ARYZTA AG (ARYN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the ARYZTA Full Year 2021 Results Presentation and Conference Call. I'm Sandra, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Paul Meade, Head of Communications. Please go ahead, sir.

Thank you. Good morning, everybody, and thank you for taking the time to join us today for our FY 2021 results conference. And today, we have our Chairman and CEO, Urs Jordi; and Martin Huber, our CFO, joining us to present. Just to let you know that all the documents, our annual report, presentation and ad hoc are available our website, aryzta.com. Just before we begin, I would just like to draw your attention to the forward-looking statement on Page 2 of the presentation. This applies to all the discussions today. And I would now like to hand over to our Chairman, Urs Jordi.

Hello, and good morning, ladies and gentlemen, at this first autumn day, rainy day for the presentation of our annual results. Talk today about the past year, last 12 months, and amongst others, about pricing. This is the price of a product, its share of variable costs. On this variable cost today, labor is having a heavy impact. Raw material, packaging material, energy. All these price raises you know, it's an important component for our actual year now, '22. And we will talk about this price increase and how it works in a moment. Fiscal year '21, the full year revenue, you know from the release today morning. And underlying EBITDA performance is ahead of our expectations slightly. We had especially a good Q4. So a good momentum is coming back. We returned back to organic growth. This is what we told at the beginning. This is key. A company without organic growth is sooner or later finding itself in difficulties. Disposal of North American business, of our ANA business, is done, closed. There is carve-out work in progress, but on a good track. And this business ended for the moment in good hands with Lindsay Goldberg. Disposal of our Brazilian business is signed, closing will follow soon. We have the CADE approval, which is the antitrust authority in Brazil. That was the important step to take, and that worked a good week ago. So we are confident that the closing will be managed fast and smooth. The new 5-year refinancing is agreed. There is still work to be done, but this as well is done. Liquidity improved, obviously, as you can see. And net debt are reduced due to the disposals and due to the improving operational business we have. Simplification of the business took place and the local businesses are more empowered. You know that we are going for this multi-local business. There is not one ARYZTA, there are many ARYZTAs in the world, food and especially bakery. Business is very local. The same has a different taste in Asia or in the Nordics or here. The customers we have, they have different needs, and this is the way then we approach this. The reduction of the group overhead cost is well on track. It's even slightly higher. You remember we had before this Asian management levels, the European management levels, U.S. management levels. That's all gone. All the remaining operations are in direct report now into the group CEO, that works quite well. And obviously, we have a new CFO appointed, Martin Huber. Welcome. Good start ahead. And let me use the opportunity to give a warm thank to Jonathan Solesbury as well. He onboarded in a difficult moment, in difficult times, and he did very well. And he is now in his retirement life phase, and we will respect this. Q4 trends are very supportive to the outlook. There was a strong organic growth, a bounce back in Q4, especially in Foodservice. Retail appears resilient. That's coming back. There's a bit of difference in shopping behavior and pattern, but we are confident that get there our targets. The QSR outperforms. QSR seems to pick up all the lost volumes in restaurant, in snacking, in out-of-home consumption. This is a clearly outperforming channel. And food service shows a strong rebound, especially now with the holiday seasons we had over summer and now in autumn. Simplification of structure and business continues. We are basically today a EUR 1.6 billion, EUR 1.7 billion business. So this is our needs. We managed with lean, fast and agile structures. Multi-local focus on the approach of this, I just explained. So we have a Danish operation, a Dutch operation, Irish operations, Swiss operation, the German operation, Eastern Europe, Hungary, France, not to forget our Asian colleagues. They are very well settled and close to their local business. They are able to take decisions fast. We are able to take decisions much faster than in the past, which is a good thing to have, especially in times when price negotiations are actual. In QSR, there is a pass-through model based on pricing protocols. You know how this works. So this is somehow a process which is settled. And works in QSR, this is a catalog business and negotiation business with bigger customers. Retail now is -- as far as pricing is concerned, now in negotiation phase. Most of the retail contracts are calendar year contracts. So now we are heading there towards a good start into the calendar year '22. There is a financial progress we achieved. This is by far not yet the end where we should be. There is a healthier balance sheet now appearing than a year ago. Let me be understood right. This is maybe step 2 or step 3 out of 10 steps which need to be done. ARYZTA still today is a leverage company. But I think in the last 12 months, we did the important activities and the right steps in the right direction, more need to follow, but there is still room for improvement. That's clear. Disposal program delivered, U.S. and the Brazilian sales. We gave the guidance range of EUR 600 million to EUR 800 million of disposal total we would like to achieve. We are well ahead of this, so this worked. We maintained a solid liquidity position. We have reduced our bank debts and the refinancing. The Board did a lot of work around the hybrid, the hybrid instruments, the interests, the deferred and the actual ones, and formed the view on the future capital structure for ARYZTA. Disposals and higher business performance led to an improved financial outlook. So we have confidence that the solid way, that is continuing. We will pay all accumulated, deferred and current interest on the Swiss hybrid instruments, there are 2. And we will pay all accumulated deferred interest and compound interest on the [Audio Gap] The option to consider reduction of the outstanding hybrid principal according our financial capacity is an ongoing thing. So at the moment, we pay the deferred interest, the actual interest. And we will address these 3 principals, hybrid principals, according our capacity and our operational development. Nevertheless, hybrid financing may still be part of our future financial structure. It took 10 years to build it up. We invested now a year to pay the roof away, the more or less EUR 220 million, Martin? That's correct, the accumulated and deferred interest, the actual interest. And the principals, we will address again according to our capacity. There is a big elephant in the room, which is the inflation. You hear it. You see it. You pay bills in your flats and homes for gas, for fuel, for heating. Flour is much more expensive than it was some months ago. In Germany, we had day -- one day last week with almost a 10% cost increase on butter. Labor is a big issue in our biggest market in Germany as well. There is a new government waiting to take the power. And the EUR 12 minimum salary discussion is very prominent there. So we will absorb the majority through price increases. This is an increase we need of plus/minus 10%. It depends on channel, on customer and product, on constellation we have, but it goes somewhere towards the 10%. There is an ongoing efficiency increase program in many aspects all over the organization. So this will absorb a part, but the majority will have to be absorbed via pricing. It's essential to get this not only for us, for everybody in the market. This is a clear picture for me. Let me -- an inflation of 4%, 5% overall, is much easier to manage than an inflation of 1%. Because the 1% inflation is raising the expectation that suppliers are absorbing this. An increase we have now, I've never seen in my time in the business, so it's so massive. Therefore, the answer is not yes or no, price increase or not, question is only how much. There is a mix of pass-through and tender pricing, as I told just before. There is a quick-serve restaurant model, which is basically based on pricing protocols and mechanism we follow. There's a Foodservice business, which is basically a couple of business with new catalogs with year-end, new prices are in there. And there is a tender business in Retail. We are actually now working on the tenders with the big customers to have then a new pricing level beginning of next year. Higher costs, higher input costs are making the calculations around investments -- efficiency investments much more easier. So the threshold comes down. We continue to invest in optimization and in more efficient processes, and better and smarter ways to cooperate in the supply chain world. Fiscal year '22 outlook. We are now finishing P2, period 2, and entering into period 3. So we target a mid-single-digit positive organic growth, which is a plus/minus 5%. We had already discussions today morning about this. ARYZTA didn't have organic growth over the last 7, 8 years. So we are back there now first time, which is a good thing to have. And we will invest all our efforts to remain on the track. In the commercial part of the business, we target a 12.5% run rate of EBITDA pre-IFRS for the actual year, which is an intermediate step. The mathematics in the business. This is a very investment-intensive business. It's a heavy business. This is an intermediate target. The end of this way, we will see. But if we do the mathematics right, it needs to end somewhere on a 15% EBITDA level. Otherwise, the entire constellation doesn't make sense with the D. And last but not least, to achieve a sustainable net profit, which is then the bottom line target in the constellation to be able to support, again, our balance sheet. And then hopefully, at the end of the day, for the first time for many years, our shareholders. I would then hand over to Martin for more details and the numbers.

[ Thank you, Urs ]. Turning to Slide 10. Our turnaround strategy is working, and ARYZTA has delivered a good set of figures ahead of expectation, both on top and bottom line in 2021. The 4 key highlights of our 2021 results are: first, the return to positive organic revenue growth in the second part of the year; a resilient performance on the profit despite lower revenues; return to positive -- third, return to positive operating cash flow; and fourth, we have done an important step towards a more sustainable capital structure. Turning to Slide 11. ARYZTA has delivered improved organic revenue performance in 2021, although we still suffered effects from COVID. In 2020, the business has suffered 2 severe COVID quarters, while in 2021, the COVID continue to impact throughout the full year and only improved towards the last quarter of the year. Although organic growth is still negative, [ growth ] performance has significantly reduced. And this is thanks to 2 things: the improved management focus due to the multi-local business approach; and second, an improved consumer sentiment amid lower COVID infection cases. At group level, revenues decreased from EUR 2.9 billion to EUR 2.3 billion in 2021, while for the continuing operation, we decreased revenues from EUR 1.7 billion to EUR 1.5 billion. This resulted in an organic growth for the group at minus 6.1% and for the continuing operation at minus 6.4%. Turning to Slide 12. Despite the notable decrease in our revenues, we have improved our underlying EBITDA margin by 190 basis points to 10.8% for the group. This contribution was possible due to 3 things: price and mix improvement, operational efficiencies and very strong action to rightsize our structural costs. Continuing operations contributed a 10 basis points improvement to 11.4%. This more than compensated the negative volume impact on our revenues of minus 7%. North America improved its profitability by 390 basis points to 9.6% due to a revenue recovery in Foodservice and Quick Service Restaurants, strict cost management and contribution from restructuring. Turning to Slide 13. Operating free cash flow improved significantly in 2021. The group delivered a positive operating cash flow of EUR 10.4 million after a negative result of EUR 84.5 million in the previous year. Two contributors of this result were disciplined working capital management, particularly with strong contribution from our European businesses; and a very strict management of the CapEx approval process. This was achieved, in fact, by the way, despite a reduction of circa EUR 44 million of our securitization program due to disposal of our North American business. Continuing operation contributed EUR 50.2 million to the positive cash flow. And our divested North American discontinued operations delivered a negative operating cash flow, which was entirely driven by the repayment of the securitization due to the disposal of the business. Turning to Slide 14. Successful disposal of our North American business for EUR 850 million, which was achieved ahead of schedule and at the higher end of our expectations, supported the reduction of our net debt from EUR 1.011 billion to EUR 220 million, together with improved business performance as well as cash management. As a result of this, our net debt-to-EBITDA ratio reduced significantly to 0.6x in '21. Overall, interest costs decreased from EUR 42.7 million to EUR 35.8 million. The 3 main factors supporting this was a lower drawing on the RCF and the term loan, the effect of the repayment of EUR 205.5 million Schuldschein notes in December 2019 and lower lease interest expenses. For 2022, our estimates for the interest costs range between EUR 15 million to EUR 19 million, including the lease interest expenses. As you can see as well, interest comp ratio was at 1.9x, which was well above the minimum of 1x. Over the next couple of slides, I will now focus on the performance of our continuing operation in Europe and rest of the world, consisting of Asia and Brazil. Thank you. So overall revenues for continuing operation decreased by 8.6% versus previous year. This was due to trading environment, particularly in the first half of the financial year was a key contributor to this. Therefore, our -- we suffered a volume decrease of 7%, which was partially compensated by a positive contribution of 0.6% from pricing and mix. This resulted in an organic growth of minus 6.4%. Disposals reduced revenues by 0.9%. This was due to the divestment of our U.K. business in the first quarter of 2020. And the weakening of the Brazilian real, the Polish zloty and the Hungarian forint impacted sales or revenue by 1.3% for the year. Turning to Slide 16. Both regions improved their performance versus previous year. Europe, with a channel structure that is exposed to slower COVID recovery, delivered an organic growth of minus 7.9%. Rest of the world, with a strong QSR channel rate, generated an organic growth of 2.3%. In Europe, the strong COVID restrictions and the long lockdowns impacted revenues significantly, especially our Foodservice channel suffered with an important margin. As a result of this, the Foodservice revenue share decreased from 31% to 27% in the region. Retail and QSR performance was more resilient, particularly our QSR business in Europe delivered almost the same level of revenues in 2021 versus 2020. In Rest of the World, we returned to a positive organic growth of 2.3% compared to a negative performance in previous year. The strong exposure to the QSR channel in this geography supported this performance. In fact, in APAC, we had the most successful year in terms of revenue in QSR. This was partially muted by the strongly affected Foodservice channel in this region. Turning to Slide 17. Quarterly sales evolution is clearly linked to management -- to improved management focus, from the multi-local approach and the improving trend of the pandemic, while in the first 2 quarters, ARYZTA suffered in all 3 channels from significant negative volume impact. This turned positive in the second half of the year. In Q3, Retail and QSR channel delivered a positive organic growth and compensated the negative performance of our Foodservice channel. In Q4, all 3 channels delivered positive organic growth. Worth mentioning, that the Foodservice channel delivered or contributed about 50% of the quarterly revenue performance in Q4. In Q4, the revenue performance was supported by a baseline effect, particularly in the Foodservice channel. For 2022, we have all plans aligned to consolidate our return to positive organic growth and expect to deliver a mid-single-digit revenue growth in [ 2020. ] Turning to Slide 18. Price/mix contribution for the year, as mentioned before, was positive at 0.6% and strengthened quarter-by-quarter. The second part of the year showed a clear acceleration, thanks to the good contribution of -- in terms of product mix from the Foodservice channel, improved portfolio management and the first positive contribution from pricing. Urs has highlighted the inflationary pressure and the need for pricing. Our input costs have suffered double-digit increases. For example, butter and flour have increased by more than 20% since the beginning of 2021. So therefore, we plan for a price increase at 10% plus. We will not only rely on price increases. We certainly will continue working on operational efficiencies and expect an equal contribution both from pricing and operational efficiency to make [ front ] to the headwinds of our input costs. Turning to Slide 19. The QSR business, which is 20% of our business, has shown the fastest recovery from the COVID impacts. We have seen, particularly in those outlets that have drive-through, the fastest contribution to the sales growth. This has helped us to achieve in this channel an organic growth of 2.3%. The Retail channel, which represents about 50% of our revenues, has proven to be resilient. Nevertheless, this channel has also suffered some change in purchasing behavior. The strong preference for packaged bread offering due to hygiene concerns, especially in the first part of the year, have impacted the bake-off performance in Retail. This resulted in a negative organic growth of minus 3%. The negative impact from out-of-home consumption as well as impulse snacking has hit our Foodservice channel the strongest and drove the organic growth down to minus 17.7%. This channel returned, as I mentioned before, to positive organic growth in Q4. And when we look at particularly in France, our biggest foodservice business, the pace of recovery will largely depend on the reopening of the restaurant, tourists and hospitality sector. Turning to Slide 20. Underlying EBITDA margin of continuing operations improved 10 basis points to 11.4%, supported by 3 main drivers: disciplined cost management; the contribution from price and mix; and the strong actions on our structural cost, including the targeted 25% reduction of our group overhead. These 3 drivers more than compensated the negative impacts of the volume impact. The improvement of 10 basis points in Europe to 10.9% was the key driver of the profit increase in continuing operations. A majority of our European businesses improved their EBITDA margin, including Germany, our biggest market. Contribution from price/mix, efficiencies resulting from increased capacity utilization and the reduction in conversion costs supported as well as restructuring-related savings. Rest of the world on the other side decreased the margin slightly to 13.6%. This reduction was driven by Brazil, which suffered significant negative currency impacts, inflationary pressures, input cost headwinds, which they were only able to partially offset through strict cost management and restructuring. Turning to Slide 21. When we look at the nonrecurring cost for the continuing operation, this amounted in 2021 to EUR 49.8 million. The 3 main components of these costs are severance and staff-related costs of EUR 24.8 million. These costs are related to the reduction of our regional and global head office as well as executive teams, together with many restructurings that we have performed in the different businesses across the group. Legal and financial obligations totaling EUR 16.1 million were the second most important component, and they relate to advisory and [ different ] bank's costs related to the Elliott bid, which was rejected by the Board in December 2020. These costs are, to a large extent, legacy commitments. Then profit on disposal reduced our nonrecurring cost by EUR 8.6 million. This relates to the disposal of the remaining 4.6% shareholding in Picard, which included the gain on disposal and a dividend of EUR 1.1 million, which we received during the period. Turning to Slide 22. On this slide, negative figures are a deterioration of working capital, positive figures are an improvement. For the group, working capital performance significantly improved versus previous year. At group level, working capital has increased by EUR 175.4 million in 2020, while in 2021, it still increased, but at a much lower pace at EUR 59.9 million. And this was associated to the reduction of our securitization program that we had to reduce given the disposal of the North America business. Now on continuing operation, working capital actually improved by EUR 12.3 million after a significant increase in the previous year. And this was -- this performance was mainly driven by the European business, which accelerated the cash conversion cycle by 10 days. All 3 levers of working capital contributed. Strongest contribution came from inventory management as well as accelerated cash collection. Turning to Slide 23. In summary, we can say that the turnaround plan of ARYZTA is on track. With a much improved management focus, we are well prepared to consolidate our return to positive organic growth. The results from our strong structural cost action, the acceleration of operational efficiencies and pricing will support margin progression in [ 2020 ] towards our run rate of around 14% underlying EBITDA. That is equivalent to the 12.5% that Urs has mentioned before pre-IFRS. The strength and discipline in working capital, the repayment of the deferred and current hybrid interests, proceeds that we will receive from Brazil, plus the new RCF, set us up to further progress towards a more sustainable capital structure in the next year. With this, I conclude the financial review of 2021, and hand back to Urs.

[ Thanks ], Martin for details. This picture, you know quite well, it's all about operational improvement at the moment. So we had a clear focus in the last year, fiscal year '21 on the balance sheet. We are focusing this year on the P&L., as I mentioned, top line growth, good quality top line growth, with the improved pricing, and then through a reasonable cost structure, going down on reasonable net profit. This is to be gained, having then the future value of ARYZTA, which is representing the true value of our business. North American business, just to remember again, disposed for USD 850 million in cash to Lindsay Goldberg, a wonderful partner and a good new home, a good new owner for our North American business. There is a Brazilian business which is signed and soon closed with the CADE approval, which, again, is the -- probably the most important step in this administrative process to the sale of the business. We did good progress in simplifying the business, in supporting the business in fast and more efficient structures, in removing costs. The businesses were costs overloaded, not only in the group, the businesses as well. There is a new refinancing agreed, as I mentioned, of EUR 500 million with our lenders, with new lenders. On the hybrids, again, paying back the accumulated, deferred and actual interests on all 3 hybrid principals. Nevertheless, hybrids for the time being will remain part of our capital structure. And we will work -- continue to work towards a lean and agile business structure. Basically, we are a much smaller organization now, EUR 1.65 billion of sales. In European countries, in Asian countries, we are an industrial bakery, and we do our utmost to have the correct structure and the correct processes in place to support our business model. The outlook, again, for fiscal year '22, mid-single-digit organic -- positive organic growth is the target. The Q4 is a bit misleading. There is a base effect in -- and this is, I think, a good and a solid view and prognosis and target for the actual year, to have a plus/minus 5% organic revenue growth. The 2.5% (sic) [ 12.5 % ] EBITDA, I already mentioned before. It's an intermediate target. This is a run rate we will achieve in the actual fiscal year. And then in a consequence, having a sustainable net profit. This was the prepared presentation. And we would now go to the Q&A question, first to the questions in the room and then to the questions from the listeners.

[Operator Instructions]

Patrik Schwendimann, Zürcher Kantonalbank. First question, you were mentioning an organic sales growth target of roughly 5% for the current year. At the same time, you're aiming for price increases of roughly 10%. So this means, at the end of the day, you were expecting a volume decrease of 5%. That's my first question. Second question, what was the recent sales trend you have seen so far in the first 2 months of the new financial year? And how far are you with these new price negotiations in [ current ]? Let's say, or you're already 10% through or 50% through? Whatever indication you can give here. And my last question is regarding the EBITDA margin before IFRS 16. You're aiming for an exit rate of 12.5%. What -- could you give us any flavor here, what's your best guess in terms of H1 and full year? Thank you.

Thank you, Patrik. I'll start with the -- maybe the last one and would then hand over to Martin for the price and volume mix in pricing. At the end of the day, it's always a mix, and Martin will go back to this. Basically, a 5% volume growth target. So pricing is then, to a certain extent, coming on top. Pricing has a phase-in effect. So we are already now in the fiscal year '22. And maybe now coming to the question of how this work, it's the QSR part of our business. It's roughly 1/5 of our business. There is a pricing mechanism in place, which basically is based on 2 different systems. It's an Asian system and the European system. The European system has always a bit a slight delay. The Asian business is faster. But don't forget, we are covered. So this is then a balancing effect. So the QSR pricing is on a good track. There is, again, a pricing mechanism based on pricing protocols, which will lead with -- in the worst case, a slight delay to a correct pricing. Retail now is in negotiation time. Most of the retail contracts are annualized contracts, January till December. So we are now in negotiation with all our biggest customers around this. There is a good progress so far done. Usually, these contracts are then being closed towards year-end, end of November, beginning of December. But we are confident to get the pricing we are looking for. Again, the costs in -- or increase, is that significant, that's -- nobody is able to ignore this [ service ]. This is a catalog business basically. There is as well a pricing mechanism, targeting a year-end change then, starting with 1st of January. Remember, [ vision ] as well that there is a coverage we have in place, so we will be able to face it time-wise in a good moment. I'm not able to tell you to what extent we are there in Retail or in Foodservice pricing. This is a thing we are managing with our customers. So I can't give you more details on this. You are asking about sales trends. One or the most obvious one we can see is the Quick Serve Restaurant trends. The system providers, they picked up the volume, which is not -- or which was lost or is lost by the smaller protagonists in the market around the world. The organized customer, and the better they're organized, the more they pick up, are growing -- clearly outgrowing the market faster. As well as, Martin mentioned, there is a trend towards packed products. There's a bit less impulse sales and more packed product sales, but the normal pattern is slowly coming back, but still a bit depressed on the simple sales. Foodservice had a strong rebound in the summer holiday season, especially in France, in Switzerland as well. And Asian countries, a bit less due to the ongoing pandemic situation there. But as soon as the lockdowns and the restrictions becoming less, Foodservice is coming back with the products we know and we [ have]. And Martin, price, volume mix in growth?

Well, we say -- we guided for an overall mid-single-digit growth, so that can have a lower end and the higher end of mid-single digit, let's put it, 5% to 8%. And pricing will certainly come in. And I would expect a lower mid-single-digit volume performance. The long-term improvement, Urs has mentioned, is 5%. For the 2022 results, a lower mid-single-digit volume evolution. On top of the pricing, we go to the mid-single [ digit ].

But then all in all, this would still mean then double digit, right? I mean if you are aiming for a low single digit volume growth...

No. We say our overall organic growth, as I said, is mid-single digit. That has a lower and the higher end of 5% to 8%. Then we are at the higher end of mid-single -- then we are at mid-single digits, and it will have a volume component and the price component.

Carbohydrates are growing with the population. Population is growing by 1%. We are in convenience part of the carbohydrate market. This market is growing between 3%, 4%, 5% volume. And this is the place we are aiming to. Martin, EBITDA margin?

Our -- as I mentioned before, our strict cost management that we have taken during the previous year will gradually help us to improve profit margin, together with the additional operational efficiencies and the pricing that should start coming through. And therefore, as we mentioned, we will aim at the run rate of 14 -- around 14% towards the end of the fiscal year 2020.

Gradual improvement means also H1 should be better than H2 last year, [indiscernible] headwind from -- despite seasonality or special effects.

Patrik Schwendimann again, Zürcher Kantonalbank. Concerning the planned repayment of the hybrid bond interest, when exactly is this likely to happen? And can you give us some more details about the terms concerning the agreed 5 years, EUR 500 million refinancing deal? And last question, could you give us an insight into the latest product innovations and what we can expect in the near future?

The hybrid interest details, Martin can show you later. But basically, there are 2 payments windows. One will be in October for the 2 Swiss hybrids, and there is a euro hybrid due in March.

Yes. You pay the accumulative bond?

Exactly.

[There's a ] slide in the backup, where you can consult the timing on the payment of the cumulative and compounded interest of the EUR 175 million. And then there are the due dates of the different hybrids where we pay the current interests.

Maybe for the refinancing details?

Yes. So the refinancing to continue is very similar rates as the current one that we just retired at the end of September. Our RCF interest -- weighted average interest rate for this -- for the concluded period was 1.4%. So the structure is very similar. You can expect similar rates for our new RCF.

As far as innovations are concerned, there is an overall trend towards artisan and artisanal products, towards starter products. So not really the white roll or the white baguette, it's rather a handmade-appearing product. We start the flour with sour dough in with plant-based ingredients. This is a big trend. CO2 footprint is a big question now coming up. There is a lot of -- there are a lot of efforts going into this customized products on the different regions. There are in QSR initiatives towards more exclusive products. So having then a lower end of the pricing scale and the higher end of the pricing scale. And it's different from country to country, customer to customer. But these are basically the trends.

But were you so far happy with the product quality? Or do you see there some room for improvement?

There is always room for improvement. And ARYZTA suffered on the quality side and on the innovation side over the last years. Innovation, by the way, is not only product. Product is one part. There is the entire value chain we should take into consideration. But there is always room for improvement. We need to improve this innovation process and the quality level overall, but this is an endless and the -- an evergreen topic we are addressing. Basically, innovation is almost not the most efficient way, let me say it like this, to defend the company from becoming not relevant anymore and protecting the company from pricing erosion. So innovation is key for all businesses we are doing, in Foodservice, in Quick Serve Restaurants and in Retail towards the trend. I told there are innovations in the logistic part of the business. Even in the packaging part of the business, that's a big issue. As well driven by shortages in the market, foil, cardboard boxes, carton boxes were not always available. So then organizations are becoming very innovative around topics like this. So it's a very [ levy ] environment, we woke up in ARYZTA since we are in power.

It's Jörn from UBS. Three questions, please. The first one is on your current utilization in Q4. Can you tell us where it's roughly standing? And also, if you see your cost base on the ground and the production side as more or less efficient right now that you only would need to do some fine-tuning. The second question, if I may, a quick back of the envelope, cash flow calculation. On the equity free cash flow, including the hybrid dividends and the interest costs, it should be around EUR 60 million. Maybe CapEx, slightly below EUR 100 million. Is it fair to assume that the equity free cash flow this year is already reaching EUR 50 million plus? And the third question, please, on your balance sheet. I mean you have your hybrids outstanding with an, in brackets, interest cost, 6% plus. You're paying on the credit facility, 1.5%. Isn't there the option to, for example, refinance the euro hybrid already with that or to evaluating also a convert or a capital increase in the future? Just some more color would be appreciated.

I will hand over then to Martin. Let me go firstly maybe to the hybrids. We did a lot of homework and analysis around the hybrid. And the way they are in the balance sheet now are not that bad. They are expensive. But at the end of the day, a refinancing of the hybrid wouldn't lead us at the moment to an arbitrage to a lower interest. We have always to take in consideration that hybrids are a part of our equity structure. So we need to take care that this remains like this. The company did a capital raise in 2018, Jörn. And the process from 2018 until 2020 ended in the name of the Board to sell the company. So the money is gone. So we understand and you will understand that there is very limited humor and enthusiasm for a capital raise, whether it's a direct one or an indirect one via debt equity swap. So this is not a topic at the moment. We clearly go after the EUR 220 million. And we will eat the elephant, the 3 hybrids, in bits and pieces. For the time being, this is the plan. So for more details, Martin.

I think the first question was on capacity utilization in the factories, if I got that right, and if we are already happy with the efficiencies that we have achieved. I think we made good progress in 2021. But as Urs said, it was an important step of many. It's a good set of figures. But there is still work to be done in terms of improving the capacity utilization, which is below 70% overall at group level, and continue working on efficiencies. As I mentioned before, this will be an important part, together with pricing to offset the headwind. So we have established a good base to continue working from, but we're not yet satisfied where we are. So we see opportunities still to come in terms of efficiencies and certain capacity utilization. And I guess the strong drive in innovation will also help us to support that volume growth. In terms of cash flow, continuing operation, as I showed you before, delivered around EUR 50 million this year. And we expect to continue increasing that in the full year '22, it will sizably increase. And certainly, overall cash flow will be negative because we paid the deferred and the cumulative interest.

Maybe just one quick follow-up. I mean total interest cost with the hybrid together, EUR 60 million according to your, I think, interest guidance. And then the CapEx, is it fair to assume between EUR 80 million to EUR 100 million this year?

Lower. I think you have to be a bit -- you can be a bit less aggressive in terms of CapEx. But yes, the hybrid interest, about EUR 45 million, the current one. And then you had the other interest, plus the leases that I mentioned to you before.

The first question from the phone comes from Andreas von Arx from Baader.

First one, I'll start with easy ones. Slide 35 on your presentation, cash generation of the continued operations. So if we would add now a year -- financial year 2022, I mean, could we go here through the most important numbers? I mean to my understanding, EBITDA of the continued business will be, let's say, EUR 200 million. And then you -- I think you indicated that the CapEx should be below EUR 100 million. I mean given an input cost increase of more than 10%, shouldn't there be a significant adverse negative effect on the working capital movement on that slide, Page 35? Could you quickly comment on the lease contract? Is that still on the same EUR 45 million level? And could you please comment on the restructuring-related cash flows, which has been around EUR 50 million last year? Can that expected to be close to 0? And just to have clarity, could you give me a best guess on the interest and income tax, which has been minus EUR 42 million for the last year? That will be my first question. Then the second question is on the capital structure that you mentioned that you have given a lot of thought. Just to be clear, there is no negotiations at the moment with hybrid holders on potentially transforming their hybrid into equity capital and there's also no plan to do so in the future. That's the second question. And then the third question on the capacity utilization again. So if I understand you correctly, you're guiding for mid-single-digit organic growth, which means minus 5% volume growth, as you have indicated. And I assume this will basically all come from the Retail segment and not from QSR and probably not from the catalog business. So given this is a bit more, let's say, 50% of your business, the Retail business could be down in volumes by 10% next year. I mean shouldn't that then give you a significant negative hit on the capacity utilization in financial year 2022? That will be my questions.

Thank you, Andreas. I'm not sure whether we managed to write down everything you asked. Maybe I'd take the easy one to give Martin a moment in time to be prepared for question 1, which is -- question 2 about the finance structure and the hybrids. No, there is at the moment no discussion with the hybrid holders about debt equity swap. And no, there are no plans at the moment to go there. Martin, question 1.

The question 1, if I was right, was on working capital and significantly...

So I mean, if I may, I mean, probably it's easiest if you just look on Slide 35, in the appendix of your slides where you have the cash generation. And when you can -- just could comment on most of the lines. I said, I mean, EBITDA should, I guess, be around EUR 200 million. And then for 2022, I mean, how much negative working capital would you expect? Would you expect the same level of lease contracts? Would the restructuring be close to 0? And what would be a best guess for the interest and income tax?

So let's start with the more straightforward one. I think Urs also mentioned it on the slide. We will target or expect nonrecurring costs to be minimal in 2022, certainly not at the levels that we have had in this year. When it comes to the lease, you can expect similar levels as we have in 2021. When it comes to working capital, yes, it's certainly true that we will have an input cost increase, which will impact, to some extent, the inventories. But there is also efficiencies that we will still foresee in terms of management of payables as well as cash collection. So I -- so we will see a continuous improvement in our working capital management.

And the interest and the income tax?

The interest rates, I've given you a range of EUR 15 million to EUR 19 million. And then the -- we'll have the payment of the deferred and accumulated hybrid interest, which you can see also on -- in the deck, it's EUR 175 million, plus the current hybrid interests, which are around EUR 45 million. That gives you the EUR 220 million that Urs mentioned before.

If my -- if I may put in an add-on. I mean the cash generation might be negative this year. And in the following years, it will be, let's say, somewhere between EUR 0 to EUR 100 million. I mean will that then not take quite long to pay down the EUR 800 million hybrids to a reasonable net debt to EBITDA level, including the hybrids?

So just to reinforce, operating free cash flow next year will be certainly positive and will be more positive than it was this year, number one. Number two, the overall cash flow from the activities will be negative, as I mentioned before, given the repayment of the -- mainly the repayment of the hybrid interest. So we expect our performance to continue to improve. And therefore, over the next period, we can review, as Urs mentioned, depending on the performance how we will address the hybrid principals.

Andreas, we discussed this several times. The hybrid mountain was built up over the last 10 years. It will take a moment to digest this. That's not possible. In a moment, there is no plan and no room at the moment for a capital raise. So having now the view on the hybrid principles, there are 3 basically. There is a euro hybrid, which is the expensive one, north of 6%. And there are 2 Swiss hybrids of about 4% plus/minus both. So the 2 Swiss hybrids are moderate, the euro hybrid is expensive. That's the most probably the first one we will address. But at the end of the day, the cost of capital, if you take share capital, owners' capital, is much higher than the 6% or the 4%. So it's still an efficient solution. It's an expensive solution. It's a historic solution and we will address this. And as I told, there are more and less expensive ones. But doing this with this process is, from a cost of capital point of view, a more efficient way than a capital raise.

The next question comes from Baig Faham from Credit Suisse.

Sorry. Can I just come back to the guidance, and primarily the EBITDA margin guidance? Because, yes, I'm just trying to get my head around this. So I guess the first question is, what was the EBITDA margin pre-IFRS 16 in 2021? Because I don't think you've disclosed the lease depreciation unless I've missed it. I -- well, I've had a go at it anyway and I get to around 8.5% for FY '21, which means that by the end of, I guess, FY '22, you're expecting a 400 basis points increase in your EBITDA margin on a pre-IFRS 16 basis. That accounts to around EUR 60 million. Given that your volume forecast for FY '22 is at the lower end of mid-single digit and that you're saying that you're going to absorb half of the double-digit 20% plus input cost appreciation, how do you get the [ fall through ] of such a large operating margin expansion? Because it seems to me that you're going to be seeing a marginal leverage on the volumes of well in excess of 100%.

Fiscal year '21 is a condensed view on 12 months, so the P&L and the performance of the company improved towards the year-end. The same we will see in fiscal year '22. There is a pricing, a phasing in and there is a costing phasing in. As I mentioned, we have there some coverage position. So the 400 basis points, you need always to see on the time line. It's based on our budgets and plans and programs doable. There is a lot of operational improvement. Let me remind you that there was a cost removal of 25% plus/minus on group overhead costs, which didn't fully appear in the P&L '21. There is an -- a ramp-up in the total saving as well coming in the fiscal year '22. So for us, the 12.5% is a doable and reasonable target. Martin?

Yes. And just to be -- just to reinforce what I mentioned before. The 12.5% pre-IFRS EBITDA margin corresponds to around 14% post IFRS 16. So the 14% -- around 14% run rate, which we expect to achieve towards the end of the financial year '22, corresponds to the 11.4% that we have reported for continuing operation.

Okay. That's helpful. And I guess a question on sort of strategy. I think as you mentioned, you want to step up your playing field within QSR in Europe. How is that developing? Any early wins that you can call out? When do you think your exposure will be more aligned to the market in Europe?

This is -- we are in actual projects now to align with this in the existing production capacities. We are building now at this very moment additional one in Poland. We are in discussion with our customers about next steps. So this is an ongoing process. We ship today products and volume almost through Europe to support markets which are faster growing. There are projects most probably we will address in Asia. So this is an ongoing process. The next bigger capacity which is coming to the market is then already somehow in a good year from now from Poland. Poland will support Poland, Czech, part of Hungary, Germany, yes, and Germany. So this is the journey we go. There is a lot of innovation in this QSR channel which is widening the offer from a positioning point of view and from a new product category point of view. This is the way we will pick up this trend. By the way, the same way in Retail and in Foodservice, the world became different. There are more and more house -- single-person households. They are more and more people taking care for their lifestyle. There are studies saying that as more expensive basic food products are, the higher volume has been sold via bread because bread is the cheapest component in the basic food. It's cheaper and more efficient than fruits, than meat, than dairy and fish, for example. We are addressing all these trends. So QSR is a strong trend, but not the only one. Did I answer the question with this?

Yes. That's helpful.

The next question comes from Roland French from Davy.

I just have one. It's more so a clarification question around the inflation cost pools. So if you take it in turn, you've called out raw material, labor and distribution cost inflation. Can you maybe just guide us to your overall expectation for inflation across those cost pools and then break it down by, A, what you're getting via pricing; and B, what you might recover in terms of those internal efficiencies?

The absorption is in majority through pricing. It's 2/3 or even more of the costs we will have to get via pricing, the rest via efficiency increase and better and smarter processes. The breakdown in the cost components, if I understood the question, well, we mentioned flour. Martin told this, that there is a flour price increase over the last 12 months of 20% plus. Butter, I mentioned last week. Actually, last week within 2.5, 3 trading days, almost 10%. There is a labor cost increase. In our biggest market, it's not only there, but mainly there. The hourly rate was around EUR 11 an hour, minimum salary. So we are now on almost EUR 13. There is an energy price explosion, let me say it like this, over the last 2 months, you read it in the newspaper. There is a construction material increase. So we had projects with a budgeted rate of 100 -- budgeted investment of 100. And we ended then, after a review of the project on a 150% cost base, now managed down and slimmed some, but there is still a significant inflation. Now it's important that, again, we understand that this is a timing game as well. It's the question from when on we get the new prices. And we will get the new prices, we will make sure with all our efforts. And what the current coverage position is we have in the market. We cover flour. We cover butter. We cover energy. We cover other raw materials. So it's somehow a mix. Fiscal year '22 is a mix of pricing. Pricing going then into growth. And costing, costing going then into the cost part. Price increase or the cost increase, the cost inflation, we believe, is driven by 2 factors. And this we should understand well, which is a release of the COVID pushback. Everywhere, if somebody tries to buy a new car now, you will see this. There are some parts not available, so you would easily end up in the situation getting a car without all the components. But this pushback will go away. And there will be a leftover. And the leftover is a significant cost increase on the basics into our industry. Let me give you an example. The transportation cost of a container from Denmark or Rostock or Hamburg or Rotterdam, wherever it is, to an Asian port, into Shanghai or into Tokyo or wherever it is, was in the past below $2,000 a container. Now it's above $4,000, maybe above $5,000. So factor 2.5. This is significant. We'll remain there. And it's our big project for this year to, A, absorb this to 1/3. So could this will be possible, and to hand over then the rest to the customers. There is no really alternative to this. Did I answer with this your question?

You did.

And ladies and gentlemen, we have received a number of questions on the line. So I have a summary of some of them that have not already been answered. So I'll just call them out for the transcript so that everyone is aware of them. So the first question was that, can you comment further on the expected proceeds of Brazilian business?

We agreed with the partner, with Grupo Bimbo, a wonderful company, a good competitor. This is important to understand, good competitors are good challengers acting on a reasonable price level. We agreed with Grupo Bimbo to keep silent on this. But as I mentioned at the beginning, the range of EUR 600 million to EUR 800 million is well exceeded together with the North American business. This is the answer for this question.

The next one is that with the payment of the deferred hybrid interest, does this mean that, going forward, hybrid interest will be paid as normal?

In the future, yes.

Would you care to comment further on the level of the securitization program that operates within the company?

Martin?

This is part of our way we manage working capital and our financing. And Brazil has not been part of it, so there is no effects of the divestiture of the Brazilian business to be considered in that. And then we consider this to continue supporting our working capital performance and financing. It's a relatively efficient way of financing at a relatively low cost.

And the final one that hasn't been answered really is, could you comment on the targeted leverage that you would expect for the OpCo, excluding hybrid?

We don't publish targeted leverage ratios. What we have said, we will continue working on strengthening the balance sheet through operation, above all, through operational performance or improved operational performance. And subsequently, as the company finance health allows, we will start turning towards the hybrid, as we mentioned in the presentation.

That concludes a summary of the questions that we received. And I'd now hand back to Urs for some closing remarks. Thank you.

Thank you for the questions. And I hope we were precise enough with the answer or the answers. It's the journey now for a bit more than 12 months we undertook, so I think we did some first good steps in the right direction over the last 12 months. Many more needs to follow. This year is all about qualitative revenue growth, pricing absorption. And there is a lot about cost, cost efficiency, process efficiency. There is a lot about delivering what we planned. We see and we realize, and Jörn figured this out as well, somehow in research, there is an increasing morale in the company, which is important. The company is nothing else than the sum of its people working for, the sum of its customers buying from us, partners financing us, supporting us all over the place. I remember times when ARYZTA had to pay flour packaging and transport before any truck of deliveries. Times are gone. So slowly, we go back or we are coming back into a normalized world. It will take time. The -- you shouldn't expect new big announcements in that written as we had it this year. We did now the first big steps. More will follow, but it will take time. For me, the important view is that the plane, called the plane, the ARYZTA plane is gaining flight altitude and not losing anymore. In the past, the plane lost flight altitude. Then it's a question of time until the first month, nor the [ Irish Seas loop ]. So we turned the flight path up to higher levels. It will take time. It's work. It's not just happening from 1 day to another. And we know that you understand this very well, not only on the hybrid part of the business. It was good to see you here in Zurich. Many of you we saw each other since many, many years. That's -- good to see you back in an old cooperation, targeting [indiscernible] towards hopefully better world. So let us invite you for something to eat as it should be for a food company. It's a shame -- would be a shame to let people go home without a good -- something good to eat and present. And if you hand over this bag you are carrying home to your wife and your kids, give them warm regards from us. From Hiestand in Switzerland or from ARYZTA, they know where they can buy it tomorrow, because tomorrow, it's going to be eaten or over. Thank you. Have a good day. And let me invite you, as I told, for a short bite. Thank you.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.