ARYZTA AG (ARYN) Earnings Call Transcript

Good morning, and welcome to our H1 results call. Our presentation includes forward-looking statements, which details the various risks and uncertainties that may impact our business and which also apply to today's discussions. I will now hand over to Urs to start the presentation.

Thank you, Paul. Good morning, all. Let me welcome you to this H1 2026 results overview. On Page 4, you can see the key highlights of the first half year 2026. We did achieve a revenue of EUR 1.064 billion almost, which accounts for an organic growth of minus 2.7%. EBITDA has been achieved of EUR 139.9 million and a free cash flow of EUR 23.6 million. Earnings per share stands at EUR 1.82. In April this year, we did repurchase the hybrid bonds, the last outstanding hybrid bonds. And as you did read some weeks ago, we did a French bolt-on acquisition to expand our French business. Then, on the next page, Page 5, you can see the H1 organic growth being impacted by mainly a heightened macro and geopolitical uncertainty. Consumer savings are going up and consumer uncertainty is visible, resulting in a subdued consumer sentiment. We did work against strong prior year comps. Germany was clearly the most challenging market. Germany's underperformance offset the growth in other key markets. We are driving Project Excellence at pace to harvest attractive savings and strengthen margin resilience. For Germany, we are considering all options to maximize shareholders' value. Both measures accelerating and delivering attractive savings benefits. The Excellence program, as I did mention, is rolling out faster and in more bakeries and in more markets. We are streamlining the organizational model. Further optimization investments are planned for H2 this year. We have very good visibility on key inputs. The innovation rate of 19% is supporting profitability via premiumization. Then on Page 7, the guidance for 2026. We are targeting to achieve organic growth at the lower end of the guidance range, reiterate expectation to deliver further EBITDA and EBIT improvement, and we expect to deliver solid cash generation and an improvement in net debt to EBITDA. For 2027 and 2028, the Board will propose a capital return allocation to shareholders at the AGM 2027. The options for this are dividends, share buyback or a combination of both. We are targeting to evolve progressively towards Swiss-listed SMEs payout ratios. I will hand over now to Martin Huber for financial review.

Thank you, Urs, and good morning. I'm pleased to share our results for the first half of 2026. We had a challenging start into the year, particularly in Germany, but the group delivered a resilient performance in a difficult economic and consumer environment. Revenue of EUR 1.0639 billion was below the prior year, resulting in an organic growth of negative 2.7%. This was mainly driven by volume mix of negative 2.1% with Germany being the key drag on the group performance. Our reported EBITDA margin of 13.2% was 70 basis points below prior year and includes one-time costs of approximately EUR 5.4 million, mainly related to the Excellence program, which is driving cost optimization and organizational efficiency. These one-time costs represent approximately 50 basis points of revenue. Free cash flow of EUR 23.6 million is largely in line with previous year and our guidance for the first half of 2026. ROIC of 11.1%, although below last year, given lower profitability, is ahead of our weighted average cost of capital, creating value for our shareholders. At the same time, we made clear progress on the levers that matter for the full year. We accelerated cost efficiency, improved capital structure and reduced the financing cost. Let me now provide more details on the composition of our revenue performance. Total revenue decreased by 2.1% or EUR 22.5 million. This reflects an organic growth of negative 2.7%, which is partially offset by a positive foreign exchange impact of 0.6%. The subdued consumer sentiment impacted retail in particular, as well as QSR channels in Europe, with Germany being the main driver of the negative growth. Solid organic growth in Switzerland, France, the Netherlands partly offset this impact, but not enough to compensate for the decline in Germany. QSR in Rest of World delivered mid-single-digit organic growth, supported by pricing and volume mix, while the other 2 channels in this region were flat. Overall negative pricing remains limited and is expected to be stable to slightly improving for the full year. I will now move from the group revenue bridge to the performance of Europe and Rest of World. Europe, and Germany, in particular, weighed on group revenue performance in the first half. At the same time, it is important to highlight that there are clear signs of relative resilience in several of our retail markets. Year-to-date, 3 of our 7 retail markets have outperformed their respective markets and 2 additional markets have significantly closed the gap versus market performance. Our continued strong innovation activity, representing 19.2% of revenue, delivered almost the same absolute top line contribution as in prior year, and importantly, is supporting margin. Distribution platform acquired in France will contribute to our revenue growth for the full 6 months of the second half. Lower revenue impacted profitability with an EBITDA margin of 12.4%, coming in 80 basis points below the prior year. The European businesses are the main focus of our cost efficiency and optimization initiatives and most of the related one-time costs, therefore, are recorded in this region. Based on the progress of these initiatives, we are confident that Europe will recover margin in the second half and contribute to the overall targeted improvement of the group EBITDA margin. This was Europe. I will continue to share further details to Rest of World segment. The QSR channel has been driving the top line performance of Rest of World. Positive organic growth of 2.7% is supported by both volume mix and pricing. The other 2 channels in Rest of World were flat in growth. Worth highlighting our Malaysian business with good contribution to growth driven by volume, which was, however, offset by the performance of the other businesses. The ramp-up of the Perth factory is progressing well, and we expect a positive contribution to revenue in the second half of this year. The cost of pre-hiring of factory staff and preparatory work in the factory have temporarily impacted profitability of Rest of World. For the full year, we expect EBITDA margin to increase to previous year's level. As a next step, I will move now to the key drivers of the EBITDA margin. EBITDA margin reduced by 70 basis points in H1 to 13.2%, including a 50 basis points impact of one-time costs related to the cost efficiency and optimization initiatives of our Excellence program. These one-time costs correspond mainly to restructuring expenses and consulting costs supporting the accelerated rollout of the program. Gross margin before distribution improved sequentially by 70 basis points versus the second half of '25 and remained flat versus the first half of 2025. Key drivers of the evolution of the gross margin versus previous year are a positive contribution from procurement and other savings initiatives of 90 basis points, plus margin-accretive innovation, which added 20 basis points to the gross margin. These positive effects helped to compensate the impact of lower operational leverage and the negative net effect of commodity deflation, labor and energy inflation as well as slightly negative pricing. The negative impact of distribution and SG&A on the EBITDA margin on one side is driven by lower operational leverage, and on the other side, by approximately 50 basis points of one-time costs, which are recorded within SG&A. These costs were partially offset overall by the ramp-up of the Excellence cost savings program, which have already contributed 30 basis points to the result. We expect the impact of Excellence actions to strengthen in the second half and to be a key contributor to the targeted EBITDA margin improvement for the full year. I will now provide more details on the Excellence program and the savings initiatives behind this margin improvement. We have made good progress in our long-term efficiency and cost optimization program Excellence. The program is now moving from assessment into delivery with confirmed savings already being realized and further rollouts prepared for the second half. Up to now, we have addressed with this program circa 45% of total production volume. So far, we have identified and confirmed EUR 8 million to EUR 10 million of gross cost reductions in operations. We are gradually building up internal capacity to further accelerate the coverage on the remaining plants, and we expect to have our full manufacturing footprint covered by the end of 2027. The alignment of our organizational structure is progressing according to plan and is expected to deliver annual gross cost savings of approximately EUR 10 million. We are also progressing with the rollout of our IT roadmap, as we continue to evolve towards a more digitally enabled company. Key initiatives this year include the S/4HANA implementation in Fornetti and the upgrade of our warehouse management system in the French Coup de Pates business. With this, we confirm that ARYZTA continues to target to achieve the EUR 20 million to EUR 30 million net savings by 2028 through Project Excellence by optimizing on one side our operation and on the other side streamlining the organization. From Excellence, I will now turn to the cash flow performance. Free cash flow of EUR 23.6 million is largely in line with previous year and as per the expectation. Stable working capital and disciplined CapEx management supported the results. Lower absolute EBITDA was almost fully compensated by the improvement in financing costs and lower cash taxes. Higher net lease payments and some other elements had a slight negative impact on cash flow. For the full year, we are confident to generate solid levels of cash flow, supported by the improved profitability. On the next slide, I share more details on the working capital performance supporting cash flow. Our trade net working capital was maintained at efficient levels and protected cash flow performance for the company. Our cash conversion has slightly increased by 2 days compared to H1 last year. Somewhat higher inventories and days of sales outstanding have been almost fully offset by better payment terms management. I will now move to our capital structure and leverage development. We continue to move towards our targeted leverage levels and to improve our financing and capital structure, supported by consistent cash generation and disciplined balance sheet management. Key achievement in the first half of 2026, our total net debt decreased by almost EUR 100 million to EUR 789 million, corresponding to a leverage ratio of 2.7x. The repayment of the last remaining hybrid principal concluded our hybrid repayment and refinancing program, and our core equity continues to increase to 23.3% of total assets, up from 18% in previous year. On the next slide, I'll explain the evolution of our financing costs where the stronger capital structure is translating into tangible benefits. Supported by the continued optimization of our financing structure, the reduction of total net debt and a further improvement of our cash management decreased total financing costs by EUR 5.5 million to EUR 16.8 million. Our interest rate hedging, which is covering 29% of our bank debt, will end in the second half of this year. Given the positive evolution of our year-to-date financing cost, we are improving our full-year guidance to the lower end of the EUR 37 million to EUR 40 million range. This compares to the previous year range -- the previously targeted range of EUR 40 million to EUR 43 million. Next is the evolution of ROIC and value creation. Our ROIC remained robust at 11.1%, which is ahead of our cost of capital. Even in the more challenging profitability environment, the group continues to generate returns above its weighted average cost of capital and creates economic value for the shareholders. The year-on-year reduction of ROIC is explained by lower operating profit in the first half. Importantly here, the capital base has been well controlled, disciplined CapEx and efficient working capital management have delivered a stable to slightly declining invested capital base. ROIC is lower than last year, but remains comfortably above the cost of capital. Moving now to the earnings per share. Earnings per share at EUR 1.82 is largely stable versus previous year. The lower operating profit was almost fully compensated by further improved financing costs and a lower tax charge. I will now conclude with our outlook for the full year. While the first half was demanding, particularly in Europe, we have made significant progress in ramping up our cost optimization and efficiency initiatives. These actions are expected to support a stronger profit contribution in the second half and keep us on track to deliver profit improvements for the full year. We are set to accelerate the impact of the Excellence initiatives, which contribute to the targeted profit improvement for the full year. The plan to further drive channel penetration, the contribution from our growth investments in new facilities and the strength of our innovation pipeline provides support required to target the lower end of our organic growth guidance. We are reviewing all options for Germany over the next few months to support shareholder value maximization, and we'll share the outcome in due course with the market. Our resilient business model and solid cash generation will set us up for the resumption of returning capital to our shareholders in 2027. So in summary, while the first half was challenging, the direction of travel is clear. We are addressing the short-term pressure points, accelerating the initiatives, which are under our control and are strengthening the financial platform of the group. This gives us confidence to target profit improvement for the full year and the lower end of our organic growth guidance. Thank you very much, and I hand back to Urs.

Thank you, Martin, for this information. We would now continue with Q&A.

[Operator Instructions] First question comes from the line of Daniel Burki from Zürcher Kantonalbank.

Can you hear me?

Yes. Yes.

Yes. I would have a question on the European market, especially in retail. Is the shrinkage there, it's only the market decline or you also walk away from some contracts or did not renew them because they were not attractive enough? That will be my question.

Thank you, Daniel, again. It's basically the market and the consumer environment. We have good figures and good visibilities in the markets. We believe that in many markets, we are gaining market share even in Q2 in Germany. But in Germany, the market for H1 for bakery products was short by minus 1% in value and minus 4%, minus 5% in volume. So this is the main driver of this. So there is no cancellation of contracts or cooperations. It's clearly a market issue we see in this retail business.

The next question comes from the line of Chiara Di Giammaria from Berenberg.

I'd like to ask what gives you confidence in achieving the full-year guidance? Are you already seeing demand acceleration in the beginning of H2? And then, I also wanted to double check if you have any comments on the midterm guidance.

Thank you for this, Chiara. We have all programs in place, as you already see. Martin did mention the markets outside Germany are doing reasonably well. We have good initiatives in place. We have a high share of innovation, which are -- which is driving our positioning in the market. On the other hand side, we have this aggressive cost program, this Excellence program, which is delivering good results. We have now addressed almost 50% of the entire manufacturing footprint or the entire volume output by 50%, which is a good progress, generating very good results. That's why we are confident to achieve the guidance we gave on the top line at the lower end. As we have told, the markets will remain challenging, mainly in Europe, mainly in retail, but this has been addressed. This is the confidence we have.

And on the midterm guidance.

We stay with this for the moment. This is no change. We have, as I told, good programs in place, good initiatives. As we have told, we test options for Germany. Midterm plan '28 remains unchanged.

We now have a question from the line of Marti Queral Ferre from UBS.

The first one would be on Germany, please. I mean, I would like to understand what happened on pricing, especially. So -- yes, I mean, what is driving this negative pricing? Are there overcapacities? Is there potential in-sourcing from retailers putting pressure to prices? And any color here would be appreciated. And also my second question would be on, yes, considering what you can control, what are the plans to drive growth, especially in Germany, but also elsewhere in 2027 and beyond?