S.k.u. rationalization in North America cuts into Aryzta revenue

by Jeff Gelski
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ZURICH, SWITZERLAND – Relationships with larger customers and an improving economy have Aryzta AG executives optimistic about its North American business, but for now the company will deal with the short-term consequences of stock-keeping unit (s.k.u.) rationalization.
Eliminating more than 20% of its s.k.u.s in North America had a negative impact on revenues in the six-month period ended Jan. 31.

“Underlying revenue declined by 0.9% overall as a result of a decline in North America of 5.8%,” said Owen Killian, chief executive officer of Zurich-based Aryzta AG, in a March 16 earnings call. “This decline was even more pronounced in quarter two, where it fell by 8.4%. This decline hit operating profit margins by 50 basis points in North America and reflected in a fall of 20 basis points for the food group overall.

“Much of this reduction in revenue was self-inflicted and due to aggressive repositioning of revenue to free up capacity to service anticipated demand.”

The underlying revenue decline will continue through the second half of the fiscal year but at a slower rate, he said.

“Optimizing our capacity through s.k.u. rationalization will negatively impact reported underlying revenue growth in the near term but will positively impact returns and invested capital and our net cash generation over the next three years,” Mr. Killian said.

Total revenue and EBITA in North America still rose for Aryza in the first half of the fiscal year thanks to two recent acquisitions: Chicago-based Cloverhill Bakery, a bakery snacks maker, and Pineridge Bakery, which is based in Canada. Revenue in North America increased 31% to €937.2 million ($993.8 million) while EBITA rose 26% to €113 million ($119.8 million).

The Food Group for Aryzta overall saw EBITA increase 16% to €224.8 million and revenue rise 17% to €1.86 billion.

Mr. Killian said larger customers make up a bigger portion of Aryzta’s business in North America.

“So we're well connected with large customers,” he said. “We've got a partnership model with most of our large customers, and it is giving rise to revenue growth.

“So we're very confident about being able to get back to underlying revenue growth, sustainable underlying revenue growth in North America, and we see this situation as it's really one of optimizing the return on our assets.”

The improving economy also should help Aryzta results in North America.

“If you go back four or five years ago, when the consumer recession hit the marketplace, there was a trading down where everybody wanted value,” Mr. Killian said. “I think the definition of value for a consumer is somewhat different today. They want to be treated. They want different standards of freshness, of traceability in their ingredients.”

Aryzta is keeping track of consumer interest in gluten-free products.

“I can't honestly say that we see an enormous interest in gluten-free,” Mr. Killian said. “It's a very rapidly growing category within North America, but it's a very rapidly growing category from a tiny base.

“When you look at the totality of the bakery market, it's insignificant in its impact on consumption at this point in time, but we are, we have a capability within gluten-free. We're continually looking to see when and where we will position all of that. We have – rest of peace – we have capability, but, for the most part, it's not as significant as the noise around it would suggest at this point in time.”
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