ZURICH, SWITZERLAND — Acknowledging that fiscal 2018 was not a good year, Aryzta has stabilized its business and now has a clear plan and team in place to drive shareholder value, Kevin E. Toland, chief executive officer and executive director, told analysts during an Oct. 1 conference call to discuss fiscal 2018 results.
Mr. Toland said Aryzta’s strategic priorities are built around Project Renew, which is an initiative centered on “a clear focus on customer, the market, operations and rigorous financial controls, a back-to-basics strategy, which is narrow and deep.”
“A successful capital raise will provide us with an effective capital structure, which will allow the management team to fully focus on driving the success of the business,” he said. “We firmly believe that there's a significant value-creation opportunity through clear delivery of our plan.”
In the year ended July 31, Aryzta North America EBITDA plummeted 47% to €89,902,000 ($103,751,000), which compared with €170,096,000 in fiscal 2017. Aryzta North America revenues in fiscal 2018 decreased 18% to €1,468 million ($1,694.4 million) from €1,799.1 million.
“It was a strange year (in North America),” said Frederic Pflanz, chief financial officer. “The first beginning of the year, we had no permanent management, we had interim management, and we had a tough situation around Cloverhill, which we managed to sell just at the beginning of H2. Volumes are declining, minus 4.2%, and they were declining the year before as well, so we had quite a negative operating leverage due to these volumes. The year was greatly influenced then by the labor cost increases and in the second half … by distribution cost increases.
“The new management under Dave Johnson in place has been addressing cost issues through reorganization, has been addressing our input cost issues through trying to create new pricing. And we are really strengthening our focus to working with the customers, as we are a B2B business.”
During the call Mr. Toland and Mr. Pflanz highlighted the importance of the company’s plans to raise €800 million in equity capital.
“In simple terms, we are too highly leveraged today, and we need €800 million from our shareholders to deliver on our multiyear turnaround program,” Mr. Pflanz said. “We have a complex and somewhat unusual capital structure. We have a lot of upcoming maturities in 2019, and at the moment, we’re not able to pay dividends to our shareholders and especially not while the hybrid dividends remain unpaid.
“The €800 million that we we’re asking our shareholders are based on a detailed review of the business together with our independent financial advisers. It is the level of capital required to implement our business plan, and it is fully underwritten by our bank. The capital raise will reduce leverage and financial risk, and it will help through the transition to leverage metrics more in line with our peers over the medium term. As mentioned earlier, it also provides the necessary funding to execute Project Renew rapidly and safely, the flexibility to maximize value of noncore disposals and to address the liquidity constraints of the business.”
Overall, EBITDA at Aryzta decreased 29% in fiscal 2018 to €301,822,000 from €420,307,000, while underlying net profit fell to €423,314,000 from €807,520,000. Revenues fell 10% to €3,435,422,000 from €3,796,770,000.
Mr. Toland identified six key components in Aryzta’s strategy to drive performance across the business between fiscal 2019 and fiscal 2021. The components include: growing margins by achieving higher volumes and prices; focusing on customer business-to-business relationships; improving the company’s approach to innovation; executing on Project Renew; systematically improving operational efficiency across the bakery network; and engaging in selective investments where there is clear customer demand and support.
Launched in June, Project Renew aims to enable a three-year cost reduction of €200 million during fiscal 2019 to fiscal 2021, including operating model cost reductions, procurement and supply chain initiatives, and automation initiatives. Describing the project in more detail during the Oct. 1 call, Mr. Pflanz said Project Renew is centered on two regions in the world — Europe and North America — and concerns four major work streams: manufacturing, supply chain, procurement and operating model.
“In Europe, we target €50 million of run rate savings out of the €90 million; and in North America, €40 million out of the €90 million by 2021,” Mr. Pflanz said. “Let me give you a few examples. In manufacturing in Europe, we believe that manufacturing plays a big role. We will automate 12 out of our 37 German lines, for example. We will close two or sell two underperforming bakeries. We have significant savings opportunities in procurement, especially in direct procurement, where we have not worked as a group before. And we will also make changes in our operating model and supply chain by looking at more outsourcing.
“In North America, automation plays a big part. We wanted to automate more than half of our 75 lines that we have in North America. We will be reducing the bakery footprint as well because we have to get more efficiency into our manufacturing organization. We’re also well on track on securing our operating cost savings as we already have downsized our head of the staff several times throughout the year 2018. Today, our U.S. headquarters staff number is 25% smaller than it was at the start of FY ‘18. And at the same time, we have organized ourselves to be able to sublease or exit offices to get I.T. (applications) in both regions.”