Aryzta AG: Announces Full Year 2017 Results

Zurich / CH. (aag) Swiss Aryzta AG is pleased to announce the results for the financial year ended 31 July 2017.

Key Developments

  • Significant Board refreshment and renewal achieved
  • New CEO in place and new CFO appointed
  • Strategic direction is defined
  • Refocusing on core B2B Frozen Bakery and European Food Solutions businesses
  • Five-year 1.8 billion EUR refinancing completed
  • New Net Debt: Ebitda bank covenant ceiling of 4.75x agreed
  • Continued strong cash generation in FY17 of 196 million EUR
  • Commitment to generating cash of 1.0 billion EUR over the next four years, inclusive of asset realisations
  • Non-cash impairment charge of 860 million EUR relating to goodwill, intangibles and fixed assets
  • Scrip dividend proposed
  • Deferral of hybrid dividend
  • Best current estimate for FY18 Ebitda is to be broadly in-line with FY17 given the range of internal and external challenges

Financial Summary

  • Revenue decrease of (2.1) percent to 3.80 billion EUR; (2.1) percent organic decline
    • Aryzta Europe revenues decreased by (0.5) percent to 1.74 billion EUR; plus 1.4 percent organic growth
    • Aryzta North America revenues decreased by (5.7) percent to 1.80 billion EUR; (6.3) percent organic decline
    • Aryzta Rest of World revenues increased by 15.8 percent to 259 million EUR; plus 7.2 percent organic growth
  • Ebitda declined by (31.1) percent to 420.3 million EUR
  • Ebitda margin decreased by (460) bps to 11.1 percent
  • Joint ventures performed well, contributing 21.3 million EUR, net of interest and tax, plus 35.7 percent
  • Net Debt: Ebitda (Syndicated Bank RCF) of 4.15x
  • Underlying net profit decreased by (42.5) percent to 179.0 million EUR
  • Underlying fully diluted EPS decreased by (42.4) percent to 201.6 cent

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 Service Restaurants (‘QSR’) and other foodservice categories.

Total revenue decreased by (2.1) percent to 3.8 billion EUR during the year ended 31 July 2017, due to an organic decline of (2.1 percent), consisting of volume losses of (4.2) percent, partially offset by a positive price/mix impact of 2.1 percent. Prior year disposals, net of acquisitions, reduced revenue by (0.8) percent, while there was a positive currency impact of 0.8 percent.

Overall organic revenues decreased during the year by (2.1) percent, primarily related to an organic revenue decline of (6.3) percent in Aryzta North America, significantly related to volume declines with contract renewal customers and earlier than anticipated in-sourcing by co-pack customers. This decline in Aryzta North America was partially offset by 1.4 percent organic revenue growth in Aryzta Europe and strong organic growth of 7.2 percent in Aryzta Rest of World.

Group Ebitda decreased by (31.1) percent to 420.3 million EUR, while Ebitda margins declined (460) bps to 11.1 percent. Within Aryzta Europe, the 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 in the UK. Significant butter price inflation also impacted results during the second half of the year. Within Aryzta North America, margins were affected by reduced operating leverage, combined with increasing labour input costs and increased spend on branding and marketing costs.

In what has been a year of significant change, Aryzta has made considerable progress in putting the core elements of the new leadership team in place. Kevin Toland has commenced in his role of Group CEO in September 2017. Aryzta also recently announced the appointment of Frederic Pflanz as Group CFO, who will join in January 2018. Kevin and Frederic bring extensive expertise in global food and consumer goods industries, as well as a proven track record of managing businesses undergoing significant transformation.

Aryzta is committed to improving revenue growth by refocusing on its core strengths as a global leader in B2B Frozen Bakery and European Food Solutions, while continuing to deliver best-in-class customer service, support and food safety to our customers. This revenue focus, when combined with bakery cost alignment, will support the financial aim of restoring operating leverage, improving Ebitda margins and enhancing cash generation.

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, Czech Republic and other European countries.

Aryzta Europe revenue decreased by (0.5) percent to 1,738.6 million EUR during the year ended 31 July 2017. Organic revenue growth of 1.4 percent was a result of a (0.6) percent decrease in volumes offset by a 2.0 percent benefit from improved price/mix. Unfavourable currency movements also impacted revenues by (1.0) percent and the prior year disposal of a business in France resulted in a (0.9) percent decline in year over year revenues. Excluding the previously highlighted impact of in-sourcing by a large customer in Switzerland, volume growth in the segment would have been positive during the year.

Aryzta Europe Ebitda decreased by (23.3) percent to 211.1 million EUR and Ebitda margins decreased by (360) bps to 12.1 percent. Aryzta Europe has experienced considerable challenges in transferring 225 SKUs in Germany from the Fricopan facility to the new bakery capacity in Eisleben and in optimising the operations around this additional bakery capacity. There was also commodity price inflation during the year, in particular significant butter price increases in the second half of the year, which have not been fully mitigated to date. UK margins were also impacted by the increased cost of products supplied from the Eurozone, as a result of weakening Sterling.

With the exception of the challenges in Germany and the UK, most geographies in Europe performed well, with the impact of in-sourcing by a large customer in Switzerland somewhat mitigated by that transition occurring more slowly than initially anticipated.

As detailed in Section 10, during the year Aryzta Europe recorded a goodwill impairment charge of 103.0 million EUR relating to the Germany business. In addition, Aryzta Europe incurred 1.3 million EUR of non-cash asset write downs and 11.7 million EUR of other restructuring-related costs, primarily related to severance and staff-related costs incurred as a direct result of bakery rationalisation in Germany and consolidation 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. It has a diversified customer base, including multiple retail, restaurants, catering, hotels, leisure, hospitals, military, fundraising and QSR. Aryzta is a leader in high-value artisan bakery via La Brea Bakery, which focuses on the premium branded bakery segment.

Aryzta North America revenues declined by (5.7) percent to 1,799.1 million EUR during the year ended 31 July 2017. Organic revenue declined by (6.3) percent, due to volume declines of (8.5) percent partially offset by positive price/mix of 2.2 percent. The disposal of a non-core, fillings and mixes business in the prior year impacted year over year revenues by (0.9) percent, while currency movements supported revenues by 1.5 percent.

As previously announced, the decline in Aryzta North America organic revenues during the year was initially driven by declines with contract renewal customers and was further compounded by co-pack customers in-sourcing volumes earlier than anticipated.

Aryzta North America Ebitda declined by (43.3) percent to 170.1 million EUR, while Ebitda margins declined (620) bps to 9.5 percent. These very significant declines are the result of negative operating leverage following an overall reduction in volume and are further impacted by increased labour input costs and additional brand marketing investment behind the business-to-consumer (‘B2C’) centre aisle food offering, which has not been successful and has now been stopped.

As detailed in Section 10, following the significant reduction in overall profitability during the year, and related reductions in future cash flow projections, Aryzta North America recorded impairment charges totalling 756.9 million EUR in respect of goodwill, intangibles and fixed assets. In addition, Aryzta North America incurred 37.6 million EUR of restructuring-related costs, including costs associated with business interruption challenges at the Cloverhill bakeries acquired in FY 2014, severance and staff-related costs, onerous leases, advisory and other restructuring-related costs.

Aryzta Rest of World

Aryzta’s operations in the Rest of World primarily includes businesses in Brazil, Australia, New Zealand, Japan, Malaysia, Singapore and Taiwan. While representing only 7 percent of total Group revenue and 9 percent of total Group Ebitda, these locations provide attractive future growth opportunities and have importance as suppliers to our global QSR customers.

Aryzta Rest of World revenues increased by 15.8 percent to 259.1 million EUR during the year ended 31 July 2017. Organic revenue increased 7.2 percent, as a result of 4.7 percent volume growth across the region, combined with additional price/mix growth of 2.5 percent. Favourable currency movements also supported revenues by 8.6 percent.

Aryzta Rest of World Ebitda increased by 13.6 percent to 39.1 million EUR, while Ebitda margins declined by (30) bps to 15.1 percent. The continued growth in this segment relates to the ongoing support of our internal customer partnerships, as well as an expansion of the food offering within the convenience and retail channels.

Joint ventures

During August 2015, the Group invested 450.7 million EUR in a 49 percent interest in Picard, which operates an asset-light B2C platform focused on premium speciality food. Picard is located primarily in France, is separately managed and has separately funded debt structures, which are non-recourse to Aryzta.

While Picard is not considered part of Aryzta’s long-term strategy, disposal of the Group’s investment is currently only possible with agreement of both joint venture partners. Therefore, as it is the Group’s intention to achieve a fair market return only once all shareholders are aligned in pursuit of an exit, the Group’s investment continues to be accounted on a historical cost basis using the equity method of accounting, rather than at fair value as an asset held-for-sale.

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 1,515.8 million EUR during the Aryzta year ended 31 July 2017 and delivered an underlying contribution to Aryzta, after interest and tax, of 21.3 million EUR. Both joint ventures performed well, growing revenues, expanding margins, and generating strong internal cash flows.