ARYZTA AG (ARZTF) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to ARYZTA's Half Year Results 2025 Conference. The call will be hosted by Michael Schai, CEO; and Martin Huber, CFO. There will be a presentation followed by Q&A. This call is being recorded. Now I'd like to hand over to Paul Meade, Head of Investor Relations, to open the call. Please go ahead.

Thanks, Laura. On Page 2, you will see various risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking outlook statements. I'd just like to draw your attention to that as this is important in relation to all our discussions today. I will now hand over the call to Michael to begin.

Thank you, Paul. Good morning, ladies and gentlemen. It is my pleasure to welcome you to the ARYZTA Half Year Results Conference Call and Webcast. My name is Michael Schai, Group CEO. And with me today is our Group CFO, Martin Huber; and Paul Meade, Head of Investor Relations. I'm very pleased to announce that we have achieved in a challenging market environment, a solid H1 result with revenue at EUR 1,086.4 billion or a 3% growth versus H1 2024. Our organic growth amounts to plus 2.8%, driven by a healthy positive volume increase of plus 2.1%, which resulted in further market share gain. Our EBITDA delivery stands at EUR 150.5 million, an improvement of EUR 0.7 million versus prior year. In relative terms, our margin comes in at 13.9%, 30 basis points lower than in H1 prior year. Martin will provide more details in the finance section. The free cash flow amounts to just under EUR 30 million, and the EPS stands at EUR 1.84, which is an increase of 12.4%. This takes into account the reverse share split from May for a like-for-like comparison. We have delivered these solid results over the past 6 months in what was and still is a volatile and demanding market context. The H1 result was supported by a strong quarter 2 organic growth momentum of plus 4% after plus 1.6% in quarter 1. Europe has performed consistently and rest of the world has caught up in the second quarter after some QSR promo phasing early in the year. While headline inflation has come down from its height in 2023, 2024, we still face heightened raw material and labor inflation across many of our markets. The volatility of these input factors has delayed some of our tender agreements in H1, but we have closed all open negotiations now. While obviously different market by market, the overall consumer sentiment is still subdued with shoppers being less loyal and more price sensitive, which leads to an overall more nervous market environment. The market consolidation is ongoing, as outlined in more detail at our Capital Markets Day early in the year. Our absolute focus remains on organic growth and the fact that we have delivered a balanced volume mix and price growth in H1 confirms our strategy. The 3 main levers for our H2 performance continue to be organic growth, strong innovation and a relentless focus on cost efficiencies. As outlined at the Capital Markets Day in May, the bake-off segment ARYZTA is active in continues to gain market share. In addition, a baked goods calorie remains the most efficient calorie in an environment where consumer spending is stretched. Innovation, we are holding a consistent high share of innovation, which stands at 18% in the first half of this year. The strong innovation supports organic growth and margin progression and is one of our 4 strategic growth pillars. We continue to focus on our successful cost discipline measures with the 3 main areas being operations, procurement and structural cost initiatives. Based on our solid H1 results in what admittedly continues to be a challenging environment, we continue to target our 2025 full year guidance. This is organic growth in the low to mid-single-digit range and EBITDA margin expansion versus prior year and the improvement in key financial metrics plus further earnings per share growth. To round off my section, here again, our midterm targets until 2028, which we have communicated at the Capital Markets Day in May this year. We are fully committed to delivering against these financial targets. As our H1 results demonstrate, our strategy and business model delivers good results in a demanding market environment. Martin will now elaborate in more detail on the financials of the past 6 months. Over to you, Martin.

Thank you, Michael. Good morning, everyone. I'm pleased to present to you our results for the first 6 months of 2025. In this period, ARYZTA has delivered a robust set of figures. Revenue increased by 3% with a balanced contribution from volume mix and pricing. The good acceleration of growth in the second quarter is reassuring. Significant input cost volatility and the muted consumer context resulted in prolonged negotiation of some of our key retail contracts. This had an impact on profitability in the first half of the year. Although we were able to increase absolute EBITDA versus the previous year by 0.5%, the margin is slightly impacted. Return on invested capital of 12.9% remained at solid levels, generating value for our shareholders. EPS continues to improve and increase in the first half of 2025 by 12.4%. We made further progress in strengthening our balance sheet versus the comparable prior period, reducing total net debt leverage to 2.8x. We have delivered these results against a difficult economic backdrop characterized by consumers being more and more value-driven, an increasingly competitive environment and significant volatility in input costs. Next slide. While the start of the year was at the lower end of the organic growth guidance, we accelerated in the second quarter with an organic growth of 4%. This acceleration is supported by strong volume/mix growth and improving pricing, which drove organic growth for the first half of 2025 to 2.8%. EBITDA grew to EUR 150.5 million, resulting in an EBITDA margin of 13.9%, which is a drop of 30 basis points versus previous year. The resilient profit performance was affected by the prolonged customer negotiations and the subdued consumer environment. Proving effects of pricing over the first 6 months and our disciplined cost management programs helped to offset part of these effects. Free cash flow of EUR 29.4 million is below last year, affected by strong working capital performance at the end of 2024. While we recognize that this result is at the lower end of our expectations, we are confident to generate free cash flow above EUR 100 million for the full year. Slightly lower profitability and stable invested capital has delivered a return on invested capital of 12.9%. This is well within the value creation territory. Next slide. Within the context of an increasingly competitive market environment and value-driven consumers, our revenue grew by 3% to EUR 1,086.4 billion. Volume/mix delivered 1.8% to this growth, particularly supported by Europe. Key contributors are Germany, Poland, Ireland and the European QSR cluster. The recovery of our Rest of World QSR business also added to this achievement. Pricing improved from 0.9% in quarter 1 to 1% for the first half of the year, supported by Europe. We expect pricing to remain at current quarter 2 run rate, contributing to our performance going forward. FX added slightly to the overall revenue growth, mainly driven by Switzerland, Poland and the foodservice business in Rest of World. Next slide. Europe had a good start into the year and sequentially improved organic growth from 2% in quarter 1 to 2.9% for the first 6 months of 2025. All channels are contributing to this growth with mid-single-digit growth -- organic growth in QSR and good momentum in retail and foodservice. Apart from the European QSR cluster, our primarily retail-focused businesses in Germany, Ireland and Poland delivered solid growth performance. Innovation continues to be a support to our organic growth in Europe with a share of 18% of revenue, which is at similar levels compared to the previous year. Profitability decreased by 40 basis points to 13.2% due to the input cost pressure and the tender timing. Next slide. In Rest of World, the first quarter was impacted by promotional phasing. Organic growth strongly accelerated in quarter 2 to 5.4%, closing the first half of 2025 with an organic growth of 2.1%. In QSR, impactful promotions and the continued recovery of the business contributed to these results. High mid-single-digit organic growth in Q2 in our foodservice businesses, supported by innovation and strong growth in Japan brought the foodservice channel to a flat growth in the first 6 months in this region. Overall, profitability in Rest of World improved by 90 basis points to 19.6%. The recovery of the QSR business and the overall strong Q2 revenue performance are the key drivers of this achievement. Next slide. ARYZTA delivered an EBITDA of 13.9% in the first half of 2025. This result is slightly below the previous year and impacted by the prolonged negotiation time of some key tenders with European retailers and the volatile input cost context with significant inflationary pressure from key ingredients such as butter, eggs, cocoa as well as labor costs. As a result of this, our gross margin decreased by 140 basis points. Improving pricing in quarter 2 and the contribution from innovation as well as cost reductions from our procurement and Simplex initiative of almost EUR 6 million, together with other cost discipline measures addressing the indirect factory cost helped to partially offset these negative effects. Distribution and SG&A costs delivered 90 basis points margin contribution. It's worth highlighting here that the growth of SG&A cost was well below revenue growth, generating 60 basis points of this improvement alone through operational leverage. All of these measures maintained the EBITDA margin of the group at robust levels and allowed ARYZTA to continue investing in our long-term efficiency initiatives such as the ERP rollout and the expansion of the business service center in Poland. Next slide. Our cost discipline measures are and will continue to be an instrumental part of our overall value creation framework going forward. As communicated in the Capital Market Day in May, we expect to deliver EUR 20 million to EUR 30 million net savings by 2028. Key parts of these cost discipline measures are our procurement and Simplex initiatives, which have contributed almost EUR 6 million cost optimization in the first 6 months of 2025 and the structural cost initiatives. With this program, we will drive simplification and standardization in our organizational setup, focusing particularly on those businesses which are already supported by the business service center and are SAP based. We expect to gradually ramp up contribution from these measures in 2026 onwards. In order to harness the benefits of these cost discipline programs, we are progressing well with the rollout of our ERP and IT applications road map. The [ S4 ] rollout in our Fornetti business in Hungary is on track, and we plan to address Pr Pain and Mette Munk by 2026 to bring them on the group ERP platform as well. Next slide. Free cash flow of EUR 29.4 million for the first 6 months is at the lower end of our expectations. Working capital contribution to free cash flow was negative. This is primarily driven by the strong improvement of working capital at the end of 2024. The reduction of financing costs more than offset higher cash taxes and mitigated part of the negative working capital impact. A slightly increased EBITDA and stable CapEx corresponding to 3.7% of revenue did not have a significant effect on cash generation versus the previous year. Supported by our continued improvement plans in place to working capital, we are confident to deliver a free cash flow above EUR 100 million for the full year. Next slide. Overall, ARYZTA continues to improve the efficiency of working capital management. The 5-quarter average of trade working capital as a percentage of revenue which is our long-term trend indicator, has further improved to 0.2% in quarter 2. Continuous focus on improved inventory management and standardization of payment terms will allow us to further drive efficiency toward year-end and support the overall cash generation of the group. Next slide. We continue to make progress on strengthening our balance sheet. At the end of June 2025, our total net debt, including the hybrid bond decreased to EUR 886 million. This improvement is supported by solid year-on-year cash generation and our strategy to reduce the hybrid funding. The resulting leverage ratio has reduced from 2.9x in H1 '24 to 2.8x in the first half of 2025. Next slide. Our strategy to deleverage the company and to optimize the overall financing cost is driving consistent results. Financing costs reduced from EUR 33.5 million to EUR 22.3 million in the first 6 months of the year. The repayment of the hybrid bond in October 2024 is delivering circa EUR 14 million of this optimization. Higher bank financing as a result of the hybrid refinancing strategy and an increase in lease interest is compensating EUR 2.7 million of the hybrid interest optimization. For the full year '25, we confirm the guidance for the financing cost range of EUR 46 million to EUR 50 million. Next slide. The continued disciplined CapEx and working capital management maintained invested capital stable versus previous year. The somewhat lower profitability impacted ROIC slightly with 12.9%. We maintain a healthy level of return on invested capital and contribute to the value creation for our shareholders. Next slide. Our earnings per share increased by 12.4% to EUR 1.84. This is another double-digit EPS growth on top of the achievement in H1 2024. Our financing strategy and disciplined financing cost management strongly contributed to the overall EPS growth. This has more than offset higher taxes and slightly lower operational profitability compared to H1 2024. Next slide. We recognize that the market context has become more challenging due to a more and more value-driven consumer, an increasingly competitive market environment and further input cost volatility. Considering these updated situation and as Michael highlighted before, we continue to target to deliver a low to mid-single-digit organic growth, supported by both volume mix and pricing. Our focus on innovation and the contribution from our cost discipline programs will provide the means to improve our key financial metrics year-on-year. And we are confident to deliver a free cash flow above EUR 100 million and will further strengthen our balance sheet. Thank you, and I hand back to Michael.

Thank you, Martin. I'm now passing back to our operator, Laura, and open the floor to the Q&A section.

[Operator Instructions] The first question comes from Andreas von Arx of Baader Bank.

I have 3 quick ones. I guess I go through them one by one. First one is on the net working capital. I mean, historically, net working capital has been negative, respectively, slightly flat -- respectively flat without the debt securitization. Now that you are, let's say, a normal company with normal development, do you think when you grow going forward, you can grow with a stable net working capital? Or will you be a typical food company where higher growth will lead also to continuously higher net working capital needs? That's my first question.

I'll pass this straight on to Martin.

Andreas, thank you for the question. We certainly have, over the past couple of years, done some significant improvement on working capital management, which was clearly visible there in the presentation of the 5 quarter trade working capital percentage of revenue. This is to normalize, and we expect going forward to have more stable working capital evolution. We believe that we still have opportunities to continue improving the efficiency of working capital and that this -- with this manage the effect of the increasing growth. I would refer to probably the most single biggest lever to further improve is our overall business planning efficiency, which is a more longer-term measure, where we believe that we have some further opportunities to manage growth and working capital evolution in that sense.

I might have missed it, but could you remind me what was the euro impact of that delayed price negotiation in the first half? Are you able to quantify that? That would be my second question.

The euro effect of the delayed -- I think -- look, I think I would keep it as we communicated. We had, on one side, the impact of the delayed negotiation of some key European retailer contracts, which, as Michael said, are now all closed and finalized. We have, on the other side as well, our cost discipline measures. Just to reiterate, for example, the contribution from our procurement initiatives and Simplex, which delivered around EUR 6 million of cost optimization. This helps to balance the effect. And then you can see also in print, the quarter 1 pricing and the quarter 2 pricing there an improvement. And this has also been another measure to sort of compensate part of these effects that we have highlighted.

Okay. My third question is, I mean, you had your Capital Markets Day in spring. I guess you also then had a lot of talks with your shareholders afterwards. Would you be able to summarize maybe a bit your discussions with what your shareholders think with regards to the priorities of cash usage of dividend, hybrid payback, net working capital securitization reversal and fourth buyback? How do your shareholders seem on average to think what the priority should be?

Thank you. I think we had -- indeed, we had a couple of discussions with a broad range of shareholders representing a relevant share of our investment. And the strategy that was presented in the Capital Market Day in May was well understood in terms of the ambition, in terms of the focus and also in terms of the evolution of the results. And as a consequence, the timing and the sequence when we will come back and communicate how we intend to distribute capital to our shareholders, be it through dividends or be it through share buybacks. The sequence, I think, is also well understood that the first one to address is the hybrid buyback. We have reiterated that we aim at a core equity ratio of around 30%. We said that this is not a hard target, but that is the direction to move towards. When you see also our core equity has significantly improved versus H1 '24. So we're making good progress in this direction. So in that sense, I think it was -- the strategy communicated was clear, well understood and shareholders see it relevant for their case.

Your next question is from Patrik Schwendimann of [indiscernible].

Patrik Schwendimann from ZKB. What was the contribution from the new lines in Malaysia and Switzerland in H1? And would you expect here a higher contribution from these lines in H2? That's my first question. Then secondly, could you please explain the volatility of the payables and why you are positive that this factor will rewind in the full year? And then maybe 2 housekeeping questions. What's your best guess for the tax rate for the full year and the future? And what's your best guess in terms of depreciation and amortization?

Thank you, Patrik. I'll do the first one in relation to our new lines in Malaysia, which we started late last year and then the new line in Switzerland, which went up in March, pretty much at the time of the Capital Markets Day. And then there's another one literally being ramped up as we speak. All the 2 lines plus the third one that's coming online are well on track. There's no delay in timing. As we always communicated, it takes about 2 years to fully utilize the line. And we do not communicate on individual line utilization as such, but both the Malaysian and the Swiss line are really exactly on track and ramping up those volumes. And as they ramp up, they will clearly contribute more, in particular, also to our innovation agenda in the second half of this year. And for question 2 and 3, I'll pass it on to Martin.

That is just a question -- just so I make sure I heard you back correctly. So working capital question, the tax rate question and depreciation and amortization question. Is that correct?

Yes, correct. And for the net working capital specific for the payables because we have seen high volatility there, yes.

I think overall, when you see -- when you -- refer back to that 5-quarter average trade working capital chart, there is a consistent evolution step-by-step towards the result where we are. So there is -- there might be volatility in one quarter to the other, but comparing overall working capital evolution quarter or June '24 versus June '25, I don't see major variation. There might be a variation in between the different levers. But as a total, I don't see a major variation. We have had, and I reiterated that with the answer to Andreas before, we have had significant improvement over time and improvement is becoming now, let's say, more difficult to achieve on one side. On the other side, we are now starting to focus on maintaining a level that is at similar levels of percentage and absolute amounts for the period. So I think we are on track. We have additional measures, as I mentioned before. Some are more long-term effects like the planning efficiency improvement. Some are more shorter term as the ones I mentioned during the presentation. Tax rate, we are in the progress of normalizing. We're not yet at a normalized tax rate. You see higher tax charges in Page 125. This is mainly driven by the fact that we have continued improved profitability in our businesses, and we are getting to the end of the consumption of accumulated losses that we had from previous exercises. So therefore, we are -- and we said our long-term tax rate is somewhere around 25%. This is -- that's also what we are using for the ROIC calculation. And I would leave it at that. Depreciation has increased. That's part of the effect of some new lines being commissioned. And I think when we look at going -- at the rate going forward, you can probably expect a similar rate as a percentage of revenue as you have seen here in H1.

And your next question is from Jon Cox of Kepler Cheuvreux.

A question from me, just on the margin. Obviously, a 30% decline in H1, and you're talking about conditions getting worse well, in terms of the consumer environment plus increased competitor intensity. Just wondering what your thoughts are for the full year. You've talked about EBITDA margins still going up. How confident are you on that? What levers do you have? And I'm wondering, given the fact that you've given up a bit of margin, but you've got maybe market share gains in H1, should we anticipate this is likely to be more of the strategy going forward, i.e., a focus on top line and if push comes to the shove, you would rather maybe give up a little bit of margin. And just a point of clarity, on the pricing, you talked about the run rate being similar. I guess you're talking about around 1% pricing for the H2.

Thank you, Jon. Maybe just one clarification from my point of view. I do not foresee that the market environment deteriorates. I think what we call out is that, in general, it is a more nervous market environment. But I think, again, as we always said, in the baked goods area, the baked goods calorie is a very efficient and a very cost-effective calorie. So I do not foresee that the market significantly changes or additional headwinds. It was more in the context that in general, probably the FMCG and food and drinks market is in a bit of a more nervous state. To your point on full year guidance, we clearly target to deliver what we said low to single mid-digit organic growth and an improvement in all key metrics that does include EBITDA. I think what gives me the confidence for the second half is when you look at the acceleration of our organic growth quarter 1 at 1.6% now into quarter 2 at 4%. And if you look at current trading, I have no reason to doubt that, that momentum we have gained as new capacities come online, as innovation have been introduced in the market is a baseline we can count on. And Martin has shown also the improvement on pricing. There's a slight improvement. And now that we have closed all open negotiations that we had, in particular with retail, that also provides us with sort of a higher flight level for H2. So clearly confirming that we continue to target our full year guidance, both top line and bottom line. And to your second question, whether we would, I guess, focus maybe more on market share gains versus profitability. I think what ARYZTA has consistently done over the last 3.5 years is have that healthy above-market growth, but delivering year-on-year profitability improvement. I have no reason to change this and either sacrifice margin for market share gain or lose market share gain to optimize the margin. I feel confident with the 3 channels and the 2 geographies that this can go hand-in-hand. And as we showed at the Capital Markets Day, obviously, the big jumps are 50 and 100 basis point improvements of the past, that is not realistic. But beating the market and delivering a year-on-year EBITDA improvement, I feel confident about.

[Operator Instructions]

I think time-wise, we are pretty much there. I'm just looking at Paul, whether we have time for one more. One more.

Your next question is from Marti Queral of UBS.

For 2025, you're guiding for an EBITDA margin above last year. So that is above 14.6%. What will drive this margin improvement in H2? Is it more pricing? Is it more SG&A efficiencies? Some color here would be appreciated. And my second question also, if I may, is on mix. Why is it still negative in Q2 when innovations accounted for around 18% of sales?

I'll probably just follow up on my elaborations with Jon around H2. I think the 3 levers we have for H2 is the acceleration of organic growth and the momentum we had in Q2 and taking now into the second half year that gives us clearly operational leverage. If you also look at normally H1 and H2 over the past years, H2 from a volume and revenue perspective has always been the stronger year so that there is a natural, I guess, improvement in H2. The second one is innovation. We have achieved in H1 innovation of 18%. That is a building block for our organic growth, but it's also a building block for margin improvement. As Patrik has asked on the new capabilities and capacities that came online in Malaysia, Switzerland and in a week or 2 in Germany, that again helps us on a top line perspective, but also from a margin building block. And then the third one, Martin called out, we had in H1, EUR 6 million, I guess, cost savings or efficiency gains. And we do foresee again that, that momentum will increase as those projects in operations, procurement and structural cost initiatives basically accelerate and are rolled out to all the markets. So this organic growth momentum that we have, a strong innovation pipeline with new capacities and capabilities coming online and this relentless focus on efficiencies and cost discipline gives us the confidence that we continue to target the full year guidance. And then there was a second...

I think there was a question... maybe just building on what Michael said in terms of innovation on the mix question you called out. While, yes, innovation, just to reiterate, is a key driver of organic growth and is margin accretive. We had some softness in the foodservice channel, which is impacting the mix in that 0.3% that we have reported for H1. We -- based on the plans we see, based on the forecast we see, we expect mix to turn towards neutral to positive for the full year. So I think that's kind of a temporary effect that we see there.

Thank you, Marti. That concludes our Q&A, and I'm passing back to Laura.

There are no more questions in the queue. I will now hand back over to Michael Schai for closing remarks. Please go ahead.

Thank you, Laura. Ladies and gentlemen, thank you for taking the time on this very beautiful summer morning here in Zurich for the ones that are based in Switzerland. Thanks for taking the time. Thanks for your questions. We look forward to discuss over the next hours and day or 2 in more details with some of you. And thank you for your interest in ARYZTA and wishing you a great week. Thank you.

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.