3i Group plc (III) Earnings Call Transcript & Summary

Good morning, and welcome to 3i's FY '20 Annual Results Presentation. My name is Simon Borrows. I'm the CEO of 3i Group. And also on the line, we have Julia Wilson, CFO of 3i. We plan to go through the presentation, which has been put on our website this morning. I'd like to start by acknowledging the unprecedented situation we find ourselves in. This is not the results announcement I was anticipating several months ago. The world has truly been turned upside down by this global health and economic crisis. Our way of life has changed very abruptly, and social and economic costs are considerable. And they go way beyond anything I have ever seen since I embarked on my career in finance in the early 1980s. I hope you've all have climatized well to working from home. I'm sure you share with me a sincere respect for all those folks working in our hospitals and care homes as well as the other front line staff keeping the lights on and the country fed. At 3i, we've been very focused on the health and well-being of our staff, and of everybody working in our portfolio companies. Our entire organization has moved seamlessly to working remotely and dealing with the significant workload associated with our year-end processes as well as working with our portfolio through this period of disruption. I've been keen to encourage a business-as-usual approach, and our team has responded very effectively. Our main priority is to focus on managing our existing portfolio, and we do this from a strong base, given our prudent management of the balance sheet and good liquidity. And while we don't expect this to be a big year for investment or realizations, we don't see any reason to change of through the cycle, return objectives or dividend policy. Okay. Let's take a look at FY 2020, where we delivered 11 very good months before being hit by the COVID-19 steamroller, and the related lockdowns in mid-March. We closed the year with a total return on equity of 3%, as you can see here, a net asset value of 804p and a dividend of 35p. Julia will talk more about that in a minute. Once again, all of our teams performed very well, delivering a good portfolio performance across infrastructure, PE and in Scandlines. We had a very busy transaction year with 13 bolt-on acquisitions in private equity, a good level of investment and realization activity in both divisions, and the successful completion of the sale of Eurofund V's holding in Action. We made a cash operating profit of GBP 40 million, paid GBP 363 million of dividends, and finished the year in a net cash position of GBP 270 million. Now at 3i, we always spend the first 2 weeks of March going through all of the private equity and infrastructure portfolio companies as part of our regular deep dive portfolio reviews. This year, we had also asked the investment teams to put each company through a COVID-19 filter, and to reset forecasts and cash flows for any pandemic effect. These meetings bring all the senior partners and private equity and infrastructure together with the investment committee. We use this forum to take key decisions on each of our portfolio companies around strategy, management, operations and M&A or exit. This time, we set a new emphasis on the rebasing of forecasts under various lockdown assumptions as well as the production of a detailed liquidity analysis for each company. We're now monitoring these forecasts on a weekly basis for some companies, and a monthly basis for others. We also trialed working from home for IT purposes and then moved straight to remote working and canceled all international travel. We've made extensive use of our video conferencing app, and we've ensured all our staff and those in our portfolios are receiving good advice on safety, mental health and general well-being. We do start from a stable base with a strong balance sheet and good quality real-time portfolio information. We don't have lots of property or any planes or cruise ships. We're not owners of carbon energy assets, and we've avoided the leisure and hospitality sectors. Yes, we do have some travel exposure through our capital-light assets in Audley and ICE. We also have several retailers where shops were temporarily closed in Continental Europe over the last 6 to 8 weeks as well as a stake in basic fit and some auto exposure through Formel D and a division of Q Holding. We've tended to be at the more conservative end of the spectrum in terms of portfolio company leverage, and all our companies have been acquired at sensible prices with senior debt only and covenant-light banking arrangements. And in many cases, our companies have grown materially under our ownership, both organically and through bolt-on M&A activity. Okay. Let's move to specifics, and I'll start with Action. As you all know, we completed the sale of the Eurofund V stake in January at an enterprise value of EUR 10.25 billion. We took the opportunity to recycle some of the GBP 1 billion-plus of cash distributions 3i has received from Action over the last 9 years to increase our stake with an investment of GBP 591 million. That new investment now gives us a 52.6% equity interest, or 46.2% net of our ongoing carry liability. Together with our new co-investment partners, 3i now controls over 80% of the Action equity share capital. We did this off the back of a very strong 2019 for Action, which included a significant recovery in supply chain performance, and delivered sector-leading growth across all the key indicators, new store expansion, sales, profits, cash flow and returns on capital invested. The picture on open stores today is very different to that shown to you at the Capital Markets Day in March, as you can see here. The lockdown measures are varied between countries. In Holland, all stores have remained open, successfully selling the full catalog with social distancing measures in place. It's been a similar position in Poland, with just 10 stores and shopping centers closed for the period. The overwhelming majority of German stores have now been open for a number of weeks, selling the full catalog, and the Austrian stores have been opened since the 2nd of May. The Belgium stores were completely closed until Monday this week. They reopened selling from the full catalog, and we've been gradually opening the French store states over the last month. In France, our stores initially sold only essential items, representing about 50% of the catalog. But now, all items are for sale, and over 500 stores are opened since the 11th of May. All the DCs have now reopened. So the Action machine is pretty much back to where it was in mid-March, but with appropriate social distancing measures in place to keep the staff and the customers safe. As I said earlier, sales for Action going into COVID-19 lockdowns were strong across the group, with like-for-likes of over 7%, year-to-date to mid-March. Sales from the Dutch stores have been strong since the start of the year, and are currently running at over 7% like-for-likes for the year. That's a very strong performance from our most mature and second biggest market. The normal assumptions for Holland in our 5-year plan are between 2.5% and 3% like-for-likes. Action's Dutch business accounts for about 1/3 of the group. And in spite of social distancing measures, it finished ahead of its budget for sales and EBITDA in April. Trading since March in Holland has changed the makeup, if not materially, in overall numbers. Social distancing is limiting customers in stores, but customers are spending much more after waiting to come in. So the enforced drop in footfall has been more than compensated by basket size. We're seeing the same picture in our other countries that have been reopened for a number of weeks. So while footfall is down in Germany and Poland due to social distancing precautions, basket sizes are very materially up. And that's giving very strong sales and like-for-likes after reopening with the full catalog. The composition of baskets has also changed, with the stronger categories now being more seasonal goods from garden and outdoor, DIY, sports, stationery, hobbies and toys, while essentials are now being purchased in much more regular amounts. We don't have enough data to determine what is behind these strong sales numbers, but we can speculate. We're certainly benefiting from the stay-at-home lifestyle we've all been adopting and it may well be that people are making fewer but focused shopping trips. We also note our essential categories are very well-stocked and very well-priced. Here, I'm talking about things like soaps, detergents and hand sanitizers, and this has become better understood by customers as we've moved through the crisis. Our wide range of categories are also finding favor as we move into the summer, and good value has never been more important to the consumer. Action finished its Q1 ahead of 2019 on both sales and EBITDA, even with the stores being closed in 6 out of 7 markets for the last 2 weeks of March. It had delivered a very strong first 11 weeks of the year before the lockdown took effect. Their April sales, or P4 sales, came in at 41% of last year, reflecting extensive store closures in the month, but sales have recovered markedly over the last few weeks as first Germany and Poland came back fully, now followed by Austria, France and Belgium. Like-for-likes have been very strong across the entire range in all geographies of the stores that have reopened. It's too early to say how Q2 will end, but P5 and P6 are looking much better again. Germany and Poland have been trading at 10% and 20% like-for-likes, respectively, since the start of May. Holland is still at 7%, and Austria, France and Belgium have started trading very strongly. We've pulled back the store opening target for 2020 to 152, which slows growth in store numbers, but builds cash at the end of the year. Action's cash position has clearly benefited from the stronger-than-expected sales. As of P4, it was still over GBP 300 million, and our current forecast has cash returning to GBP 500 million in July. We will incur more costs and some sales restrictions because of social distancing measures this year, but we are still working through the detail of how that will turn out in each country. We're also preparing for the real risk of a second peak of infections at some point somewhere, and have asked management to maintain a minimum EUR 500 million cash position from July onwards. I'd like to say a little bit about valuation. If it were not for the pandemic, we would be marking Action up again to reflect the strong Q1 trade. While nothing has really changed in the strength of the business model or in the white space opportunity, earnings will be hit in Q2 this year, and there is still uncertainty about the longer-term consequences of the pandemic. Putting that all together, we've decided to bring the Action enterprise value back to EUR 10.25 billion, the Eurofund V transaction value. And we'll keep it at that level until we have more clarity on the Q2 outturn and our view on the balance of the year. Action's value at that level triangulates well with the peer group, and is also supported by DCF modeling. Julia will talk more about it soon. As I said earlier, we came into the COVID-19 crisis in a very good position. We have a stable portfolio with a good degree of earnings momentum, with 93% of our PE companies by value growing earnings last year. In particular, we saw good growth from our consumer and health care sectors as well as good bolt-on activity for our platform assets. Our main concerns up to February remained focused on the automotive sector and some general industrial weakness, but COVID-19 added to that by introducing temporary lockdown problems in a number of our retail assets in particular as well as having a more prolonged impact on our 2 travel companies. Conversely, we've seen a marked uptick in performance in certain sectors, including health and personal care as well as B2B services. We've also seen an uptick in online retail. And we're also seeing a rapid recovery in retail sales as those companies come out of lockdown, as I've described with Action. That different effect across our portfolio has to be reflected in how we have valued the assets at 31st of March. We varied our approach depending on the extent of the COVID-19 impact, and Julia will take you through our methodology shortly. In broad terms, when we look at our GBP 8 billion of proprietary capital, we have about 1/3 of our assets in low COVID-19 impact bucket, about 60%, including Action in the medium bucket, and about 7% in the severe or high-impact bucket. Here are some of the individual marks. It's unusual and frustrating to see so many negative movements on the right-hand side of this chart, but it is COVID-19, which accounts for nearly all of these negatives. We've been helped to a degree by our through-the-cycle value approach going into this, and in the case of ICE and Audley, it is certainly worth remembering that neither company sits on inventory. These are both capital-light businesses. ICE has a 25 exposure to the cruise sector, but also has sizable ongoing membership subscription revenue. Audley is outstanding of what it does and has a sizable loyal customer base. January is its key booking month. And this January, bookings were at a record level. The firm has done a brilliant job of repatriating over 1,500 clients from around the world during March and April, and the majority of customers with existing bookings are looking to rearrange those trips for later dates rather than cancel them altogether. I think travel would change after COVID-19. There'll be a greater emphasis on safety and quality over quantity, which will play well to Audley's approach. This has not been a big year for realizations, but we did have some good ones, including the disposal of another tranche of basic-fit shares in December as well as a very good sale of Aspen Pumps at a 99% premium to its valuation last March. Both these assets were in our '13-'16 vintage. We also completed the sale of ACR. This was a tricky legacy investment of a minority shareholding in a Singapore-based reinsurer. Our PE team did a brilliant job in persevering with this process and lining up the shareholders for this sale. We've continued with our disciplined approach to new PE investment, making 3 new acquisitions this year. All these assets have performed well through the first weeks of the COVID-19 crisis. I would like to highlight the bioprocessing business, which originated out of Q Holding and 2 new acquisitions. We've yet to finalize the name, but the group is trading strongly, and we have further acquisitions in our sights. We have an extensive list of the bolt-on acquisitions this year, as you can see here. The majority of these acquisitions were made from portfolio company cash resources, and were executed on what we consider to be very attractive multiples. Once again, Phil White and his infrastructure team produced another outstanding performance. Their 3iN portfolio has hardly missed a beat over COVID-19, and they've made some excellent investments and realizations over the year. Infrastructure contributed some GBP 80 million of cash income to the group. Scandlines was another strong contributor to 3i's cash flow this year, and although its tourist car traffic has been hit very hard by the lockdown situation in Denmark, freight flows have remained strong and demonstrates Scandlines' importance to trade between Continental Europe and Scandinavia. We've taken the valuation down at Scandlines to reflect the short-term impact of COVID-19 and the high level of uncertainty. But fundamentally, we think once border restrictions are lifted, that the business will continue to perform for 3i. Okay. Let me hand over to Julia at this point.

Thank you, Simon. So as you have just heard, we had a solid performance for the first 11 months of the year, but we finished with an NAV per share of 804p, that's down by 1% after paying 38p in dividends. Now obviously, you'll be most interested in how we valued our portfolio at the 31st of March, so I'll get straight on with that. You can see from this NAV waterfall that we had an 18p reduction as a result of negative value growth of GBP 172 million. This slide shows you the breakdown of that GBP 172 million. Starting with Action. As Simon said, Action had a very good 2019, and that positive performance was reflected in the value growth that we had recognized up to the 31st of December 2019, that was GBP 733 million. However, since then, we have adjusted the value down to take account of both current trading and the temporary delay to store rollout. That means a negative movement of GBP 272 million in our fourth quarter. Elsewhere in the private equity portfolio, we have some ups and some downs. We have GBP 182 million of value growth, offset by GBP 677 million value reductions. That GBP 677 million includes the GBP 103 million write-off of Schlemmer that happened in December, and the GBP 92 million loss from our quoted holding in Basic-Fit. 3iN announced a very reassuring set of results last week, but its share price at the 31st of March 2020 reflected the significant nervousness in the market at the time. That share price movement accounts for GBP 76 million of the GBP 92 million that you can see here. And finally, Scandlines has also been affected by the closure of the border between Denmark and Germany and by the slowdown in economic activity. So we've taken GBP 46 million of its DCF valuation. Now I'd like to go into some detail on how we valued the portfolio. There's no doubt in my mind that valuing the portfolio at the 31st of March 2020 was one of the trickiest exercises I've done, and I have done quite a few. However, the process was made significantly more manageable by a number of factors: our portfolio management processes, which we've been operating consistently since 2012, allowed us to act very quickly to get good quality information from our portfolio companies. As Simon explained, we used the first 2 weeks of March to do our semiannual portfolio company review. These strategic reviews of each company and of our investment case, are always an important input into the valuations at the 31st of March. This year, the timing proved crucial in getting an early view of the pandemic effect. It was an early view and before most of Europe going into lockdown, but it gave us a very good starting point. The strong foundations of our investment team's close working relationship with portfolio company management, our monthly dashboard monitoring and our specialist banking team, made sure that we were able to respond quickly to the rapidly changing circumstances. In the middle of March, when most of us were already were all working from home, Simon and I got the first cut of a detailed short-term liquidity and covenant analysis for each company in the private equity portfolio. We issued some top-down guidance to the deal teams before the 31st of March, so that we could ensure an overall consistency in our approach, and so that we could gather as many inputs as possible. After the 31st of March, we went into our usual valuations process, but with significantly enhanced information flows. The detailed liquidity and banking monitoring is updated regularly, and we have short lines of communication between the business and Investment Committee, and they were unaffected by the fact that we were all at home. We have plenty of challenge from our current auditors, EY, and that included the benefit of the input from their specialist valuation team. And they were also shadowed by KPMG, who will take over the audit for FY 2021. The Valuation's Committee met formally at the end of April, although we have been discussing our progress with committee members throughout the month. And we have kept the portfolio under close review since then because of the constantly changing situation. That constantly changing situation has been most apparent in our largest investment, Action. Before we talk about the endpoint, here's a summary of how the Action transaction has affected our investments in that business. At the half year, we had a valuation of GBP 3.2 billion. That was just about equal to the action transaction valuation of EUR 10.25 billion enterprise value. At that time, we had an equity interest of 45.3%. Strong earnings growth into the end of 2019 meant that we had recognized a further GBP 353 million of value growth at the 31st of December 2019. As I said in our Q3 calls, the Action transaction was complex. And for 3i, it involved a series of both disposals and investments throughout Q4. These resulted in our growth investment in Action being 52.6% at the 31st of March, 2020. As an aside, that 52.6% is a net interest of 46%, after taking account of our ongoing carry liability. That's lower than the 49% that we had indicated previously. We decided that it was better not to use our balance sheet cash, flying out more of the carried interest at this time, but we are keeping that idea under review. So after the Q4 write-down of GBP 272 million, we finished with a 52.6% interest with a carrying value of GBP 3.5 billion. And that GBP 3.5 billion is based on the same EUR 10.25 billion enterprise value that was validated in the Action transaction. Simon showed you this slide. It shows that this is also equivalent to taking the March run rate earnings and reducing the multiple by turn to about 17x. We had reviewed the peer group earlier in January using some of the input from the Action transaction process. And as a result, we had decided to include Grocery Outlet and Costco as new comparisons. As is always the case, there are differences in their business models, but they've got more than enough similarity in their growth profile to make them relevant. We'll continue to monitor this group, although for now, we're paying more attention to the 2021 estimates, then the estimates for 2020. Turning then to the valuation of the rest of the private equity portfolio. By the end of April, it was clear that the portfolio can be split into the 3 buckets that you saw a minute ago. For companies such as Royal Sanders and Cirtec, those which are largely unaffected or trading better than we might have expected, we have generally used December LTM earnings as we normally would. Almost all the companies in this bucket still have multiples, which are lower than their comparable set. The company is in the middle grade, where there is some impact from lockdowns and other government measures, but where we are reasonably confident that the effect will be temporary, we have anticipated some of the short-term impact by using March LTM. We've also made a small number of adjustments to the multiples. In striking the fair value for these companies, we also considered how their earnings might develop through 2020 and our expectations for 2021. Finally, the companies in our portfolio, which are most directly affected, are Audley Travel and ICE. It is still very difficult to forecast reliably how 2020 will turn out for either of these companies. So there was no question of valuing them on a forecast basis. So we use the most up-to-date earnings, March LTM, and then significantly reduced their multiples to anticipate a further reduction in earnings during the summer. I said right at the start, this is one of the trickiest sets of valuations I have been involved in 3i. The easiest approach might have been to take a very pessimistic view and write-down the portfolio more dramatically. However, that would not have been taking a fair value approach. We have a portfolio of 32 investments, which we know very well. And apart from KINOLT, we are not a willing seller of any of them at the moment. So we have taken a considered approach to fair value and we will continue to do that through the rest of 2020. It doesn't mean that we have tried to anticipate all possible outcomes, but we have not shied away from making some pretty significant write-downs where there is the most uncertainty. So after reflecting these valuations with a net write-down in Q4 of GBP 778 million, private equity finished the year with a gross investment return of 6%. That return also included GBP 90 million of net realized profit, the excellent 4.1x sale of Aspen Pumps contributed GBP 102 million to that number. We recognized a realized loss of GBP 30 million on the sale of ACR, which completed on the 31st of March. The proceeds for that transaction should be released in Q3 2020. The realizations of GBP 848 million and cash investments of just over GBP 1 billion, included growth effect of the Action transaction that I talked about earlier. The other effect of the Action transaction is on our carry payable and receivable. 3i received GBP 679 million of carry from Eurofund V in January as a result of the Action transaction. That resulted in a significant reduction in the balance sheet receivable. The receipt of that GBP 679 million also triggers carry payable. We will pay GBP 438 million from our cash balance before the end of the first quarter, and the GBP 109 million escrow account sitting in current assets on the balance sheet will also be released. Simon talked about the resilience of 3iN, despite the effect of the share price performance at the end of March. That decline accounts for GBP 76 million of the GBP 92 million value reduction in the Infrastructure business. We also have 2 U.S. Infrastructure investments on our balance sheet, both of which are valued on a DCF basis. To remind you, Smarte Carte principal business is the provision of airport luggage trolley. So it's obviously affected by the international travel bans and all its consequences. We have reduced the value of Smarte Carte by GBP 22 million at the 31st of March. Regional Rail, which provides short rail freight, has been categorized as an essential service in the U.S., and it has the potential to continue its bolt-on strategy in spite of market conditions. As a result, its value increased by GBP 10 million. Infrastructure is an important and resilient contributor to our cash income from the dividend and the management fees we received from 3iN. Our investment in Scandlines is also an important contributor to income. We received GBP 37 million of income in the period, along with a capital return of GBP 70 million following its refinancing in August 2019. As I mentioned earlier, we have reduced Scandlines valuation to GBP 429 million to reflect the effects of the Danish-German border closure on car traffic. Scandlines is managing its cash well, but I am assuming that we do not receive any further dividend income in FY 2021. We had good contributions from all our businesses. So we made a cash operating profit of GBP 40 million in FY 2020. As a reminder, our objective is simply to at least breakeven on that measure. Our cash operating expenses will be lower in FY 2021, and the contribution from 3iN really underpins our income. When I was talking about valuations, I said that we were not a willing seller of any of our investments at the moment. Our ability to make that statement is a consequence of our conservative balance sheet strategy. We have a very simple balance sheet, a high-quality portfolio and cash on the asset side, and long-term bonds from carry payable on the other. We have no financial covenants in our RCF or bonds. We have no material outstanding fund commitment. We don't have a geared balance sheet at the group level, but we're prepared to operate in a range of net cash of GBP 500 million and net debt of GBP 500 million, depending on the timing of flows from investments and realizations. We closed the year with gross cash of GBP 845 million, and an undrawn RCF of GBP 400 million. Even after settling the carry payable, we have liquidity of GBP 800 million. That means we face these uncertain times in a completely different position to the large crisis in 2008. Looking forward through FY 2021, we're being cautious. So I'm assuming that realizations are very modest. We expect to receive the proceeds from the disposals of KINOLT and ACR, totaling about GBP 190 million in Q3 2020. In the short term, investment will be focused on supporting the current portfolio, and we have a very good line of sight on how that might develop over the course of the year. This support may be in the form of liquidity, such as the EUR 22.5 million that we've provided to Hans Anders in April, or it could be to support further bolt-on investments. I don't expect the investment pipeline to pick up meaningfully until the second half. But despite the uncertain conditions, our teams are keeping active on origination. Our balance -- strong balance sheet will provide the opportunity to act quickly when good opportunities become available, without us having to accelerate realization. The strength of our balance sheet and the opportunities it presents were critical factors in the Board's decision to recommend the payment of the second dividend for FY 2020. That second payment will be 17.5p, making a total of GBP 168 million. In keeping with our usual timetable and subject to shareholder approval at the AGM in June, we will pay that dividend at the beginning of July. Thank you. And now I'm going to hand back to Simon to make a few closing remarks before we take questions.

Thanks, Julia. Let me just make a few comments. First, our strategy at 3i is focused on thoughtful growth-orientated investment, cautious use of leverage, good governance and strong and active asset management. Second, our main focus will remain on managing our portfolio and continuing to add to our platform assets through selective M&A. As I said right at the start, it's bound to be a quiet year for new investment and realizations, but on realizations, we've already signed two disposals. And on investments, we don't rule anything out at this stage. But we do need to have a clearer view of the outlook before we commit to a major new investment. We'll maintain our prudent approach to cash and provide support to those companies that need it, whether that be for liquidity or bolt-ons. It's still early days in terms of how COVID-19 plays out. But as things stand today, our current base case forecast suggests a very small number of our portfolio companies will require any future support from 3i Group, which we are well placed to provide when they need it. And while performance in FY '21 will almost certainly be negatively affected by COVID-19, let me remind you of the benefits of the 3i model. We are a selective investor in great private companies with good growth strategies, and we don't need to buy the vintage simply to put new fund money to work. We use proprietary capital, which means we can run our companies for longer to maximize value. And we are under no pressure to sell if circumstances aren't suitable. Where we have real winners, as with Action, we will hold on to them and help them compound value and cash for shareholders. And over the medium term, we have the ability to reshape our portfolio as the market shifts as we have done over the last 8 years. And these strengths give us confidence to stick with our through-the-cycle return objectives and our dividend policy. Thank you. I'll now hand back to the operator for some Q&A.

[Operator Instructions] And we'll take our first question from Liz Miliatis in Bank of America.

If I could start with valuations, when you were coming up with your valuations, was there any consideration as to the significant uncertainty in the coming 6, 12 months in terms of a potential second wave as well so maybe if we could break that down by travel-related businesses and nontravel related businesses? And I suppose my question is sort of asking in a different way, is there potential for more write-downs in the event that there's a second wave that we haven't quite captured today? And then second, on Audley Travel, I was just wondering, how are you managing it from an operational perspective? Are they -- have you had to make significant redundancies or cost-cutting measures there to sort of help the business? From what I understand from previous presentations, the staff there are -- have a very strong knowledge basis of their own regions and quite unique, and it takes some time to build that knowledge. So I would imagine it would be hard to make redundancies in that kind of business?

Thanks, Liz. I'll take that first one on valuations, and then I'll hand over to Simon on your question about Audley Travel. I mean, as we said, we had to think quite carefully about each individual investment. And the -- trying to think through second wave implications. Interestingly, when we started the process, people were more concerned about the first wave and whether we would go into lockdowns. Now we're starting to come out of lockdowns, people are about -- thinking about second wave. And that's what I meant about having to keep an eye on constantly changing situations. We have absolutely tried to think about the trajectory for 2021, and the relative resilience of the businesses that we've got and how susceptible they might be to further lockdown measures. Obviously, the most challenging ones were the ones that we've highlighted in terms of Audley and ICE just because of the uncertainty about travel. It's not just when the plane starts flying again, it's when people want to get back on them, and forting there in quarantines and all of those as well as other changing factors. So I wouldn't -- as I said, I wouldn't want to suggest that we've tried to anticipate all eventualities over the course of the next year, but we certainly try to think quite carefully about how the trajectory might be in striking the valuations that we've done. And of course, the sort of the trajectory for 2020 isn't necessarily negative for everything. And Simon talked about how well action has been performing and the measures that they may well take in terms of anticipating second waves, too, to continue to operate strongly. So there are pluses and minuses in that forward-looking view, I think.

I'll take the second. But I mean, just adding to that, Liz. So we have looked carefully at each asset, and we've add on the side of caution with a view to looking forward and looking at the cash flows, in particular. And that's where we've told management to focus. So in the case of Action, I gave you an example of one of the instructions there, which is build up the GBP 500 million cash buffer, and let's keep it through the next year in case we face another dilemma as we did in mid-March. On Audley Travel, Audley has had to keep quite a significant central group of experienced people, because repatriating 1,500 people from all over the world and lots of people, who use Audley, goes for exotic prices was no simple task. So they did keep a pretty senior crew on to do that, and they've kept that crew. We have, I understand, made use of the furlough scheme rather than making a lot of those experienced advisers redundant. And the anticipation is that, that business will be back and strong, it's just a question of when. So they've really reduced as far as they can any sorts of permanent redundancies.

We'll move to our next question from Shamoli Ravishanker in Morgan Stanley.

I'm Shamoli from Morgan Stanley. I had a couple of questions. Firstly, on the balance sheet position. I see you're in net cash now, but if you decide to pay the Action carry from the balance sheet cash and post the dividend payment as well, the headroom's a little lower. So would you consider going beyond the GBP 500 million net debt cap, if you see any opportunities of market to invest? And secondly, can you also comment on just the market environment right now for investments? Is there still a large disconnect between buyers and sellers there, pricing, et cetera? And secondly, on Action, I appreciate it might be difficult to comment on this now. But the 5-year targets, can we still assume they're intact? I guess store openings are lower this year. Would you be able to make that up? And what kind of behavior have been seen for our customers through economic downturn? Is it quite stable given the pricing levels of the products? Or even slightly better?

Thanks, Shamoli. If I start off with the balance sheet question, and then you'll pick up the rest. Just to clarify, the net debt of GBP 500 million, it's not a cap, we describe it as a tolerance. We still don't have any real appetite for structural gearing at a group level, but we recognize with investment flows and realization flows that we have to be able to manage around that. And I gave you some indication of how we think things might play out through the course of the year. So I'm not looking at that and particularly worrying about that as something that's going to stop us doing what we need to do through the course of the year.

Let me pick up on the transaction and buyers and sellers. I suppose there are -- there is the occasional transaction occurring, and you've read about 2, and some of them are as desperation, and others maybe for valid reasons. But there is not a significant level of transaction activity going on at the moment. And many of the processes that we were around going into COVID-19 have been put on hold and have been stopped, and are probably being fundamentally reconsidered given the effects on the environment in general and the uncertainty the situation has created. So people are not overbusy on transactions, I would suggest. I would also suggest that doing proper due diligence, making an assessment of a new management team, all of these things have real practical difficulties in the current environment. We have seen our German team return to the office. We are certainly seeing our Dutch team jumping in a bit to return to the office. And -- but we see more difficulty in cities like New York and London getting straight back to work in the office. The reliance on mass transit, transport and various other things. So we think there may be more complicated routes back to working where you can achieve the sort of due diligence and other requirements that you need in a transaction. But at the moment, that's not entirely clear. So yes, there may be the odd thing happening, but we got our deals done. We've signed to and we're not proposing to put any more businesses up for sale in the current environment. In terms of Action, the 5-year plan, clearly, we've got a bump in the road, as someone called it, this year, which affected the second half of March. It affected April, and it will affect a little bit of May, I think. With -- we've got social distancing measures to wrestle with and see what that means for the estate. But on the basis of the trading in Holland, it hasn't really held it back, because the basket sizes are more than compensated for any extra costs that have been involved in social distancing measures in the stores or any reduced footfall. So we need to look at that in detail. But at the moment, that doesn't look like a problem. So yes, it's -- the focus is very much on regrouping once we get through this and working out what's the art of the feasible with respect to the 5-year plan. But we won't be giving up on those targets very easily, and I'm optimistic for the snapback for Action is going to be as powerful as it is for any retail company, and that's certainly what we're already seeing.

Our next question comes from Charles Murphy in [indiscernible] Investment.

I've got a couple of questions. There was a discussion about Action -- I seem to remember a discussion about Action becoming a corporate asset rather than a private equity asset. Have I misremembered that? And then generally, across the company, you're investing portfolio, how basically is everybody drawn down on the RCFs? And then finally, Action's supply chain, how's that held together?

Okay. Shall I deal with those? Is that okay?

Yes.

I mean we did talk at one stage about Action becoming a corporate asset. In order for it to do that, we would need to buy out the team's carry, and as was touched on earlier, we decided given what was going on at the moment. This was probably not the right time to buy the team out of their balance sheet carry. So we've put that on hold for the time being. It hasn't gone away completely, and we'll reflect on that in due course. On RCFs, I mean it depends on the company. Many companies have drawn RCFs, but those that don't need to and are trading very well have not resorted to doing that. So it's a different picture depending on what bucket you're looking at, I would suggest. What was the last one?

Supply chain in Action.

On the -- I mean, this was an interesting position. So the supply chain was the main concern back in February. And fortunately, the seasonal containers had already left China before they ran into their problems. So Action did not have a problem in terms of its spring and early summer catalog. And now the situation is that the supply chain is pretty much back to normal. The European factories are all back and are operating, so the Chinese factories and containers have started to arrive. So whether it be the local network of suppliers within Europe, or whether it be some of the direct import, I would say it's getting back very much to normal at the moment. Continental Europe is clearly somewhat more advanced than in the U.K. in terms of where people are in their return to work, and that's what we're seeing in the supply chain.

[Operator Instructions] And the next question is from Bill Barnard, a Numis Research Analyst.

With the [ Ipes ] valuation guidelines being somewhat cool on the use of recent transactions as a basis for valuations going forward. I mean was the Action transaction kind of an exception that kind of proves the rule in that it was: A, very recent; B, very large; and C, involves some pretty sophisticated investors making a 6-year view, and that was kind of the basis on which you proceeded? And then also moving forward, how do you think you will look to assess what a run rate earnings number looks like given the slight volatility in quarter-by-quarter performance this year, albeit clearly, the earnings are back on the up?

So the sort of the [ Ipes ] guidance that came out to try and deal with COVID was very clear, that they saw a sort of a bifurcation between transactions pre-COVID, and clearly, there's not many transactions since the pandemic. But it's really, your third point, we took a view that the transaction value is a bit like -- it's shorthand really for the fact that we had a good group of sophisticated financial investors. He did detailed due diligence on a 5-year plan for Action. And when you go back to look at that 5-year plan, as we've talked about earlier, we're not really seeing a significant change in our outlook for that business. And so that's why we're quite comfortable in pegging back to it. It's kind of irrelevant whether the transaction would happen today or not. But we can see that as a very good underpin. And then as we think about the valuation going forward, what we mustn't lose sight of is actually that exceptional performance that came through the first quarter of 2020, and so the sort of -- if you like, the value foregone in not taking that, that we might otherwise do. So that was the other reason why we felt quite comfortable with going through that position. So technically, we've got to think quite hard about our run rate adjustment. The whole point of the run rate adjustment is to try to reflect the store opening activity and the likely profitability of those businesses. So it seems somewhat bizarre to bake in a Q2 dislocation into that number, but we haven't finished our thought process about that, but we will have to think about that quite carefully as we go through the rest of 2020.

Let me touch on the quarterly development. So if you look at Q1 this year, Action was trading with 7% like-for-likes up to the end of week 11. Had a lot of momentum in the business. And if you'd assume that into the end of the year, the EBITDA -- the run rate EBITDA or the EBITDA would have been over GBP 30 million higher than the EBITDA we've essentially got at the end of the March. So that was the impact of the steamroller hitting us, closing virtually all of our stores, but an inability to deal with quite a lot of capped cost immediately, dealing with some of those costs took time. So that was a very difficult 2 weeks where we had to wrestle with no money coming in, except for in Holland, and an awful lot of costs on such a big retail business. So that was the effect in those 2 weeks. If we'd have pulled the quarter up at the end of week 11, we'd have had a much, much bigger number. The same will happen in Q2. So essentially, Holland was the only business open. And while it traded extremely well and it more than accounted for itself, notwithstanding social distancing, basically, most of the estate was closed or partially closed for that rest of that period. So that's an ugly, ugly period. May, I'm much more optimistic about because of the sheer strength of the trading we've seen since the beginning of the month. And I'm hoping June will be very much back on track or ahead, given the strength of the trading. So the picture, if you roll forward, is going to normalize for a number of quarters, but we're going to have a difficult Q1 for Action and Q2 for Action relative to their budgets. But then wind forward to next March, and I think you're going to see a significant outperformance if we're not into a second spike scenario against this Q1, and you're going to have a very significant outperformance in Q2 next year against this Q2.

Our next question is from Jens Ehrenberg in Citi.

Just 2 quick questions from me, please. So the first one, I suppose, a little bit more strategically, but with everything that has happened so far with COVID-19 and the general changes that you've seen in the market. Have you seen any shift in terms of target industry for sectors that you would invest in going forward? That's one question. And the other question is on Basic-Fit, and I appreciate if you're somewhat limited in how you can comment on that. I mean we've seen you sell down your stake, I think, end of last year, which was obviously pretty good timing even though you couldn't really see that back then. But obviously, with your remaining stake, how do you see that investment right now? And would you expect to have to put further capital in there? How is your take on that?

Let me deal with the Basic-Fit one first. It's not really our position to comment. We're very happy shareholders. That's been a tremendous investment for us. It's an incredibly strong business. It's very much leading edge in terms of its use of online and digital marketing and digital communication with its folks. I'm not anticipating that we put lots more money into that, all that shareholders will, in general, but I'm not plugged into what's going on at the company. I think that they've -- they're dealing with their costs very effectively, and there will come a point when they will be reopening those gyms. And they'll obviously have to put measures in place. But we're still optimistic about them coming back. We would have it in the more difficult bucket along with Audley, and so we understand why the market has marched the price back in the way it did.

As a result of...

Well, as I said, we have this capacity to change the composition of our portfolio over time, which we do constantly and so I wouldn't be at all surprised if we continue to shift. I think the 3 businesses that I talked about in my piece, whether it be the short line rail business in the U.S. or whether it be the Magnitude Software business or whether it be the Evernex computer maintenance business. These businesses are proving very resilient through this period. And that was a deliberate move on our part, not with any foresight for this, but just the general macro pressures that we had been seeing building in the economy in general. Okay. Well, we better close the call. Thanks to everyone for calling in. Very much appreciate it.

Thanks very much, everybody.