Aryzta AG: announces Q3 Trading Update

Zurich / CH. (aag) Swiss Aryzta AG announces its third quarter trading update for the period ended 30 April 2016. Highlights:

• Continued progress in underlying revenue recovery, +0.9 percent in Q3
• Improved revenue visibility with all outstanding long-term contract renewals signed
• Underlying revenue growth in North America was (2.3) percent in Q3. Excluding revenue with customers impacted by contract renewals, underlying growth was +4.7 percent
• H2 margin weakness trending in-line with guidance
• Group-wide efficiencies and cost reduction initiatives identified
• Incremental one-time cash non-recurring costs in FY 2016
• Earnings and cash generation guidance reiterated

Commenting on the Q3 Trading Update, Chief Executive Officer Owen Killian said: «Q3 revenue development confirms an improving trend in all regions. All outstanding long-term contract renewals are now signed, adding greater visibility to our revenue and validating Aryzta’s investment in the long-term customer partnership model. H2 margin weakness remains in-line with expectations and guidance. We have identified further potential for improved group-wide efficiencies and cost reduction initiatives. These will enhance our future competitiveness in a market that continues to demonstrate attractive growth. However, these initiatives will lead to incremental onetime cash non-recurring costs in FY 2016. We expect to report underlying fully diluted EPS broadly in-line with consensus and to generate free cash in excess of 200 million EUR in FY 2016».

Underlying Volume + Price/Mix Trend

To help investors better understand the dynamics impacting revenue development, Aryzta considers it helpful to break out underlying revenue growth by volume and price/ mix over the seven quarters to Q3 FY 2016. This data highlights favourable price/mix developments at total Group level, despite negative volume trends. Underlying growth in Food Europe over the seven quarters has been driven by broadly positive trends in both volume and price/mix. Underlying growth in Food North America was supported by positive price/mix throughout the seven-quarter period, which helped mitigate substantial volume declines.

Total Revenue

Total revenue declined by (2.4) percent in the quarter to 949.8 million EUR. Underlying revenue growth was 0.9 percent in the quarter. Disposals, net of acquisitions, reduced revenue by (1.0) percent and currency movements reduced revenue by (2.3) percent in the quarter.

Europe

Europe revenue grew by 3.6 percent in the quarter to 420.3 million EUR. Underlying revenue growth increased 3.9 percent in the quarter. Acquisitions, net of disposals, provided 1.1 percent growth, while currency movements impacted growth by a negative (1.4) percent. Europe’s performance continues to benefit from growth in In-Store Bakery, driven primarily by growth in the discounter channel. Good progress on commissioning new capacity in Europe has been achieved, with further benefits likely from new efficiency and cost reduction initiatives. Recovery in Aryzta Food Solutions (AFS) continues, driven by improved regional performances in Ireland and UK. AFS continues to benefit from a strong innovation pipeline, an increased focus on premium offerings and strong cost control measures.

North America

North America revenue declined by (7.0) percent in the quarter to 473.5 million EUR. While sequential recovery in North America underlying revenue continues, underlying revenue growth declined by (2.3) percent in the period. Disposals, net of acquisitions, reduced revenue by (2.8) percent and currency movements reduced revenue by (1.9) percent. The speciality bakery segment in which Aryzta operates continues to display attractive growth opportunities and the market response to the increased investment in La Brea Bakery and Otis Spunkmeyer brands remains positive. In addition, the SKU rationalisation completed in H1. All supply contracts have now been signed, which significantly increases revenue visibility. Excluding revenue with customers impacted by contract renewals, the underlying revenue growth in North America was +4.7 percent in the quarter, driven largely by new food items. This demonstrates the success and relevance of the customer centric business model.

Rest of World

Rest of World revenue declined by (3.4) percent in the quarter to 56 million EUR. Underlying revenue growth was strong at 7.5 percent. Currency movements negatively impacted in the quarter by (10.9) percent.

Supply Chain Contract Renewals

Aryzta has signed all outstanding long-term supply chain contract renewals. The contract periods vary by customer and by food category, with durations of up to nine years. The financial impact of the new contracts are fully reflected in Aryzta’s earnings outlook. The successful conclusion of the negotiations validates Aryzta’s investment in customer partnership models within the attractive speciality bakery segment. This reflects the competitive advantage of an integrated supply chain, offering benefits of best in class manufacturing, food defence, food quality, food assurance and innovation. The successful agreement of new long-term contracts significantly improves revenue visibility.

New Efficiency Initiatives

Aryzta has identified the potential for group-wide efficiencies and cost reduction initiatives. These will lead to incremental one-time cash non-recurring costs in FY 2016. At this stage the expectation is that total cash non-recurring costs for FY 2016 will be less than the prior year amount of 88 million EUR. Aryzta’s policy on non-recurring costs remains unchanged. All non-recurring costs associated with the integration of the business since FY 2012 are complete. Any future non-recurring costs will relate to clear specific initiatives to improve growth. In Europe, in accordance with its legal obligations, Aryzta is currently engaged in discussions with relevant works councils about operational changes, which may impact approximately 2 percent of the Group’s total employees. As these discussions are ongoing and the outcome is unknown at this time, it is not possible to provide exact guidance on the potential costs arising.

Associate and Joint Ventures

Aryzta’s associate and JVs, Picard and Signature Foods, are performing satisfactorily. Capital Markets Day Aryzta announces that it will host a Capital Markets Day on 06 October 2016 in Canada.

Outlook

Underlying fully diluted EPS is expected to be in-line with company collected consensus of 355.5 cent. Free cash generation is expected to exceed 200 million EUR, in-line with guidance.