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Aryzta sees challenges ahead in North America

October 10, 2019
Food & Drink

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News that sales in North America will slump in the first half of fiscal 2020 sent shares of Aryzta AG spiraling downward 5.2% on Oct. 8. The announcement was made during the company’s conference call to discuss fiscal 2019 results.

In the year ended July 31, Aryzta North America EBITDA increased 9% to €97,993,000 ($107,305,153), up from €89,902,000 in fiscal 2018 and compared with €170,096,000 in fiscal 2017. Meanwhile, Aryzta North America revenues in fiscal 2019 decreased nearly 5% to €1,397.9 million ($1,530.7 million) from €1,468 million a year ago.

In an Oct. 8 conference call with analysts, Kevin E. Toland, chief executive officer of Aryzta, said North America accounts for approximately 40% of Aryzta’s total group revenue and 32% of group EBITDA. As such, the division is an important element of Aryzta’s business and turnaround and growth strategy. Although fiscal 2019 was difficult, Mr. Toland said the company is focused on the issues and is making progress.

“We want to deal with the issues that impacted our North American business for the year and the steps we’ve taken to address these issues, in particular a deep dive into the revenue,” he explained. “The overall revenue decline was minus $66 million. Firstly, in Q.S.R., whilst our overall performance was satisfactory and we maintained our position with key customers, there was a $14 million loss in the channel, with revenue reduction with one customer accounting for $15 million. It’s important to remember that in B2B within Q.S.R. our performance is also tied to the underlying sales as from the customer. In this case, our business position with this customer has been fully stabilized, and we are driving new business for and with them through a number of new product innovations, which are rolling through into fiscal ‘20.”

In retail, Mr. Toland attributed the revenue declines to one large customer. He said Aryzta lost two production lines during the year, but the situation has been addressed through new products that are in the process of being progressively rolled out with that customer through fiscal ‘20.

In food service, Aryzta experienced some losses early in fiscal 2019, but that position improved during the second half of the fiscal year, he said.

Mr. Toland said the revenue stabilization in North America “is challenging, and the recovery will take time and will be bumpy.”

“We reiterate that, despite the revenue decline reported today, we’ve not lost any major customers,” he said. “And just to highlight some of the actions that we put in place to turn around the region: Firstly, the new management team is now well embedded and has recently appointed a new head of marketing for the retail channel, which accounts for 30% of revenue in the region. Customer relationships have been repaired and strengthened across all channels. Our supply chain and procurement processes have been improved across the organization, benefiting customers and margins, including realignment and expansion of capacity to better support service levels.

“We have a strategy in place to optimize margin opportunity across all channels. We’ve refocused our innovation around core, higher-margin categories and away from noncore, lower-margin categories. And over the period, we’ve been awarded new business wins that will start to impact through fiscal ‘20 but primarily in the second half.

“North America continues to not only be a very important region for the group but also for the overall global bakery market, and we’re absolutely committed to delivering continued EBITDA growth and stabilized revenue. We’ve taken the initial steps, which have delivered the EBITDA improvement in fiscal ‘20. In terms of revenue, we continue to expect negative comps in Q1 and Q2, as we see the impact of volume changes from last year flowing through into this year. However, positive organic revenue evolution is expected through H2 as the new contract wins and volumes are realized.”

Overall, EBITDA at Aryzta increased 2% in fiscal 2019 to €307,508,000 from €301,822,000. Revenues fell 1.5% to €3,383,425,000 from €3,435,422,000.

Launched in June 2018, 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.

Mr. Toland said Project Renew delivered independently verified savings of €26 million in fiscal 2019 and an annualized run rate saving of €40 million.

“We sold two loss-making bakeries in Europe during the year, and we’ve disposed of our U.K. Food Solutions business since the year-end,” he said. “We closed our first bakery in North America. And as you will have seen last Friday (Oct. 4), we announced a binding offer to sell the majority of the Picard stake. And on completion of the transaction, we will have realized 85% of our asset disposal target.”

By Eric Schroeder

Source: Food Business News

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