It is a case of new regime, same old story at Aryzta. My 2018 share tip looks a beaten docket and January’s not even out. There lie the dangers of trying to catch a falling knife.
A year ago, former chief executive Owen Killian issued a warning that profits would be 20% lower than guidance released just three months previous. He got sacked. New chairman Gary McGann and chief executive Kevin Toland gave hope of a new era. Last week, Toland unveiled a 15% downgrade on guidance released just three months ago. For investors, it must sound like getting a second opinion on a corpse.
This is the fourth consecutive year that Aryzta has issued a profit warning. Despite upbeat comments from Toland in his first outing with analysts, the baker is starting to look like a bread basket case. Société Générale analyst Warren Ackerman described the situation as a “complete shambles”.
It is a simple yet sorry tale. Aside from its car crash of a bakery at Cloverhill, Chicago, which continues to ship losses, revenues are stable at its US business. Labour and distribution costs are not, inflating at 10% or more.
In Europe, the company is struggling to recover lost volumes since Swiss supermarket Co-op took to making croissants in house. Aryzta also flagged up concerns over Brexit, mainly sterling’s weakness.
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Aryzta supplies the UK from its industrial bakery in Grange Castle, west Dublin. Killian spent €200m on the bakery, one of the biggest investments ever made by a domestic food company. It ships about €60m of part-baked breads and pastries into the UK every year. Supplying UK multiples at a currency disadvantage is not a nice place to be.
The really depressing signal is that all the factors behind the latest profit warning were known knowns, familiar themes. A profit warning should contain an element of surprise. Practically all the issues were called out previously, aside from distribution costs in America, which are rising steeply, and unexpectedly, yet freight accounts for only 8% of total costs.
Perhaps most worryingly of all, the company seems unable to recover rising costs through increased prices, something Toland says is going to have to change “dramatically”. As much as he plans to cut costs and drive efficiency, Aryzta has to demonstrate an ability to increase prices.
Toland says the company will raise €450m through disposals, part of its drive to reduce its borrowing by €1bn within four years. It has sold La Rousse Foods, which distributes foie gras to Irish restaurants, and will receive a dividend from Picard, the French frozen food retailer where it has a 49% stake. These raised €84m.
That suggests the Picard stake, the Cloverhill bakery and its stake in flat bread maker Signature might make as little as €370m. That is harrowing, given the investment in Picard alone was €450m. Having refinanced debt to generate breathing space to maximise value from its disposals, this now looks like a fire sale.
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Toland said he has a multi-year strategy, a multi-year turnaround and is “trying to get through, hopefully, the bumps along the bottom”. Aryzta is in growth markets, has good customers, and just needs to hone its distribution and costs, he said.
It is forecast to make €336m before interest, tax, depreciation and amortisation, compared with €638m in 2015, while sales are down one third.
Alas, the turnaround team’s credibility is now pretty much toast. Maybe all that private equity cash sloshing around Europe might glance at Aryzta and see some break-up value.
As for the eejit who nominated the company as a stock pick, please note, this is the year of the dog.
