Aryzta: announces first half FY 2017 results

Zurich / CH. (aag) Swiss Aryzta AG announced financial results for H1/2017 – the six month period ended 31 January 2017. 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.

Key Developments

  • Continued strong cash generation of 99 million EUR
  • Financing costs reduced by 26 million EUR
  • Weighted average interest cost reduced to 1.62 percent
  • Increased Syndicated Bank RCF covenant to 4.0x Net Debt: Ebitda
  • Extended 614 million EUR term loan maturity to February 2019
  • Strategic review of joint ventures investment strategy underway
  • Interim CFO appointed
  • Management transition accelerated
  • In these circumstances, the Board is not in a position to provide guidance
  • Free cash flow is key near-term performance measure

Total revenue decreased by (2.8) percent to 1.9 billion EUR during the period ended 31 January 2017. Disposals, net of acquisitions, reduced revenue by (1.6) percent, while there was a positive currency impact of 0.4 percent in the period.

Overall underlying revenue decreased during the period by (1.6) percent, with underlying growth of 1.0 percent in Europe and a strong 9.5 percent underlying revenue growth in Rest of World, offset by an underlying revenue decline of (5.2) percent in North America. The decrease in North America was primarily due to the continuing impact of long-term contract renewals, together with revenue losses from accelerated in-sourcing by co-pack customers.

Group Ebita decreased by (31.3) percent to 158.5 million EUR, while Ebita margins declined by (350) bps to 8.3 percent. The Aryzta Europe margin decline was primarily due to the ramp-up of new bakery capacity in Germany, as well as the currency impact of Brexit on cross-border revenues and input costs. Aryzta North America margins were affected by reduced operating leverage related to declining underlying revenues, combined with increasing labour cost pressures and continuing investment in the brand strategy in that segment.

Aryzta is committed to improving revenue growth and operating leverage from its well invested asset base and is working to improve margins through cost alignment and efficiencies, while continuing to deliver best-in-class customer service, support and food safety.

Financial Summary

  • Revenue decrease of (2.8) percent to 1’906 million EUR; (1.6) percent underlying decline
    • Aryzta Europe revenues decreased (2.3) percent to 861.8 million EUR; 1.0 percent underlying growth
    • Aryzta North America revenues decreased (5.8) percent to 915.2 million EUR; (5.2) percent underlying decline
    • Aryzta Rest of World revenues increased 20.3 percent to 129.0 million EUR; 9.5 percent underlying growth
  • Ebita declined by (31.3) percent to 158.5 million EUR
  • Ebita margin decreased by (350) bps to 8.3 percent
  • Joint ventures performed well, contributing 16.7 million EUR, net of interest and tax
  • Net Debt: Ebitda (syndicated bank loan) of 3.41x
  • Underlying net profit decreased (22.4) percent to 109.4 million EUR
  • Underlying fully diluted EPS decreased (22.2) percent to 123.2 cent

Aryzta Europe

Aryzta Europe revenues declined by (2.3) percent to 861.8 million EUR during the period. This decline primarily relates to a net acquisitions/(disposals) decrease of (1.8 percent) mostly from a business disposed of in France during H1 2016 and unfavourable currency impacts of (1.5) percent, due mostly to the significant weakening of the Sterling against the Euro compared to the previous period.

Underlying revenues in Europe grew 1.0 percent, as a result of strong revenue growth within the Central and Eastern European business and the Netherlands, and a stabilised performance in France, offset by some declines in Germany as the new bakery capacity is commissioned.

Aryzta Europe Ebita decreased by (25.9) percent to 78.1 million EUR. Ebita margins decreased by (290) bps to 9.1 percent reflecting the inefficiencies around the slower than expected ramp-up of new bakery capacity in Germany, as well as delayed recoverability of Brexit’s impact on cross-border sales prices and input costs, due to the weakened Sterling.

The commissioning at the new bakery in Germany continues to progress and in time will provide a strong capacity base for efficient future production as we exit a period of major capital investment. Pricing has been agreed in Europe to recover a substantial portion of the UK currency effects going forward, which will begin to benefit during the remainder of the financial year.

The expected contract customer in-sourcing of c. 80 million EUR in annualised revenues in Switzerland commenced towards the end of the period, however, so far this transition has been at a lower than expected pace.

During March 2012, the Group entered into an agreement to acquire the remaining 40 percent interest in HiCoPain in Switzerland. Based on the terms of this agreement, the non-controlling interest shareholder continued to participate in the risk and rewards of the business until the final exit date in December 2016, at which time Aryzta obtained 100 percent control of the business. As of 31 January 2017, the remaining liability to the non-controlling interest shareholder was 15.1 million EUR, which is expected to be settled during the second half of financial year 2017.

Aryzta North America

Aryzta North America revenue decreased by (5.8) percent to 915.2 million EUR. Underlying revenue declined by (5.2) percent during the period. There was also a further decline of (1.7) percent from the disposal of a non-core filling and mixes business in H1 2016, while favourable currency movements supported revenues by 1.1 percent.

Underlying revenues declined in North America, primarily due to the impact of anticipated volume losses from long-term contract renewals, as well as co-pack customers in-sourcing volumes earlier than anticipated.

Aryzta North America Ebita decreased by (42.1) percent to 65.5 million EUR, while Ebita margins decreased by (450) bps to 7.2 percent. This reduction in margins was due to lower operating leverage resulting from the transition of long-term contract volumes and earlier than anticipated in-sourcing of volumes by co-pack customers. This negative operating leverage has been further compounded by labour cost increases during the period, as a result of higher labour wage rates to remain competitive in attracting and retaining people, as well as increased investment in training and development of employees to continue to deliver on our commitment to quality and food safety, in compliance with the Food Safety Modernization Act (FSMA), which became mandatory during the period.

There has been continued investment in the roll-out of the North American brand strategy, in particular the launch of the Otis Spunkmeyer branded snack cakes.

The primary focus of management in North America is on revenue development and re-alignment of costs to the revenue base, in order to drive improved margins and overall profitability going forward.

Aryzta Rest of World

Aryzta Rest of World revenues increased by 20.3 percent to 129.0 million EUR, with underlying growth contributing 9.5 percent. The underlying revenue growth relates to ongoing support of our international customer partnerships, as well as an expansion of the food offering to convenience and retail channels. There was a favourable currency impact of 10.8 percent in the period, arising from the appreciation of the Brazil Real and the Australian Dollar.

Aryzta Rest of World Ebita increased by 21.4 percent to 15.0 million EUR due to increased underlying revenues, as well as positive currency translation impacts, while Ebita margins increased by 10 bps to 11.6 percent.

Joint Ventures

During August 2015, the Group invested 450.7 million EUR 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, as previously announced, Aryzta is engaged in a review of its investment strategy in joint ventures. As part of that review, Aryzta has commenced a process with our investment partner, Lion Capital, to evaluate investment alternatives for the Picard business. Picard continues to remain separately managed and has separately funded debt structures, which are non-recourse to Aryzta.

The Group also owns a 50 percent interest in Signature Flatbreads, a pioneering flatbread producer in the UK and India, producing an innovative range of authentic Indian breads, as well as high quality international flatbreads, tortillas, pizza bases and pitas.

Joint ventures had combined revenues of 843.4 million EUR during the Aryzta six-month period ended 31 January 2017 and delivered an underlying contribution to Aryzta, after interest and tax, of 16.7 million EUR. Both joint ventures performed well, growing revenues, maintaining margins, and generating strong internal cash flows.

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