accounting for gross margin so that the store costs are put into gross margin when you look at in-house figures for either this business or in other business in the sector. But I will answer your question directly. So as you think about the gross margin for the group going forward, there will be a modest, very modest decline to the group average, but not something that we think changes the overall profile of the group's P&L.

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 Sundeep Arora,  B&M European Value Retail S.A. - CEO & Executive Director   [40]
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 We might run of time, and that this is arranged at short notice. Moderator, could you just tell them there are 3 or 4 minutes, please.

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Operator   [41]
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 (Operator Instructions) And there is nobody else in the queue, sir, this time to ask question so I would like to send the call back to you for any additional or closing remarks.

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 Sundeep Arora,  B&M European Value Retail S.A. - CEO & Executive Director   [42]
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 Enough said. Very kind. Well, thank you all again for listening, and we're very excited by this transaction. Clearly, we've got a huge opportunity in this channel ahead of us, and we look forward to being as disruptive in convenience retailing as we have been in our core general merchandise or variety retailing in the U.K. Thank you for your interest, and thank you for your support. Bye-bye.

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Operator   [43]
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 So ladies and gentlemen that does conclude today's conference call. Thank you for your participation. You may now disconnect.




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