THE FRIDAY INTERVIEW/Owen Killian, chief executive of Aryzta:ARYZTA'S investor roadshow has taken Owen Killian through several airport security detectors this week: from the bakery group's base in Zurich for the Monday morning conference call, on to Geneva, then to London by Wednesday.
Despite the intense itinerary, these are not the worst days to be in the business of bread, and Killian knows it: shifting croissants through the tills is a lot easier than selling cars. Par-baked demi-baguettes have that lunchtime trade-down factor written all over their freshly golden crusts. And there are no Ratner-like declarations of carbohydrate indifference here: he loves “all of our products”.
Aryzta – which is coined from the Latin noun Arista, meaning the pinnacle of an ear of wheat – released its first batch of half-year results this week to a satisfied audience of analysts. They appear to like what the company has got on its recently expanded menu.
Formed from the merger between Irish food group IAWS and Swiss baker Hiestand, Aryzta began trading in August 2008, when Killian’s role as chief executive of IAWS transformed into chief executive of Aryzta, purveyor of rustic breads, viennoiserie and the odd pretzel.
The merger is working well, says Killian, “notwithstanding that I don’t think anyone was anticipating that the economic environment would be so tough”.
A “palpable fear” has gripped large chunks of the 700 million consumers that Aryzta has access to across four continents, Killian says. “Fewer consumers are walking into convenience stores and people are spending less when they come in,” he says.
As a result, volumes of its par-baked goods sold in Ireland and Britain have steadily declined. Uncertainty abounds, even in a recession-resilient business like his – “bread is the lowest cost component in a sandwich,” he notes – but the fall-off now appears to have stabilised.
“The reality is that the consumer recession, rather than the economic recession, began in the US in August 2007 when the subprime crisis hit the decks. Consumer patterns started changing as far back as that,” he says.
In the fast-growing North American market, where Aryzta owns artisan bread specialists La Brea and cookie kings Otis Spunkmeyer, the company has chased new retail customers to offset the trend for consumers to drift away from food service channels.
“It’s become cool to be frugal,” he notes. For years, American consumers have spent 50 cent of every $1 that they spend on food on items consumed outside the home, but the balance is shifting back toward home consumption.
Meanwhile, the convenience store channel, so intrinsic to IAWS’s success with Cuisine de France in the Irish market, is underdeveloped Stateside.
“I think the convenience store model is probably better developed in Ireland than it has been anywhere in the world,” Killian says. The Subway-littered strip malls and golden arch-decorated shopping precincts of North America are comparatively lacking in the aroma of freshly baked goods.
But while Aryzta waits to bring European habits to transatlantic consumers, its new production facility at Grangecastle in Dublin can increase the visibility of La Brea’s niche bread products here.
Aryzta has invested €200 million in Grangecastle, an investment of which Killian is proud. Coupled with the merger of Hiestand, the investment means in-sourcing is the new out-sourcing for the group, which now owns 23 bakeries. Grangecastle’s capacity to make artisan breads, baguettes and multi-seed rolls and loaves also complements Hiestand’s output of laminated doughs, he says.
Aryzta’s overall interim earnings defied the recession, with a near 17 per cent increase in pretax profits to almost €110 million for the six months to the end of January.
Having raked in almost €1.6 billion in revenue over the half-year to the end of January, Killian believes 2009 earnings will be “difficult to predict” across all earnings channels, not just because of consumer foibles but because of the credit environment for suppliers and the retail and food service operators that sell its products.
On Monday, he declined to give analysts guidance for the year ahead, likening his role to that of a newsreader rather than a weather forecaster. The focus now is on generating cash and consolidating what Aryzta now has.
Hiestand, in which IAWS had held a 32 per cent stake before the merger, has added Switzerland, Germany, Poland and Austria to the IAWS footprint, while globally the speciality bakery market in which Aryzta now operates is estimated to be worth €30 billion a year.
“We don’t have standardised processes across the group. That’s our immediate priority, that and maintaining our cashflows,” Killian says. “Acquisitions are not something we wake up thinking about every morning. They are something we do strategically, but at the moment we would rather invest in our own business.”
Aryzta also owns 71.4 per cent of Origin Enterprises, the feed and fertiliser business that comprised the original IAWS before it went down the so-called lifestyle food route in the 1990s.
Despite short-term commodity price volatility, Origin is doing very nicely, having increased profits by 35 per cent to €27 million over the last six months and secured the purchase of agronomy specialists Masstock.
More importantly for Killian, investment of some €175 million in Origin’s first year as a separately listed company justifies the decision to cut the agri-business end of things loose from IAWS.
“Would IAWS have invested €175 million in that side of the business? Probably not, and it would have been starved of cash,” he says.
The spin-off of Origin also made the IAWS merger with Hiestand a more straightforward fit, and the resulting company has taken Killian very far from his agricultural science roots . . . all the way to Zurich.
Aryzta is incorporated in Switzerland because under Swiss law a Swiss public company can’t be merged with an Irish one.
Blanket stock market turbulence has taken Aryzta’s listing price of €38 per share down to less than half that amount on the Iseq, something Killian told analysts he was not exactly whooping for joy about, while its market capitalisation since August has shrunk from €2.9 billion to €1.3 billion.
Of course, that still makes Aryzta worth more in equity terms than all of the Irish banks put together. Bread rolls can actually be worth something when you’ve got a lot of them on your plate.
ON THE RECORD
Name: Owen Killian
Position: Chief executive, Aryzta
Age: 55
Family: Married with two children
Lives:Divides his time between Dublin and Zurich, where Aryzta is incorporated
Career: From Roscommon, graduated with a degree in agricultural science from UCD in 1976 and began working for IAWS a year later. A former chief operating officer, he took over as chief executive after Philip Lynch retired in 2003.
Something you might expect: Having worked his way to the top of IAWS and seen the company expand into Aryzta, he says he doesn't have time for hobbies.
Something that might surprise: Not many people have a good word to say about bankers right now, but Killian says IAWS and now Aryzta has always had good support from their financiers: "It's a two-way street."
