ARYZTA AG (ARYN) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to ARYZTA Full Year Results 2020. The call will be hosted by Urs Jordi, Chairman and Interim CEO; and Martin Huber, CFO. There will be a presentation followed by Q&A. This call is being recorded today. Now I'd like to hand over to Paul Meade, Head of Investor Relations to open the call. Please go ahead. .

Thank you, Eddie, and good morning, everybody, and welcome to today's call. I would just like to briefly draw your attention to the forward-looking statements on Page 2 of the presentation, which details the risks and uncertainties relating to our business and it covers all of today's discussions. I will now hand over the call to Urs Jordi, Chairman and Interim CEO of ARYZTA. Thank you.

Thank you, Paul. Good morning, ladies and gentlemen. I hope you are fine. Thank you for taking time to be with us this morning. I'm here with our CFO, Martin Huber, and we are pleased to report a strong financial performance resulting in first underlying net profit for many years. This reflects the benefits of the significant business performance improvement. This, despite all the various business challenges facing our sector in these days. Please turn now to Page 3 of the presentation the overview of the performance of the fiscal year '22. ARYZTA achieved a revenue of EUR 1.756 billion and an organic revenue growth of supporting this by 17.9%. And underlying EBITDA increased to EUR 218.8 million. Underlying EBITDA margin increased by 110 basis points to 12.5%. The operating free cash flow reached EUR 109.7 million, repayment of a EUR 50 million Euro Hybrid part was done in the year '22. The underlying net profit amounts in EUR 45.6 million amount. Please turn now on Page #4, the organic growth performance. In the meantime, 60% of group revenue is ahead of pre-COVID levels. Both segments, Asia and Europe are performing strongly. We see outpaced European retail markets, Foodservice recovery in Europe continued. QSR in Europe and Asia delivered strong growth. ARYZTA is investing selectively in capacity for growth. Please turn then on Page #5. Significant inflation challenges remain. More in supply chain disruptions are still in our world, little respite expected in the near term as we know. Further cost and price increases are expected. But nevertheless, bakery products have competitive colorific value advantages versus other food products. So we are in a good place with our products. Markets with resilient consumer spending and robust social supports are in our portfolio. Please turn then on Page #6. Energy availability and costs are and will remain a key challenge. Energy represents 3.8% of revenue in fiscal year '22. This was 3.8% in fiscal year '21. Contingency plans are in progress to diversify energy sources. Reducing dependency on gas is in progress with modifications of heating systems. We are investing in renewable energy on some sites, such as photovoltaics. Procurement risk management and pricing is in place to address energy volatility. Please turn then on Page #7, in our midterm target fiscal year '23 to '25, which we confirmed. Organic growth between 4.5% and 5.5%, this based on constant pricing. This will lead into revenue of bigger than EUR 2 billion, again based on constant currency and pricing. And EBITDA margin, 14.5% minimum will be achieved. CapEx will amount between 3.5% and 4% of revenue. The ROIC will be 11% or higher in this period and the total net debt leverage, including hybrid these 3x. This is driven by operational results. Please turn then on Page #8, the guidance for fiscal year '23. The current trading terms remain unchanged despite challenging macro environment, as we all know. Further improvements are expected for the actual year for the fiscal year '23. We hear it confirmed our midterm targets for fiscal year '25. I will hand now over to our CFO, Martin Huber. Martin, please?

Thank you, Urs. Good morning, ladies and gentlemen. I'll ask you now to turn Page 10. ARYZTA has delivered a strong set of figures and further consolidated the turnaround plan. Revenue grew by 15.1% to EUR 1.756 billion and EBITDA margin improved by 110 basis points to 12.5%. Our finance cost decreased to EUR 17.1 million due to lower average bank borrowings and lease liabilities. Hybrid dividends remained stable. Our income tax charge reduced versus previous year mainly due to the recognition of a deferred tax asset in our Swiss business. This resulted in an underlying net profit of EUR 45.6 million for continuing operation compared to a loss in previous year. I want to highlight that ARYZTA delivered in FY '22 an IFRS profit of EUR 1.9 million for continuing operations and EUR 0.9 million for the group. I'll now ask you to turn to Page 11. In the fiscal year 2022, we have delivered a strong double-digit organic revenue growth of 17.9% with a contribution of 12% from volume. Our businesses in France, Fornetti, Jallon as well as Foodservice APAC delivered double-digit volume growth, a clear standout here with a volume growth of over 40% is our business in France. The 4 highlighted businesses generated more than 60% of the absolute revenue volume growth in the year. Pricing has consistently accelerated to 5.2% for the full year and contributed over EUR 78 million to mitigate input cost headwind. The disposal of our Brazilian business as well as the Swiss sandwich business reduced revenues by 3.4%. Currency added 0.6% to our revenues, mainly due to the strengthening of the Swiss franc and the Australian dollar. With this, we have increased our revenue by 15.1% to EUR 1.756 billion. The absolute revenue growth of EUR 230 million in FY '22 is about equivalent to the size of our current Swiss business. I now -- ask you now to page -- to turn to Page 12. Europe was our growth locomotive in fiscal year '22, with an organic revenue growth of 19.3%. Key highlights for this strong performance are all businesses with the exception of Switzerland and Germany are now ahead of pre-COVID revenue levels of FY 2019 measured at constant currency. The businesses ahead of pre-COVID level represent 55% of our European revenues. France continued its strong recovery through the year and posted an outstanding revenue growth -- organic revenue growth of 14.8%. This result was supported by important volume growth, as mentioned previously. Germany, our biggest business, we have been able to deliver an organic revenue growth of 10.1% despite very strict COVID measures during the fourth wave. Wanted to mention that in Retail, ARYZTA Germany outperformed the market both in value as well as in volume. In addition, our Foodservice business in this market rebounded nicely and delivered a strong double-digit organic revenue growth. Rest of the World had a strong Q4 organic revenue growth of 18.9% and increased the full year growth to 10.5%. Important callouts for this region are, business representing almost 80% of revenue in rest of the world are now ahead of pre-COVID levels. Our Foodservice business in APAC delivered strongly to the region's growth, with an organic revenue growth of over 20%. The newly acquired bakery in Malaysia allowed us to capitalize on the market potential and contributed significantly to this growth. After a record year in 2021, our QSR business in APAC added another record year and generated high single-digit organic revenue growth. I'll now ask you to turn to Page 13. All our 3 channels achieved double-digit organic revenue growth. Both QSR and Retail are now ahead of pre-COVID levels. Despite the strong organic revenue growth of 31.5%, the Foodservice channel is still behind. This is due to Foodservice revenues in Switzerland, Germany, Australia and Japan. The growth in our QSR channel of 16.5% is driven by our European bun bakeries. This business delivered an organic revenue growth of over 20%. And as indicated early, APAC QSR contributed with another record sales year as well. This was achieved despite flooding and strict COVID measures in Australia and New Zealand, which impacted restaurant [indiscernible]. I'll now ask you to Page 14. In 2022, our business had to manage a strong total purchase price variance, including energy of circa 20% versus the previous year. This corresponds to a cost increase of circa EUR 100 million. Through adequate pricing, we have been able to mitigate a good part of input cost headwinds. Several pricing negotiation rounds as well as energy surcharges have allowed us to increase the pricing contribution quarter-by-quarter. In Q4, pricing contributed 11% to revenues. Apart from pricing, we have applied other measures to mitigate these input cost headwinds. Procurement cost optimization and commodity risk management, the launch of our approach in Simplex to simplify our recipe structures has also started to contribute in 2022. And our continuous efficiency program in the bakeries addressing conversion costs and line efficiency delivered additional mitigating impacts against the input cost headwinds. I'll now ask you to turn to Page 15. Disciplined cost management addressing all our cost pools, combined with pricing and strong growth are the contributors to our EBITDA margin progression of 110 basis points to 12.5%. Contribution from pricing and efficiency program helped to offset input cost increases and slightly improved our gross margin by 10 basis points. Good progress was achieved in our bakeries through the continuous efficiency program, increased the line efficiency from 73.2% to 74.4% and reduced our conversion cost as a percentage of revenue from almost 35% to slightly above 33%. The efficient management of our distribution infrastructure allows us to limit the cost increase to 9.5% in absolute terms. This was achieved despite fuel and labor cost impacts and the effect of transport capacity availability. Distribution costs contributed an operational leverage of 70 basis points to profit margin. Our sales and marketing as well as administration costs increased by EUR 7 million to EUR 209.9 million, the resulting 140 basis points leverage benefit was an important contributor to the overall EBITDA margin improvement. Depreciation reduced slightly to EUR 107.5 million. Therefore, its impact on total sales reduced versus previous year. I'll ask you now to turn to Page 16. Both regions improved their EBITDA margin, while Europe increased the profit by 80 basis points. Rest of the world generate a strong progression of 390 basis points to 17.5%. Europe, France and Switzerland were the key contributors to the improved profit result. Ireland, Pré Pain and the bun business, bun bakeries as well improved their profitability. This business is more than offset the negative evolution in the other businesses. Rest of the World benefited from the strong recovery of the Foodservice business and the strong contribution from Malaysian business, the newly acquired bakery. Foodservice in APAC achieved an EBITDA margin well above 10% after a loss in previous year. I'll now ask you to Page 17. Our operating cash flow more than doubled for continuing operations to $107.7 -- EUR 109.7 million. This result is ahead of our guidance of EUR 80 million to EUR 90 million. Key contributors to this strong performance are the acceleration of our absolute EBITDA supported by our strong business results. Despite the strong revenue growth of 15.1%, we have been able to further reduce working capital. The increase in our supplier financing program contributed almost EUR 25 million and the extension of our securitization program added EUR 23 million. This helped to more than offset the increase in inventory and receivables. The reduction of our nonrecurring cash expenses from EUR 44.8 million to EUR 11.9 million was another contributor to this strong result. Cash flow from activities increased from -- for continuing operations increased from EUR 10.8 million in FY '21 to EUR 44 million, an increase by [ 4x ]. I'll now ask you to turn to Page 18. Our strong business results and disciplined working capital management accelerated our return on invested capital to 6.8%. The acceleration of the return on sales delivered the majority of this ROIC improvement, which was also supported by the lower tax charge. The improvement in our asset turn ratio mainly with the contribution from our working capital increased the ratio from 1.1x to 1.4x, which also accelerated our return on invested capital. This significant improvement in our capital efficiency in full year '22 builds a strong foundation to enter into value creation territory in the next fiscal year. I'll now ask you to turn to Page 19. In full year '22, we have made important progress in addressing our Hybrid funding structure. As announced in October '21, we have repaid EUR 172 million of compounded and deferred Hybrid dividends. In addition, during fiscal year '22, we paid EUR 43 million in current year dividends. This adds up to the total EUR 215 million dividends paid. The total dividend charge for full year '22 corresponds to EUR 45.2 million. During the Capital Market Day, we have announced that we will repay the principle of our Euro Hybrid over the period of the midterm plan. In July '22, we started with this program and repaid the first EUR 50 million. This was achieved at a discount of 4%. FX impact increased the balance of our hybrid funding to EUR 814.1 million. This includes EUR 7 million of accrued dividends. We now move to Page 20. Our total weighted average interest cost, including hybrid instruments for FY '22, was 4.2% which is stable compared to the 4.3% in fiscal year '21. The current economic context with rising interest rates, we are well set up within our capital structure. The basis of this is the EUR 500 million RCF, which was refinanced at competitive margins last year. Any interest rate increase that could impact the RCF will be partially offset by the result of the first partial repayment of the Euro Hybrid in July. The announced program to repurchase the EUR 250 million Hybrid during the period in the midterm plan, also limits our exposure to an interest resetting in March 2024 but will also help us to manage interest cost increases related to our RCF. The remaining EUR 590 million Swiss franc hybrid funding is currently at lower rates compared to the Euro Hybrid. The floating rate element on the rent resets quarterly on the basis of a 3-month SARON rate. We are currently evaluating in addition, interest risk management strategy to ensure that we have clear visibility on our total interest charges moving forward. I'll ask you now to move to Page 21. Throughout fiscal year '22, we have made important progress to improve our capital structure. The setting up of the new EUR 500 million RCF in September '21, the repayment of EUR 160.8 million of Schuldschein notes in December '21 and the repayment of EUR 21.9 million in state sponsored COVID loans, increased debt maturity profile from slightly below 1 year to 4.1 years. In addition, we have addressed our Euro Hybrid funding as detailed in the slide before. Total net debt level, including hybrids, decreased by EUR 89 million to EUR 1.104 billion. And the leverage ratio reduced from 6.9x to 5x. From a bank's covenant point of view, we are well within our limits. Leverage ratio of 1.01x is well below the limit of 3.5x. And for the interest cover, we are at 3.17x which is above the 2x limit. In summary, ARYZTA delivered a strong set of figure in the fiscal year 2022 and has further consolidated the turnaround line. I'll now hand back to Urs. Thank you very much.

Thank you, Martin. I would ask you now to turn to Page 23 with our ambition and our value proposition. Our ambition is to be the best partner for bakery solutions across all our channels and markets, with the value proposition to deliver the gold standard for bake-off the business we are in. Then on Page 24, the 4 key value drivers for the gold standard. You can see on the right side, innovation power, we brought back into the business, the category know-how being close to the business, to the markets, to customers and excellence in general solution is in place following channel trends and new Foodservice needs in retail, in quick-serve restaurants. On the left side, then excellence customer development, supporting customers' needs and plans and an excellence in quality and efficiency is in place. These 4 drivers are key for us in order to defend the gold standard for bake-off in our business. Turning then on Page 25, you can see the ARYZTA value-creating business model, again, from a very destructive acquisition-driven model into a value-creating organic growth model with the providing of the gold standard for baker solution, being a category captain offering innovation, differentiation of products, providing a multi-local European and Asian business with our bake-off partners together, being focused on channel and category solutions and having highly dedicated well-structured and focused organizations. Coming then back again on the next page, 26, to the guidance for the fiscal year '23 and we repeat is again the current trading trends remain unchanged despite, again, the challenging macro environment. We all know this. We are heading versus future improvements we expect in fiscal year '23, and we confirm our midterm targets we laid out for fiscal year '25. Thank you for listening. We would then now open the Q&A round.

[Operator Instructions] The first question comes from Jon Cox from Kepler.

Just a question a little bit on what you think the pricing environment will be for you guys in FY 2023. It seems that you've subtly changed your guidance, the 4.5% to 5.5% organic sales growth over the next few years is in constant pricing from 2022. It looks like you're exiting Q4 at double-digit pricing. Should we expect pricing based on what you know today and all of the -- where we are in terms of input costs, where do you see that? Is it going to be somewhere around 10%? Would you say that's an accurate assessment?

Thank you, Jon. I would hand over this question to Martin.

John, based on your question, if that 10% is a reasonable estimate for '23. I think you can take that as a base assumption certainly.

We will take our next question from Patrik Schwendimann from ZKB.

Patrick Schwendimann from Kantonalbank. Congrats from my side. I'm very happy to see that it's going into the right direction after many years of uncertainty. I have several questions. First question, we have seen a strong Foodservice recovery, and you also have a strong foothold in France. What is your best guess growth assumption in terms of volumes for the foodservice channel for the current year? Then second question, can you expect another repayment of the Euro Hybrid in the current year? And if yes, what is your best guess here in terms of the amount? And last question, you had an increase in the gross margin of 10 basis points. What's your best guess here for the current year in terms of the gross margin? And also, any comments on expectations for the year -- EBITDA margin for the current year.

Thank you, Patrick. Let me just write down the questions. Foodservice had a good recovery in fiscal year '23 and a decent start in the year 20 -- sorry, '23 in the actual year. We do our utmost to continue like this. It's difficult to do a guidance around this. We just confirmed fiscal year '25 guidance, this is the basis we are working on. The second question, the Euro Hybrid. These repayments are based on a prudent view we take on the development of the business we have, on the performance of the business we have. And at the moment, we feel safe to address next part of a hybrid repayment we will bring this up, but there is nothing fixed so far for the moment. Gross margin, Martin?

Thank you, Urs. Maybe just one additional comment on the repayment of the Euro Hybrid. Patrick, I think what you can take is the guidance that we have said that during the midterm -- the period of the midterm target, we will repay the full Euro Hybrid. So -- and the timing is based on what Urs has said and what we also have said in June during the Capital Market Day that this will be financed from the operation. So these 2 things in tune. You can rest assured that there will be further repayment coming as laid out during the Capital Markets Day. In terms of the margin comment, I would really reemphasize our guidance for '23. We have said that there will be further improvement expected in full year '23. That is for the overall business. We do not, for the time being, give any additional color on a particular line in the P&L.