Aryzta AG: announces FY 2016 H1 results

Zurich / CH. (aag) Swiss Aryzta AG announced its financial results for the six month period ended 31 January 2016. Commenting on the results, Chief Executive Officer Owen Killian said: «Underlying revenue growth momentum continued to improve, although still 18 to 24 months behind prior expectations. Free cash flow was strong during the period, as anticipated, and remains the key business focus. Underlying net profit from continuing operations remains flat. Speciality food is a growth segment of the overall food market in Europe and North America where consumer demand was positive in the period. Aryzta is well-invested and well-positioned to grow, because its recently invested infrastructure is the most relevant and most competitive for this market».

Key Performance Highlights

• Revenue increase of 5.5 percent to 1’960 million EUR; 0.2 percent underlying growth
• Food Europe revenues increased 9.5 percent to 881.7 million EUR; 4.7 percent underlying growth
• Food North America revenues increased 3.6 percent to 971.0 million EUR; (4.0) percent underlying decline
• Food Rest of World revenues declined (7.2) percent to 107.3 million EUR; 3.9 percent underlying growth
• Ebita increased 2.7 percent to 230.8 million EUR
  • Food Europe increased by 6.8 percent to 105.4 million EUR
  • Food North America increased by 0.1 percent to 113.1 million EUR
  • Food Rest of World declined by (6.8) percent to 12.3 million EUR
• Ebita margin decreased by (30) bps to 11.8 percent
  • Food Europe margins declined (30) bps to 12.0 percent
  • Food North America margins declined (40) bps to 11.7 percent
  • Food Rest of World margins maintained at 11.5 percent
• Associate and joint ventures contributed 13.7 million EUR, in-line with expectations
• Finance cost, including Hybrid increased 16.1 million EUR to 71.8 million EUR, in-line with expectations
• New bank refinancing in place; lower cost and extended maturity
• Cash Generation increased 146.9 million EUR from 26.1 million EUR to 173.0 million EUR
• Net Debt: Ebitda (syndicated bank loan) of 2.91x
• Underlying fully diluted EPS
• continuing operations increased 2.5 percent to 158.4 cent
• Underlying net profit
• continuing operations increased 2.0 percent to 141.1 million EUR
• Underlying fully diluted EPS decreased (1.9) percent, due to disposal of Origin discontinued operations, which contributed 6.2 million EUR or 6.9 cent during the prior period

Owen Killian: «Revenue development has been erratic for the past 12 months and will be for a further 18 months as we commission and optimise our capacity. During this period, customer in-sourcing in Europe and contract renewal in North America will negatively impact revenue by circa 3 percent, as previously indicated. This will continue to be mitigated by cross-selling, facilitated by business optimisation and ATI. During this period, the best investor barometers will be free cash flow and underlying revenue growth, with more predictable «wins» and lower «losses». We are focused on establishing a sequential growth pattern and view short-term earnings guidance as less relevant, until we deliver on this priority. We are confident we can achieve our post 2020 strategic goals, for which the significant investment building blocks are in place».

Food Europe

Food Europe outperformed in the first half, with revenue growth of 9.5 percent to 881.7 million EUR, of which underlying revenue increased by 4.7 percent. In addition, acquisitions, net of disposals, contributed 2.7 percent and there was also a favourable currency impact of 2.1 percent. Food Europe Ebita increased by 6.8 percent to 105.4 million EUR. Ebita margins decreased by (30) bps to 12.0 percent, reflecting the short-term reduced operating leverage in some parts of Aryzta Food Solutions (AFS), while Aryzta Bakeries Europe brought on-stream newly invested infrastructure.

The in-store bakery market has been experiencing above average growth in Europe, driven by the entry of discount formats supported by sophisticated, highly efficient supply chains. Substantial newly invested capacity to support this growth is coming on stream over the next 12 months. While isolated customer in-sourcing is expected to impact revenues, good progress in terms of expanding the European customer base through long-term partnerships has been achieved. Unlike North America, the European bakery market is experiencing price deflation, primarily due to lower soft commodity prices in the region.

AFS has seen a recovery to positive underlying revenue growth overall, driven by strong performance in Ireland and the UK, offsetting some weakness in Continental Europe, especially in France and Switzerland, as anticipated. Disruption in the independent retail channel continues, due to growth in discounting. Innovation investment continues to support the AFS portfolio alignment with consumer trends.

During the period, AFS completed the divestment of Fresca in France and the acquisition of La Rousse Foods in Ireland. These transactions reflect the AFS strategy to focus on premium, higher-margin business.

Food North America

Food North America revenue increased by 3.6 percent to 971.0 million EUR. Underlying revenue declined by (4.0) percent, while there was a decrease of (1.8) percent from disposals and a favourable currency impact of 9.4 percent. Underlying revenue growth, although still behind expectations, continued to improve during the period, and is expected to continue to develop through H2. Revenue developed positively in the retail and food service channels.The QSR market is proving highly competitive. As the consumer’s perception of value is increasingly based on multiple variables, of which price is only one consideration, some customers are gaining share, while others are losing out. Underperformance in the QSR segment, supply chain optimisation and supply chain contract renewals were the key drivers of the volume decline in North America. North America Ebita increased by 0.1 percent to 113.1 million EUR, while Food North America Ebita margins decreased by (40) bps to 11.7 percent, reflecting the impact of decreased operating leverage from capacity optimisation and some supply chain contract renewals. The market response to the relaunch of La Brea Bakery and Otis Spunkmeyer branded portfolio was encouraging during the period. Developing Aryzta’s branded positon remains a key part of the North American marketing strategy in the periods ahead. There was some price inflation during the period, due to higher ingredient costs, while labour and freight costs are also escalating. During the period, Food North America also completed the divestment of its non-core fillings and mixes business in the United States.

Food Rest of World

Food Rest of World revenues decreased by (7.2) percent to 107.3 million EUR, with underlying growth contributing 3.9 percent, offset by an unfavourable currency impact of (11.1) percent. The underlying revenue growth relates primarily to an improved product sales mix.Food Rest of World Ebita decreased by (6.8) percent to 12.3 million EUR, primarily as a result of currency impacts, while maintaining Ebita margins at 11.5 percent. Rest of World achieved continued growth, despite challenging economic conditions across these markets. The performance was adversely impacted by negative currency translation rates. Aryzta continues to explore opportunities to expand capacity across the Rest of World segment.

Associate and Joint Ventures

During August 2015, the Group acquired a 49.5 percent interest in Picard, which operates an asset light business-to-consumer platform, focused on premium speciality food. Picard is located primarily in France with some international locations. Aryzta also retains the right to exercise a call option to acquire the remaining outstanding interest in Picard between FY-2019 and FY-2021. Picard is separately managed and has separately funded debt structures, which are non-recourse to Aryzta.During January 2015, the Group acquired a 50.0 percent interest in Signature Flatbreads, a pioneering flatbread producer in India and the UK, producing an innovative range of authentic Indian breads, as well as high-quality international flatbreads, tortillas, pizza bases and pitas. Associate and joint ventures had total revenues of 820 million EUR at average Aryzta margins. The businesses performed to expectations, delivering an underlying contribution after interest and tax of 13’699’000 EUR during the period, and continue to provide significant future growth opportunities for the Group.