Summary:
Distribuidora Internacional de
Alimentacion S.A
Primary Credit Analyst:
Raam Ratnam, London +442071767462; raam.ratnam@standardandpoors.com
Secondary Contact:
Melvyn Cooke, Paris (33) 1-4420-6783; melvyn.cooke@standardandpoors.com
Analytical Group Contact:
Industrial Ratings Europe; Corporate_Admin_London@standardandpoors.com
Table Of Contents
Rationale
Outlook
Standard & Poor's Base-Case Scenario
Business Risk
Financial Risk
Liquidity
Ratings Score Snapshot
Related Criteria And Research
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Summary:
Distribuidora Internacional de Alimentacion S.A
Business Risk: SATISFACTORY
CORPORATE CREDIT RATING
Vulnerable
Excellent
bbb-
bbb-
bbbBBB-/Stable/--
Financial Risk: INTERMEDIATE
Highly leveraged
Minimal
Anchor
Modifiers
Group/Gov't
Rationale
Business Risk: Satisfactory
Financial Risk: Intermediate
• Good market position as one of the leading
hard-discount food retail store operators in Spain.
• Significant market presence of proximity stores in
urban areas.
• High proportion of private label penetration and
franchisee operated stores.
• Growing presence in Latin America.
• Financial flexibility as a result of long-term operating
leases with short notice exit options.
• Successful execution of acquisition strategy in Spain,
following exit from France.
• Comfortable debt maturity profile and adequate
liquidity.
• Elevated capex as acquisitions are integrated
resulting in negative free operating cash flow over
2015.
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Summary: Distribuidora Internacional de Alimentacion S.A
Outlook: Stable
The stable outlook reflects our view that Día will moderately improve its financial risk profile while it executes its
growth strategy, and that operating earnings will continue to improve, based on a strategy that is successful in
Spain. We believe that Día should continue to achieve strong revenue and profit growth in Spain and the emerging
markets, enabling it to reduce adjusted debt to EBITDA to below 2x in 2016, through improved free cash flow
generation.
Upside scenario
We would consider a positive rating action if the group successfully integrates the new acquisitions and on the
back of sustained improvement in trading, margin improvement, and capex normalization, Día materially improved
its FOCF generation, leading to the strengthening of the FFO-to-debt ratio toward 45% and with debt to EBITDA
under 2x.
An upgrade would also be contingent on our assessment of the sustainability of this financial profile and
management's financial policy commitment to using DCF for debt reduction.
Downside scenario
We could lower the rating if a more aggressive financial policy weakened credit metrics, especially if accompanied
by increased acquisition activity and shareholder-favoring initiatives that raised adjusted debt to EBITDA towards
3x, accompanied by continued negative FOCF. A negative rating action could also arise if heightened competition,
integration challenges from acquisitions, and tougher-than-expected economic conditions in Spain and emerging
markets caused operating performance to weaken or profitability to deteriorate substantially.
Standard & Poor's Base-Case Scenario
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Summary: Distribuidora Internacional de Alimentacion S.A
Assumptions
• Real GDP in Spain to rise by 2.2% in 2015 and 2.4%
in 2016.
• Topline growth of over 15% in financial year 2015
owing to organic growth and acquisitions; we
forecast strong sales performance for the next two
years.
• EBITDA margin to drop by 50-70 bps in 2015 owing
to integration of Spanish acquisitions and then
improve in 2016 due to stable profitability in Iberia.
• Elevated capex of about €540 million in 2015 due to
acquisitions, normalizing to around €350 million in
2016.
• Positive working capital contribution of €50
million-€75 million.
• A 40% haircut for sizable cash located in Latin
American subsidiaries for the purposes of calculating
surplus cash.
• A dividend payment of about €110 million and share
buy-back plan of €200 million in 2015.
Key Metrics
2014A 2015E
2016E
S&P-adjusted EBITDA margin (%)
8.2
6.7-7
7.2-7.5
S&P-adjusted debt-to-EBITDA (x)
1.2
2-2.1
1.6-1.8
S&P-adjusted FFO-to-debt (%)
61.8
36-38
40-43
A--Actual. E--Estimate.
Business Risk: Satisfactory
Significant portfolio adjustments to consolidate its market position in Spain
Our assessment of Día's business risk profile is underpinned by its key position as one of the leading hard-discount
food retail store operators in Spain, with a growing presence in Latin America. We also view favorably Día's distinct
business model, primarily based on a significant market presence of proximity stores in urban areas. Further positive
factors for the business risk profile are the nondiscretionary nature of food spending and Día's sound profitability,
which has continued to improve in tough market conditions. We also view positively the company's operating
flexibility as a result of its distinct business model--consisting of long-term operating leases with short notice exit
options--as well as its high private label penetration and use of franchised stores which allows for efficient capital
allocation. All this is tempered, however, by Día's highly fragmented and competitive markets and a less diversified
business than peers, as it generates about 70% of EBITDA in Spain.
That said the group has undertaken several portfolio adjustments notably the exit from the French market and
undertaking acquisitions in Spain to consolidate and improve its market position. With the gradual improvements in
the Spanish economy and through sound execution of its consolidation strategy we anticipate the group will report
double-digit top-line growth with gradual improvement in margins from 2016 as the new acquisitions are integrated.
S&P Base-Case Operating Scenario
We forecast that Día will achieve strong topline growth of over 15% in financial year 2015, through a combination of
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Summary: Distribuidora Internacional de Alimentacion S.A
organic growth helped by strong execution and improved Spanish economy and new contribution from acquisitions (El
Árbol) and the integration of Eroski stores. The Standard & Poor's-adjusted EBITDA margin will likely contract to
below 7% in 2015 due to the dilutive effect of new acquisitions and should improve by up to 50 bps in 2016. We
anticipate the operations in Latin America to continue their robust performance although their contributions to the
group profits and cash flows will unlikely materially increase from current levels, over the next two years.
Financial Risk: Intermediate
Elevated near-term leverage due to acquisitions and higher capex
Both of the Día's core ratios--adjusted debt to EBITDA and adjusted FFO to debt--support its "intermediate" financial
risk profile. However, recent acquisition activity, higher investment, and the exceptional return of €200 million to
shareholders from the French operations disposal will result negative free operating cash flows . Over 2016 we expect
the company's ratio of adjusted debt (adjusted mainly for operating leases and surplus cash) to EBITDA to fall below
2x and its FOCF to recover as it returns to its normal capex levels and contributions from acquisitions increase.
The unadjusted EBITDAR (EBITDA plus rent) interest plus rent coverage ratio (EBITDAR coverage) should remain
above 2.5x in 2015 and should also improve over 2016 as profit margins recover. Overall, the financial risk profile is
also supported by Día's balanced financial policy and its commitment to investment grade ratings.
S&P Base-Case Cash Flow And Capital Structure Scenario
We forecast negative cash flow from operations in 2015 due to the recent acquisition activity, higher investment, and
the exceptional return of €200 million to shareholders. This should turn positive, however, in 2016 to €130
million-€150 million, supported by both improvements in working capital of up to €75 million and normalization of
capex to around €350 million. We do not factor in additional shareholder returns in our base case. The materially
improved FOCF generation should lead to debt to EBITDA of below 2x and the FFO-to-debt ratio of around 40%-43%.
Liquidity: Adequate
Liquidity is supported by comfortable debt maturity profile and committed facilities.
Principal Liquidity Sources
Principal Liquidity Uses
We estimate principal liquidity sources of about €1.3
We forecast liquidity needs over the next 12 months to
billion for the next 12 months, which includes:
be over €900 million. These uses include:
• About €200 million of unrestricted cash and cash
equivalents;
• A €700 million undrawn credit facilities with €300
million maturing in 2018 and €400 million in 2019;
• €350 million-€400 million of projected cash funds
from operations in 2015; and
• €50 million of working capital inflow.
• €540 million of capex in 2015, normalizing to
around €350 million in 2016;
• €110 million of dividends;
• Seasonal working capital requirements of €50
million; and
• Share buy-backs of over €200 million.
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Summary: Distribuidora Internacional de Alimentacion S.A
Ratings Score Snapshot
Corporate Credit Rating
BBB-/Stable/--
Business risk: Satisfactory
• Country risk: Moderately high
• Industry risk: Intermediate
• Competitive position: Satisfactory
Financial risk: Intermediate
• Cash flow/Leverage: Intermediate
Anchor: bbbModifiers
• Diversification/Portfolio effect: Neutral (no impact)
• Capital structure: Neutral (no impact)
• Financial policy: Neutral (no impact)
• Liquidity: Adequate (no impact)
• Management and governance: Satisfactory (no impact)
Related Criteria And Research
Related Criteria
•
•
•
•
•
•
Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
Corporate Methodology, Nov. 19, 2013
Corporate Methodology: Ratios and Adjustments, Nov. 19, 2013
Key Credit Factors For The Retail And Restaurants Industry, Nov. 19, 2013
Group Rating Methodology, Nov. 19, 2013
Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012
Business And Financial Risk Matrix
Financial Risk Profile
Business Risk Profile
Minimal
Modest
Intermediate
Significant
Aggressive
Highly leveraged
Excellent
aaa/aa+
aa
a+/a
a-
bbb
bbb-/bb+
aa/aa-
a+/a
a-/bbb+
bbb
bb+
bb
a/a-
bbb+
bbb/bbb-
bbb-/bb+
bb
b+
Strong
Satisfactory
Fair
bbb/bbb-
bbb-
bb+
bb
bb-
b
Weak
bb+
bb+
bb
bb-
b+
b/b-
Vulnerable
bb-
bb-
bb-/b+
b+
b
b-
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