It’s arguably likely to be business as usual for Aryzta’s incoming CEO – keeping up the momentum in organic growth and cash-flow generation to reduce debt.
Michael Schai, who joins the Swiss bakery company from chocolate giant Lindt & Sprüngli on 1 January, was a former executive at Aryzta, holding key roles in the Asia-Pacific region, a major growth and market area for the group.
However, he left in 2018 before Urs Jordi became chairman and CEO at Aryzta in 2020, tasked with navigating the company through what it admits was a “period of significant financial risk and business uncertainty”.
One of those risks was debt, particularly the burden of financing hybrid debt instruments, an aspect that still plagues Aryzta today, albeit to a lesser degree than when Jordi took the helm.
Aryzta has mid-term targets in place through 2025 for debt leverage, organic growth, margins and capex. What freedom Schai will be given in that arena is yet unclear, whether he will be given the scope by the board and Jordi – who will remain chairman – to tweak those goals or see them through to fruition.
Speaking on a 2023 results analyst call in March, CFO Martin Huber said a review of the targets beyond 2025 would be conducted this year by the board and “management”.
Jordi has made inroads in relieving the debt burden, repaying €200m ($218.6m) and repurchasing some €120m ($131.2m) just last year. But Aryzta’s total debt pile still stands a tad over €1bn, including almost €500m in hybrid instruments, for a business that generated calendar-year revenue in 2023 of €2.2bn.
Aryzta is on track regarding its debt-reduction programme. Now the focus has to be on sustainable growth after it benefitted from the spike in prices
Jon Cox, Kepler Chevreux
Some analysts suggest Aryzta is passed the worst in tackling what has been a key impediment for the baker for some years, with volume restoration now an important consideration as the inflation-linked pricing effect on revenue fades.
“Aryzta is on track regarding its debt-reduction programme. Now the focus has to be on sustainable growth after it benefitted from the spike in prices. Now we are moving to more normalised pricing at the same time volumes are under pressure,” says Jon Cox, head of consumer equities at Zurich-based financial services company Kepler Cheuvreux.
“I suspect innovation is going to become more important in terms of delivering more bespoke products that excite customers and their consumers.”
Potential takeover bid
Arben Hasanaj, a consumer goods analyst at Vontobel investment management in Zurich, suggests Aryzta has inferred it could even become the target of another takeover bid amid rising competition and consolidation in bakery.
The last one, from Elliott Advisors in 2020, was batted away by Jordi before the outgoing CEO embarked on an asset-disposal programme to streamline the business, boost profits and cut debt.
“What Aryzta has been saying is that they have this leverage issue, so they are a bit constrained there,” Hasanaj says. “What they've been saying is they don't want to be a ‘victim of consolidation.’
“But if a certain deal basically lands on the table, they are not ruling it out if it makes economic sense.”
Jordi has also set a target to reduce debt leverage to three times by 2025 from 3.7 times at the end of last year, with organic-growth-induced free cash flow a key requisite to get there and improve profitability.
Hasanaj applauded the achievements of Jordi, suggesting Aryzta has “done a great job in terms of really focusing on the essentials, taking out complexity and bringing efficiency to a normal level”.
Jordi sold a number of assets after taking up the reins, including the North America and Latin America operations and those in Brazil, along with the disposal of Aryzta’s sandwiches business.
Zurich-listed Aryzta is now focused mainly on Europe, as well as the Asia Pacific. A new factory investment in Australia was announced late last year, coupled with a plant expansion in Bangi, Malaysia, in 2022.
“The next steps for Aryzta are pretty clear. They still have this debt issue with those hybrids that are quite costly for them, but they've been paying them back quite consistently over the last few quarters,” Hasanaj says.
“This is clearly the first priority, really to make sure that the cash flow is there. To be honest, I don’t expect there will be big changes – the focus should still be on organic growth.”
Mid-term targets
Aryzta is aiming for low- to mid-single-digit organic growth through 2025, namely 4.5% to 5.5%, and an EBITDA margin in the 14.5%-plus area. The company also plans to invest 3.5% to 4% of its revenue in capex.
Presenting the 2023 results in March, Jordi said the company “is on track to deliver its mid-term targets having implemented all the key changes across our business”.
Organic growth will be driven by volume and mix with a view to further improving free cash flow, which stood at €132.4m in the 2023 calendar year.
Discussing those results, Huber said the business was still facing “significant” labour inflation, supply chain disruption and “elevated” but “stable” commodity costs. While the outlook for pricing is “flattish”, Aryzta is not yet in a deflationary environment, he said.
Asked if Aryzta might be receptive to a takeover approach, Cox responds: “Aryzta is the biggest player in the frozen bakery space so I suspect that it will be looking at tie-ups now that its balance sheet is in better shape. Given the new CEO’s expertise in Asia, I suspect that will be the focus of attention.”
Europe, including the UK and Ireland, Germany and Poland, is Aryzta’s largest geographical market across retail, quick-service restaurants such as McDonald's, and other foodservice businesses.
Aryzta is in the process of transitioning to a calendar year reporting period. Its first-quarter results issued in April under the new regimen showed revenue from QSR – its smallest business area after retail and foodservice – was subdued by “geopolitical impacts”.
Hasanaj suggested that was down to a boycott of some American fast-food chains in Muslim-majority countries amid the Gaza conflict.
Innovation focus
Group revenue climbed just 0.1% on an organic basis to €514m, with volume up a meagre 0.2% based on prices of 0.3% and a 0.4% decline in mix.
Revenue for Europe rose 0.3% to €458.3m but the rest of the world saw a drop of 1.3%.
CFO Huber said in March that cutting debt “continues to be our focus”, adding he is “confident” Aryzta will reach the three times leverage target by 2025.
Improving organic growth, margins and profitability, along with boosting cash flow, will be key in getting there, he said.
At the same time, Jordi noted Aryzta “is on track to deliver its mid-term targets having implemented all the key changes across our business”.
He continued: “Our growth will remain organic focused and innovation-led, while our margin progression will be supported by efficiencies and cost optimisation.”
Cox suggests both Jordi and Schai, when he comes on board as Aryzta CEO, will plough more cash into innovation for a portfolio encompassing bread, rolls, savoury bakery products and sweet-baked goods.
“The company has really just been clawing back some of the lost share following the problems of the last decade or so. Now it is about growing more and probably you need more innovation,” he says.
