Polymer Logistics Flashcards
Walk me through one of your deals: Polymer
Polymer Logistics is a supply chain solutions business. It specializes in reusable plastic packaging for fast moving consumer goods industry. The business is based in Israel, but operations were 50% US and 50% Europe (UK and Italy). At the time of the deal, the company had done about E125mm in revenue and E25mm in PF LTM EBITDA.
I joined the firm during the first week of June, and while there had been some back and forth prior to my joining, it was essentially announced during my first Monday morning staff meeting that the CEO had reached out to one of our operating partners to convey some shakiness in the process and to see if we would be willing to submit a bid. The company was willing to extend the bid deadline by two weeks and pay $50k of diligence expenses, so by the end of the day we had data room access and were off to the races.
The team was a managing partner, a principal and me, so it was a great deal experience for an internship. I was able to take a big role in terms of coordinating some of the third party diligence, building the model and putting together not one but a few books in a really compressed timeline.
We ultimately submitted our first bid about two weeks after I started during a time that felt like a marathon sprint and were totally off on valuation from the company’s expectations. We were willing to do 8x LTM EBITDA at E200mm, which would have been an equity check from us ~$130mm.
It turned out we were far enough off the mark that the company flew its banker overnight from Israel to NY on 2 hrs notice. We ended up working through the unit economics by SKU by country the next day from about 8 am to 10 pm, at which point I think the principal was keeping him up to get the number out of him (ha).
After making wholesale changes to our unit economics, we came back and stretched to 9x going up to E225mm (equity check of E150mm). At that stage it seemed like we were the preferred party and it was just a function of making it all work. MD and Principal made a site visit, talked through what an earn out would look like, etc., but then when they got back the company went dark on us. Within a few days we found out that despite being assured no strategics were in the process, Tosca, one of the larger competitors backed by Apax bought the company for about 25% more than we were offering.
What was the investment thesis?
1) Big market with favorable tailwinds
A) Market in Europe ~60% penetrated whereas only 12%-15% in the US
B) Polymer and only public pure play comp, IFCO, growing volumes at >10% annually
C) Strong medium-term trends in sustainability, automation, cold-chain, etc.
2) Strong unit economics
A) Unlevered ROICs (cash flow per trip x trips / build costs) in the 20%-40% range
B) EBITDA contribution margins (EBITDA CM/price per trip) in the 30%-50% range
C) Payback period (Annualized EBITDA/build cost) 2-4 yrs
3) Strong barriers to entry
A) Capital intensive business - manufacturing (9k sqm, 21 molding machines, 1,600 tons/mo capacity), supply chain/wash distribution throughout US and Europe
B) Strong customer relationships - claimed to have never lost a customer in history
4) Strong management
A) CEO was one of the company’s founders and had been in the industry for more than 25 yrs
B) Was company’s largest shareholder at 20%
Post investment value creation initiatives?
1) Continue to grow share in the US
A) Big recent contract wins in terms of Walmart and Kroger, had just begun to do business with HEB (and ALDI in UK)
B) Want to continue winning share
2) Enter pallet market
A) CEO’s big desire
B) Attractive industry with EBITDA margins >30%
C) Had preliminary conversations with one of the larger US plastic pallet companies about combining operations
Was it a good deal?
It was an okay deal.
It would have been a good deal if we could have gotten in at 9x and built out or acquired a pallet business accretively.
It wasn’t a great deal because we were paying full price, didn’t have clear line of sight on the post-txn value creation initiatives, and potential asymmetric downside in terms of losses and capex.
What did you like about the deal?
1) Big market with favorable tailwinds
A) Market in Europe ~60% penetrated whereas only 12%-15% in the US
B) Polymer and only public pure play comp, IFCO, growing volumes at >10% annually
C) Strong medium-term trends in sustainability, automation, cold-chain, etc.
2) Strong unit economics
A) Unlevered ROICs (cash flow per trip x trips / build costs) in the 20%-40% range
B) EBITDA contribution margins (EBITDA CM/price per trip) in the 30%-50% range
C) Payback period (Annualized EBITDA/build cost) 2-4 yrs
3) Strong barriers to entry
A) Capital intensive business - manufacturing (9k sqm, 21 molding machines, 1,600 tons/mo capacity), supply chain/wash distribution throughout US and Europe
B) Strong customer relationships - claimed to have never lost a customer in history
4) Strong management
A) CEO was one of the company’s founders and had been in the industry for more than 25 yrs
B) Was company’s largest shareholder at 20%
What did you not like about the deal?
1) Not certain to continue growing
- Non-trivial resistance to adoption in the US
- Product market fit in biggest market
2) Losses, maintenance capex and FCF
- Unclear business would ever make cash flow
- Unclear business could support leverage given capex requirements
- Relationship between losses and capex
3) Exit
- Not clear PE buyer for business dramatically limits universe of buyers
4) Value creation
- No clear line of sight to asymmetric upside opportunity
- Pallet business not certain
- Continued growth in US challenging due to product market fit
Would you have done the deal?
Yes, but at no more than 9x.
Pro
1) Unit economics
- 20%-40% ROIC
- 30%+ EBITDA CMs
2) Global footprint
- 1 of 2 players with US and EUR coverage
3) Solid LT fundamentals
- Polymer and IFCO growing volumes at 10%/yr
- Sustainability, automation, cold-chain
4) Barriers to entry
- 9k sqm manufacturing facility, 21 mold machines, 1,600 tons/mo capacity
Con
1) Product market fit in the US
- Growers oriented to cardboard and resistant to switch
- No regulatory pressure
2) Losses, capex, FCF
- Business was FCF negative in base case
- Losses not fully accounted with murky capex figures
- iGPS, largest plastic pallet business filed for bankruptcy so businesses in this industry could go south quickly
3) Value creation initiatives
- Not clear line of sight to building out US or adding pallet business which was really critical to unlocking >20% IRR
4) Exit
- PE process not robust, i.e. SCC entry
- Banking on strategic, but Brambles just divested IFCO, so counting on two buyers (IFCO and Tosca) to buy versus do it themselves
What were the key model drivers?
1) Contribution Margin
- CM = EBITDA CM per trip / Price per trip
- EBITDA CM = gross profit - variable sales and G&A
- US = 26% (as of April-19)
- UK = 56%
- IT = 28%
2) Build Multiple
- Build Costs / (EBITDA CM * trips per year)
- Effectively the payback period
- US = 3.9x
- UK = 2.9x
- IT = 3.2x
Walk me through the base case?
1) Revenue growth at 15% split btwn US (56%), Italy (36%) and UK (8%)
2) Build costs and CM at YTD/CY18 Figures
- US = 26%, 3.9x
- IT = 28%, 3.2x
- UK = 56%, 2.9x
3) Capex higher of L3Y avg and implied loss rates
4) PPE levered at 60%
5) SGA 7.5% growth/yr
Walk me through the upside case?
1) Revenue growth at run-rae (25%, 25%, 15% thereafter) split btwn US (56%), Italy (36%) and UK (8%)
2) Build costs and CM at YTD/CY18 Figures
- US = 26%, 3.9x
- IT = 28%, 3.2x
- UK = 56%, 2.9x
3) Capex higher of L3Y avg and implied loss rates
4) PPE levered at 60%
5) SGA 7.5% growth/yr
Walk me through the downside case?
1) Revenue growth at 10% split btwn US (56%), Italy (36%) and UK (8%)
2) Build costs and CM at worst of L3Y
- US = 23%, 4.7x
- IT = 28%, 3.2x
- UK = 52%, 2.9x
3) Capex higher of L3Y avg and implied loss rates
4) PPE levered at 60%
5) SGA 6% growth/yr
What were sources and uses?
Sources:
Term Loan = E69mm, 2.75x
Sponsor Equity = E135mm
Memo:
SCC Equity = E115mm
Rollover = E20mm
Uses: Purchase Price of Equity = E134mm Refi Debt = E67mm Financing Fees = E1.5mm Txn Fees = E2mm
What were the unit economics?
TBU
How does pooling work?
1) Pooler Cleaning and Repair Facility
2) Supplier Packing Facility
3) Retailer DC
4) Retailer Store
5) Collection and Reverse Logistics
Who are the key players?
US
- IFCO 50%, Tosca 20%, Polymer 15%
EUR
- IFCO 40%, EPS 30%, Polymer 5%
Note: IFCO divested from Brambles in Feb-19
