Zurich / CH. (aag) Swiss Aryzta AG announces results for the financial year ended 31 July 2016. Commenting on the results, Aryzta AG Chief Executive Officer Owen Killian said: «The strategy to invert capital allocation and focus on free cash generation has been successful, with EUR 267 million generated in the year, demonstrating the highly cash-generative potential of speciality food. Underlying revenue growth has been subdued by the impact of contract renewals in North America during FY-2016. The cumulative effect of these contract renewals, combined with the long anticipated volume loss in Switzerland, will also negatively impact FY-2017. This is being mitigated by strong underlying growth in all regions, driven by investment in brands and food innovation. Consumer demand for high-quality speciality food is increasing, whether out of home or through modern retail, focused on freshly baked and prepared food, offering convenience and choice. Aryzta is strategically well-positioned to serve this increasing demand. The attractive cash flow has provided an opportunity to retire relatively expensive long-term debt, which will reduce the cost of borrowing, as we enter a period of reducing debt. Lower interest costs will help maintain underlying fully diluted EPS at consensus levels in FY-2017».
Key Performance Highlights
- Strong cash generation in FY-2016 ahead of target at EUR 267 million
- FY-2017 cash generation in a range of EUR 225 million to EUR 275 million
- Long-term contract renewals signed; positioned for revenue stability
- Commissioned EUR 150 million of new capacity and retired older less efficient assets
- Continued progress in Group underlying revenue recovery of +0.8 percent in Q4 and +0.5 percent for FY-2016
- FY-2016 Group underlying revenue growth, excluding contract renewals, was +3.4 percent
- North America underlying revenue growth, excluding contract renewals, was +2.9 percent and +2.2 percent for Q4 and FY-2016, respectively
- FY-2016 margin decline of 100bps, with 50bps due to increased brand investment, with the remainder due to negative operating leverage
- Joint ventures performed well contributing EUR 15.7 million, net of interest and tax
- Completed early redemption of EUR 1.2 billion private placement, post balance sheet
- Refinancing mitigating negative operating leverage from contract renewals in FY-2017
- FY-2017 underlying fully diluted EPS guidance in-line with consensus of 358 cent
The Business
Aryzta’s business is speciality food, with a primary focus on speciality baking, a niche segment of the overall bakery market. Speciality bakery consists of freshly prepared food, giving the best value, variety, taste and convenience to consumers at the point of sale. Aryzta’s customer channels consist of a mix of large retail, convenience and independent retail, Quick Serve Restaurants (QSR) and other foodservice categories.
Total revenue from continuing operations increased by 1.5 percent to EUR 3.9 billion during the year ended 31 July 2016, mainly due to a favourable currency impact of 1.4 percent, primarily related to the strengthening of the US Dollar.
Overall underlying revenues increased during the year by 0.5 percent, reflecting strong underlying growth in Europe of 4.0 percent, offset by a (3.1) percent decline in underlying revenues in North America, due entirely to the impact of long-term contract renewals. Excluding the impact of these long-term contract renewals, underlying revenue growth for the Group would have been 3.4 percent.
Group Ebita from continuing operations decreased (5.7) percent to EUR 484.9 million and Group Ebita margins declined by (100) bps to 12.5 percent. Approximately half of this Ebita margin decline relates to increased investments in marketing of the Group’s brands, including La Brea Bakery, Otis Spunkmeyer, Cuisine de France, Hiestand and Fornetti, in order to drive future sales of these higher margin consumer-facing sales. The remainder of the decline primarily relates to the production inefficiencies and negative operating leverage caused by the volume reductions resulting from the North American long-term contract renewals.
As previously indicated, all long-term contracts have now been signed, which significantly increases revenue stability going forward.
Aryzta Europe
Aryzta Europe has leading market positions in the speciality bakery markets in Germany, Switzerland, France, Ireland, the UK, the Netherlands, Hungary, Poland, Denmark, Spain, Sweden, Romania, Czechia and other European countries. Aryzta Europe’s business continues to benefit from growth in In-Store Bakery, driven primarily by growth in the discounter channel, and is well positioned for improved performance.
Aryzta Europe performed strongly during the year, with revenue growth of 6.1 percent to EUR 1’747.1 million, of which underlying revenue increased by 4.0 percent. In addition, acquisitions, net of disposals, contributed 1.9 percent and there was also a favourable currency impact of 0.2 percent. Europe Ebita increased by 1.8 percent to EUR 215.8 million and Ebita margins decreased by (50) bps to 12.4 percent.
The multi-year investment in additional bakery capacity in Germany was substantially completed during the year, enabling the consolidation of older less efficient capacity into a single highly-automated site by year-end. However, the level of change required during this transition period impacted production efficiencies and new product development, leading to reduced underlying revenue growth and operating leverage during Q4.
There was a good recovery in the Aryzta Food Solutions businesses in Ireland and the UK during the year. The business performance in France suffered from a significant reduction in tourism, especially in Paris, due to heightened security concerns. In Switzerland, the strong Swiss franc continues to impact pricing strategies, in order to preserve market competitiveness.
Aryzta Europe completed the divestment of Fresca in France and the acquisition of La Rousse Foods in Ireland during the year. These transactions reflect the Aryzta Food Solutions strategy to focus on premium, higher-margin business. The recent European acquisitions of Fornetti and La Rousse performed well during the year, fully delivering their acquisition business plans.
During the year, Aryzta Europe invested EUR 91.1 million in capital expansion, primarily related to extending capabilities and centralising production in Germany.
Aryzta Europe also incurred EUR 5.0 million of non-cash asset write-downs of various manufacturing, distribution and administration assets and EUR 57.1 million of cash non-recurring costs, primarily related to severance and staff-related costs incurred as a direct result of bakery consolidation in Germany and de-layering of management functions across the region.
Aryzta North America
Aryzta North America is a leading player in the speciality bakery markets in the United States and Canada. Aryzta has three routes to market; outsourced supply chain manufacturing, customer own brand manufacturing and Aryzta brand manufacturing. Aryzta’s key consumer brands in North America are La Brea Bakery and Otis Spunkmeyer.
Aryzta North America revenues declined by (1.8) percent to EUR 1.9 billion. Underlying revenue declined by (3.1) percent during the year. The disposal of a non-core, fillings and mixes business resulted in a further decline of (2.4) percent, while favourable currency movements supported revenues by 3.7 percent during the year.
The Aryzta North America decline in underlying revenues is entirely related to the impact of long-term contract renewals, as highlighted in previous announcements. Excluding the impact of these customers, underlying revenue growth in Aryzta North America would have been 2.2 percent, reflecting the success of the innovation driven pipeline of new food items, cross-selling and an overall extension of the customer base.
Aryzta North America Ebita declined by (11.6) percent to EUR 243.3 million, while Ebita margins declined (140) bps to 12.8 percent. These declines reflect the increased investment in consumer facing brands to support the nationwide roll-out of Otis Spunkmeyer. It also reflects the decreased operating leverage created by the decline in underlying revenues during the period.
During the year, Aryzta North America invested an additional EUR 39.8 million to expand and modernise existing capabilities, primarily in the premium artisan bakery segment. Aryzta North America also incurred EUR 9.7 million of asset write-downs and EUR 24.5 million cash non-recurring costs due to continued optimisation and efficiency programmes.
Aryzta Rest of World
Aryzta’s operations in the Rest of World primarily includes businesses in Brazil, Australia, New Zealand, Japan, Malaysia and Singapore. While accounting for less than 6 percent of the total Group’s business, these locations provide attractive future growth opportunities.
Aryzta Rest of World revenues declined by (3.3) percent to EUR 223.7 million, entirely due to unfavourable currency movements of (9.5) percent, primarily from the weakening of the Brazilian Real. Underlying revenue growth across the region was strong at 6.2 percent, driven by improved product mix and customer channel diversification.
Aryzta Rest of World Ebita declined by (3.8) percent to EUR 25.8 million, entirely due to unfavourable currency movements. Local currency Ebita grew relatively in-line with revenues, as Ebita margins declined by only (10) bps to 11.5 percent.
Joint ventures
During August 2015, the Group invested EUR 450.7 million in a 49 percent interest in Picard, which operates an asset-light business-to-consumer platform, focused on premium speciality food. Picard is located primarily in France, but also has some international franchises. While the Group retains the right to exercise a call option to acquire the remaining outstanding interest in Picard between FY-2019 and FY-2021, Picard remains separately managed and has separately funded debt structures, which are non-recourse to Aryzta. As Aryzta is entitled to jointly approve key business decisions, including approval of proposed members of Picard management and the annual operating budget, the Group’s interest in Picard has been presented as a joint venture.
