Monday 23 April 2018

Shareholders 'losing patience' with Aryzta and Owen Killian

Investors demanding action, with all eyes on chairman McGann after food company's profit warning

Aryzta ceo Owen Killian, who has been under pressure after a gloomy forecast Photo: Iain White
Aryzta ceo Owen Killian, who has been under pressure after a gloomy forecast Photo: Iain White
Samantha McCaughren

Samantha McCaughren

Investor patience with Aryzta has been wearing thin for some time. Last week it reached breaking point. The multi-billion-euro company, which is behind the Cuisine de France par-baked bread range, has issued a series of profit warnings over the past two years, with the spotlight increasingly being turned on chief executive Owen Killian.

If investors were unhappy with performance and corporate governance in recent months, that dissatisfaction turned into anger last week. Shares fell more than 32pc in just two days, wiping over €1bn off the value of the company.

An update for the first quarter of the current financial year issued in late November gave no clues that such troubles lay ahead. Back then, Killian told shareholders that "revenue development in quarter one of financial year 2017 is in line with our expectations".

While there was no sign of a much-hoped-for turnaround at the company, there were no surprises - until last Tuesday.

Just six weeks after the last update, Killian did an about-turn on those reassuring comments and drew a far more pessimistic picture.

In an unexpected announcement, Killian said that revenue had reduced and earnings per share would be down around 20pc for the first half of the year. He also confirmed that an unpopular 49pc stake in Picard, a French frozen food company, would be reviewed by chairman Gary McGann, as first reported in this newspaper.

While just a few weeks earlier it seemed that all was on track, Killian listed a raft of reasons why the business was under pressure. These ranged from the impact of Brexit to American wage inflation.

Both had been flagged previously by peer companies operating in the food sector, leading to concern as to why they had not been anticipated beforehand.

Anger across the investment community erupted, according to several market insiders.

"Shareholders were raging," said one source, who has long held concerns about the company.

A number of them have already contacted McGann to communicate their desire for an urgent review of management structures. "He will be in no doubt of what is needed by the end of today," said one senior source.

In a note to institutional investors seen by the Sunday Independent, Societe Generale put questions about management on top of a list of questions for the company.

"Do you still think this management team can take this business forward?" asked the note.

According to the commentary from analyst Warren Ackerman, the profit warning could be a catalyst for McGann "to consider replacing the management team and rethinking the Picard deal".

Societe Generale was one of the first advisers to raise serious concerns about Arytza in 2015, highlighting poor investor sentiment towards the stock.

"The company has been underperforming for some time, and it's getting worse. Management still sees no fundamental damage, but we do," read this latest note.

Following the profit warning, Ackerman said "clarity on management, Picard, cost savings and strategy is needed very soon".

However, Ackerman, who did not wish to comment on the note, is optimistic that McGann will take investor concerns on board.

"He is the right man in the right place," he told the Sunday Independent. "It is hopeful he will be the catalyst for change."

Jean-Philippe Bertschy from Vontobel, did not hold back, simply stating: "Investors definitely do not need to own the shares."

"Another profit warning from Aryzta, this one hurt deeply," he said.

"We hear the reasons for the significant guidance revisions. We believe however that there are more structural issues at Aryzta, as seen with the numerous profit warnings in the past two years.

"We are even more surprised to hear during the conference call that the board gave management 'support and excellent feedback' and was 'very supportive of the strategy'."

Bertschy said there is low visibility with regard to structural business development, possible management change, and other possible one-offs. He also sought swift action. "At this stage, we believe that strategic decisions from the board are needed very quickly in order to have a strong positive or negative view," he said.

"As seen with the numerous profit warnings, it seems that the business is and will remain highly volatile."

Other shareholder advisers highlighted their dissatisfaction with last week's profit warning in light of November's reassuring update.

Credit Suisse was among those who failed to understand how there had been such a marked deterioration in a short space of time.

"Visibility was never great at Aryzta, but the group seems to have badly misread its markets, its costs, the implications of its actions, and pretty much everything else," said the firm.

"Surprising how the profit outlook could change so much in such a short time."

Ironically, after years of failing to engage with investors as much as they would have liked, the company had held an investor day in October. This had comforted some analysts, advisers and shareholders at the time, but now has only served to intensify the anger.

Some of the reasons for the fall in revenue had not been mentioned in recent meetings, Credit Suisse noted. "We find these explanations against the extent of the damage to be very surprising, while both ought to have been anticipated at least in part."

There is a growing expectation that the only way to appease shareholders will be management change.

All eyes are now firmly focused on McGann. When news of his appointment came last year, many analysts speculated it could pave the way for change at the top table. Last week's profit warning has added immediacy to that.

Jon Cox of French finance house Kepler Cheuvreux said the warning "may accelerate management change given a further blow to credibility".

Fintan Ryan of Berenberg in London said he agreed there was an appetite in some quarters for change.

"Some shareholders have been pushing for a more dramatic change to the strategy up to and including a potential change of senior management," he told the Sunday Independent.

He described last week's conference call as 'weak' and said it showed "there is still a lot to do to properly stabilise and turn around the Aryzta business momentum given the high levels of debt and investment put in the business in recent years."

"This adds further pressure to management's position and Aryzta's strategy in the near- and mid-term.

"This could serve as a real catalyst for the new chairman to act and do something more radical with the radical with the management and group structure."

There are genuine concerns about the next steps for the company. Although Picard is not a popular investment by Aryzta, getting a good price is obviously high on the minds of shareholders who feel too much value has already been lost. The company paid €446m for its stake in 2015 but last week the declined to comment on whether or not it might achieve more than €500m for that holding.

Given the circumstances, Aryzta, will be in essence a distressed seller of Picard.

The majority shareholder, Lion Capital, is likely to be the only buyer, according to a number of sources, but shareholders were last week asking what type of price could be achieved.

There are also concerns over banking covenants. Killian insisted there would be no need to raise capital.

With the ball now in McGann's court, there was some disappointment that he did not take part in the conference call with analysts last week.

However, he would undoubtedly have faced difficult questions about management in a public forum.

He will meet shareholders shortly, ostensibly to discuss the strategy around Picard and sound out other shareholders about their views on the holding.

But the top priority for investors is change in the company's management, a fact which McGann will be clear on after informal conversations with investors in recent days.

While most people are pessimistic about the prospects for Aryzta for the short term at least, Cox remained optimistic.

He believes last week's share sell-off was over-done.

He and some others believe there was "an element of kitchen sinking" under the guidance of the board members. This is where a company gets all its bad news out in one painful blow. After that, the only way is up.

If this was the case, few shareholders were thanking them last week.

Perhaps in retrospect investors may look at last week's profit as a first step in restoring shareholder confidence in the company.

However, a few more painful decisions will need to be made in the coming days and weeks in order to win back the support of the investment community.

Sunday Indo Business

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