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Davy Research
Rating: OUTPERFORM
Previous: NEUTRAL
John O'Reilly john.o'reilly@davy.ie / +353 1 6148915
Cathal Kenny cathal.kenny@davy.ie / +353 1 6148937
Aiden O' Donnell aiden.odonnell@davy.ie / +353 1 6724211
Jack Gorman jack.gorman@davy.ie / +353 1 6148926
Share Price Performance
Issued 14/06/10
Issued 30/06/09
4000
3500
3000
2500
2000
170
150
70
50
Apr 11
130
110
90
1500
Apr 08 Oct 08 Apr 09 Oct 09 Apr 10 Oct 10
ARYZTA price (c) Rel E300 food prod. & proc. index (rhs)
Key financials (€m)
Year end
Revenue
EBITDA
PBT
EPS Basic
EPS Diluted (Adj)
Cash EPS (Diluted)
Dividend
NBV
Valuation
P/E
FCF Yld (pre div) (%)
Dividend Yield (%)
Price / Book
EV / EBITDA
Group Int. Cover (x)
Debt / EBITDA (x)
Company data
Reuters/Bloomberg/Xetra
Sector
Shares (m)
Daily No. Shares Traded (m)
Free Float (%)
52 Week High/Low
Capital Structure
Mkt. Cap (€m)
Net Debt/(Cash)
Deferred consideration/debtrelated
Pref Shares/Non Eq Min
Minority interests
E.V. (€m)
Jul10 Jul11F Jul12F
3009.7
3888.6 3954.5
339.9
475.1 496.8
197.7
192.2
244.0
328.2
319.1
316.0
300.0
402.7
257.2
241.0
320.6
423.4
37.0
31.3 32.6
2044.8
2314.4 2467.3
14.9
8.7
1.0
1.8
11.7
4.9
3.6
12.1
8.3
0.9
1.6
8.9
4.4
2.2
11.3
7.5
0.9
1.5
8.2
4.8
1.7
ARYN.I/YZA ID/YZA
Speciality baking
82.8
0.048
98.7
3625/2582
3001.9
1038.2
N/A
300.0
72.8
4412.9
Recent research and research resources
Recent research and financial data on ARYZTA
Sector research and data on Speciality baking
April 15, 2011
Flash Note: Company update
Price: 3625c
Arcos provides further confirmation that ARYZTA's acquisition of FSB was a good move
•
The prospectus of Arcos Dorados, McDonald's largest franchisee, supports our thesis that the Fresh Start Bakeries
(FSB) acquisition was a smart move by ARYZTA. The prospectus provides insight into McDonald's franchisee model and how the business operates with its key suppliers.
•
In June 2010, ARYZTA acquired FSB for $0.9bn. FSB's major customer and the source of its overseas revenues is
McDonald's or McDonald's franchisees. The acquisition was the catalyst for Davy to upgrade its rating on ARYZTA from
'neutral' to 'outperform'. The shares have increased by circa 25% since the deal was announced.
FSB acquisition transformed ARYZTA
•
The FSB acquisition transformed ARYZTA in that food service (including qsr) replaced retail as its major channel and exploded its geographic boundary. This progression could be said to have begun with the bakery joint venture with Tim Horton (Maidstone, which is now wholly-owned) and was accelerated with the acquisition of Otis
Spunkmeyer. Looked at in this way, FSB was the continuing evolution of the group's strategy.
•
FSB also offers ARYZTA access to fast-growing emerging markets such as Brazil (where it operates three factories).
Food Rest of World grew underlying revenues by 18% in
H1 FY 2011; this year it will account for c.7% of revenues in the Food division, up from 2% in FY 2010.
Reiterate 'outperform' rating
•
ARYZTA will provide a nine-month trading update on June
7th. We reiterate our ‘outperform’ call on the stock.
Please refer to important disclosures at the end of this report.
Davy is regulated by the Central Bank of Ireland and is a member of the Irish
Stock Exchange, the London Stock Exchange and Euronext. Davy is authorised by the Central Bank of Ireland and regulated by the Financial Services
Authority for the conduct of business in the UK. All prices as of close of previous trading day unless otherwise indicated. All authors are Research
Analysts unless otherwise stated. For the attention of US clients of Davy
Securities, this third-party research report has been produced by our affiliate, J
& E Davy.

Flash Note: ARYZTA April 15, 2011
In June 2010, ARYZTA acquired Fresh Start Bakeries (FSB) for
$0.9bn. FSB's major customer and the source of its overseas revenues is McDonald's or McDonald's franchisees. Since the deal took place, we have been keen to learn more about how
McDonald's or its franchisees (which operate to McDonald's protocols and processes) do business with its key suppliers.
Arcos Dorados, McDonald's largest franchisee, provides a good insight into the overall business
A really good insight is provided in the excerpt below from the prospectus of Arcos Dorados, McDonald's largest global franchisee in terms of system-wide sales and number of restaurants.
Arcos is the largest quick service restaurant (qsr) chain in Latin
America and the Caribbean. At end-December 2010 it operated
1,755 McDonald's-branded restaurants, which represented 6.7% of
McDonald's total franchised restaurants at that date (5.1% of its global sales). Arcos listed on April 14th on the New York Stock
Exchange following its $1.25bn IPO.
As Arcos was set up to acquire the operations from McDonald's
(August 2007) in the region and given that it has preserved
McDonald's pre-acquisition protocols, it may be reasonable to conclude that these pricing and contract arrangements with
McDonald's operate globally. FSB is a main supplier (buns certainly, maybe some sweet baked goods) to Arcos.
2
"We purchase core products and services (including buns) from approved suppliers and distributors who satisfy the above (i.e. Mc
Donald's) requirements…Since the process to become an approved supplier is lengthy, expensive and requires proof of compliance with McDonald's high standards, we have found that oral agreements with our approved suppliers generally are sufficient to ensure a reliable supply of quality food products, and we have developed long-term relationships with many of our suppliers.
In addition we enter into written agreements with most of our suppliers regarding cost of goods sold, which can be based on pricing protocols, formula costing, benchmarking, or open bidding, as appropriate.
Our largest 25 suppliers account for approximately 80% of our supplies, and no single supplier or group of related suppliers accounts for more than 9% of our total food and paper costs.
Among our main suppliers are Marfig Alimentos S.A, Mc Cain
Foods Limited, Coca-Cola and Fresh Start Bakeries".
Source: prospectus of Arcos Dorados Holdings Inc
Davy Research

Flash Note: ARYZTA April 15, 2011
The Arcos prospectus is also of interest with respect to its outline of the obligations which franchisees must meet (however big they are), including new store openings, A&P spend (5% of sales) and store reimaging.
Table 1: Arcos Dorados financial history ($m)
Year-end Dec
Revenues
Adjusted EBITDA
Operating Iicome
Net income
Adjusted EBITDA margin (%)
Source: Arcos Dorados; IPO document
*5 months operations only
2007*
941.3
90.9
71.1
22.3
9.7
2008
2606.8
288.0
222.2
104.4
11.0
2009
2665.5
266.4
206.8
80.4
10.0
2010
3018.1
299.1
204.6
106.3
9.9
Arcos has the exclusive right to own, operate and grant franchises of
McDonald's restaurants in 19 countries and territories in Latin
America and the Caribbean. At end-December 2010, Arcos operated
1,755 restaurants in the territories. Within many of these are
McCafes (267) and Dessert Centres (1,306), separate areas where customers can purchase a variety of customisable beverages and desserts.
Brazil is Arcos's biggest market with 35% of its restaurant estate located there. Currently, FSB operates three bakeries in Brazil and is currently building a new one. FSB operations in Brazil are unlikely to export given that they are at full capacity utilisation serving the domestic market. Elsewhere within the Arcos territories, FSB has joint venture bakery manufacturing plants in Guatemala and in
Chile. The joint venture bakery in Guatemala is known to export to contiguous countries.
FSB acquisition transformed ARYZTA
The FSB acquisition transformed ARYZTA in that food service
(including qsr) replaced retail as its major channel and exploded its geographic boundary. This progression could be said to have begun with the bakery joint venture with Tim Hortons (Maidstone, which is now wholly-owned) and was accelerated with the acquisition of Otis
Spunkmeyer. Looked at in this way, the FSB acquisition was the continuing evolution of the group's strategy.
At face value, it would seem very difficult to dislodge an existing major trusted supplier to the McDonald's system. Thus, if we assume that there are local trusted suppliers throughout Arcos's territory, then to penetrate this restaurant network outside of Brazil (and
Chile and Guatemala) presupposes further acquisitions on ARYZTA's part. The growth opportunity is sufficiently attractive to encourage this.
3
Arcos (based on Euromonitor data and analysis) states that the qsr segment represented more than 60% of total fast food sales in its territory of operation in 2010. The qsr segment is growing faster than the fast food sector overall. Over the period 2004-2009, qsr in
Davy Research

Flash Note: ARYZTA April 15, 2011 the region grew at a CAGR of 14.5% per year (CAGR of 3% in the
US). Total qsr growth over the period was 97%; this was 27 percentage points higher than fast food overall.
According to Arcos, growth drivers include the following:
 the region's modernisation as people in more densely populated areas seek convenience, speed and value;
 the popularity of standardised menus and the consistency of product and service.
Sustainable growth for qsr sector
Arcos believes that good growth for qsr is sustainable due to the region's favourable economic and demographic conditions. As regards the latter, it notes that within its territory there are 576m people, 28% of whom are under 14 years and 46% of whom are 25 years old. It notes that, in addition to demographics, "movements in macroeconomic conditions in the Territories are leading to modernisation of consumption patterns and increased affordability of our products across socio-economic segments and we believe we are well placed to capitalise on these trends. For example, according to the Brazilian Ministry of Finance, 29m Brazilians joined the middle class between 2003 and 2009 and the percentage of the Brazilian population living in poverty decreased by 45.6% during the same period. Moreover, according to Euromonitor, the percentage of households in Brazil with annual disposable incomes of $5,000 or more was greater than that in China and India in 2010".
Forecast growth for 2010-2014 (Euromonitor) in the fast food sector overall in various countries in its territories is as follows: Argentina,
19%; Brazil, 27%; Chile, 26%; Colombia, 17%; and Mexico 4%.
Arcos believes that qsr will take more of this growth than other segments within fast food; these include street vendors, self service caterers, full service restaurants, deliver/takeaway and specialist coffee shops. A significant factor in this is the much better capitalisation of operators in qsr which have greater capacity to invest in store openings.
US qsr operators predominate within the fast food sector in the region. The market shares of leading brands in the fast food segment in Latin America and the Caribbean for 2009 were as follows: McDonald's 12.4%; Burger King, 3.7%; Subway, 2.3%;
Habib's 1.6%; KFC, 1%; and Bob's, 0.9%.
Note that the estimated share of McDonald's (Arcos) exceeds the combined share of the next five leading brands.
Subway's presence should also be noted. It is the largest customer of
Otis Spunkmeyer (ARYZTA's US frozen cookie dough and cookie and muffin baked goods producing subsidiary).
A similar fast food story is playing out in Asia, where ARYZTA has acquired bakeries in a separate transaction (to serve qsr).
The channel re-orientation to qsr by ARYZTA is a key element of its capacity to meet its growth target. We believe it will achieve this.
4 Davy Research

Flash Note: ARYZTA
Rating: OUTPERFORM
Previous: NEUTRAL
Issued 14/06/10
Issued 30/06/09
John O'Reilly john.o'reilly@davy.ie / +353 1 6148915
Company profile
ARYZTA was formed in 2008 through the merger of two highly successful par-baking companies, IAWS of Ireland and Hiestand Holdings of Switzerland. The new entity created one of the largest specialty baking businesses with operations in Europe, North America, South East Asia and
Australia. In June 2010, it announced details of the purchase of Fresh Start Bakeries and Great Kitchens.
ARYZTA has a mixture of business-to-business and consumer brands, including Hiestand, Cuisine de France,
Delice de France, Coup de Pates, Otis Spunkmeyer and La
Brea Bakery. ARYZTA also holds 71.4% of Origin
Enterprises, an agri-nutrition business that is listed on the
IEX in Dublin.
April 15, 2011
In July 2010 we moved ARYZTA to an 'outperform' rating, driven by the $1bn acquisition of Fresh Start Bakeries and Great Kitchens. We view the recent deals as a catalyst for renewed profit acceleration.
New acquisitions increase exposure to quick serve restaurant sector
•
In June 2010, ARYZTA announced details of the purchase of
Fresh Start Bakeries and Great Kitchens for a combined sum of
$1.08bn.
•
The company expects these acquisitions to be earnings accretive to the extent of 45c-plus per share. Based on the outcome of
ARYZTA's previous deal-making, there is reason to trust this anticipation.
•
The deal increases the company's exposure to the quick serve restaurant sector through Fresh Start Bakeries' links with
McDonald's.
Financial model is cash-focused
•
ARYZTA operates a cash-focused financial model. Robust levels of cash generation provide the group with enhanced levels of financial flexibility.
•
Group net debt/EBITDA falls to 2.2x by FY 2011 with interest coverage of 6.5x.
•
Following the deal, ARYZTA has diluted its exposure to the difficult end-markets of Ireland and the UK and is poised to tap the growth potential in non-traditional markets such as Central and South America and Australasia.
Valuation not stretched on 2011 forecasts
•
The stock currently trades on a P/E of 11x our 2011 forecasts. We believe that this offers value.
•
We changed our rating to 'outperform' following the deal as we believe management will be able to integrate the new acquisitions and deliver on its guidance.
•
The key catalyst over the coming months will be any commentary around the synergies extracting from the ongoing integration of the business.
5 Davy Research

Analyst certification
Each research analyst primarily responsible for the content of this research report certifies that: (1) the views expressed in this research report accurately reflect his or her personal views about any or all of the subject securities or issuers referred to in this report and (2) no part of his or her compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this report.
Investment ratings definitions
Davy ratings are indicators of the expected performance of the stock relative to its sector index (FTSE E300) over the next 12 months. At times, the performance might fall outside the general ranges stated below due to near-term events, market conditions, stock volatility or – in some cases – company-specific issues.
Research reports and ratings should not be relied upon as individual investment advice. As always, an investor's decision to buy or sell a security must depend on individual circumstances, including existing holdings, time horizons and risk tolerance.
Our ratings are based on the following parameters:
Outperform : Outperforms the relevant E300 sector by 10% or more over the next 12 months.
Neutral : Performs in-line with the relevant E300 sector (+/-10%) over the next 12 months.
Underperform : Underperforms the relevant E300 sector by 10% or more over the next 12 months.
Under Review : Rating is actively under review.
Suspended : Rating is suspended until further notice.
Restricted : The rating has been removed in accordance with Davy policy and/or applicable law and regulations where Davy is engaged in an investment banking transaction and in certain other circumstances.
Distribution of ratings/investment banking relationships
Rating
Outperform
Neutral
Underperform
Count
50
25
8
Percent
Investment banking services/Past 12 months
Count Percent
58 25 71
29
9
8
0
22
0
Under Review
Suspended
Restricted
3
0
0
3
0
0
2
0
0
This is a summary of Davy ratings for all companies under research coverage, including those companies under coverage to which Davy has provided material investment banking services in the previous 12 months. This summary is updated on a quarterly basis. The term 'material investment banking services' includes
Davy acting as broker as well as the provision of corporate finance services, such as underwriting and managing or advising on a public offer.
5
0
0
Regulatory and other important information
Davy is regulated by the Central Bank of Ireland and is a member of the Irish Stock Exchange, the London Stock Exchange and Euronext. Davy is authorised by the Central Bank of Ireland and regulated by the Financial Services Authority for the conduct of business in the UK. No part of this document is to be reproduced without our written permission. This publication is solely for information purposes and does not constitute an offer or solicitation to buy or sell securities. This document does not constitute investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities/strategy discussed in this report may not be suitable or appropriate for all investors. The value of investments can fall as well as rise and there is no guarantee that investors will receive back their capital invested. Past performance and simulated performance is not a reliable guide to future performance. Projected returns are estimates only and are not a reliable guide to the future performance of this investment. Forecasted returns depend on assumptions that involve subjective judgment and on analysis that may or may not be correct. Any information related to the tax status of the securities discussed herein is not intended to provide tax advice or to be used as tax advice. You should consult your tax adviser about the rules that apply in your individual circumstances.
This document has been prepared and issued by Davy on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst all reasonable care has been taken in the preparation of this document, we do not guarantee the accuracy or completeness of the information contained herein. Any opinion expressed (including estimates and forecasts) may be subject to change without notice. We or any of our connected or affiliated companies or their employees may have a position in any of the securities or may have provided, within the last twelve months, significant advice or investment services in relation to any of the securities or related investments referred to in this document.
While reasonable care has been taken in the preparation of the information contained in this document, no warranty or representation, express or implied, is or will be provided by Davy or any of its shareholders, subsidiaries or affiliated entities or any person, firm or body corporate under its control or under common control or by any of their respective directors, officers, employees, agents, advisers and representatives, all of whom expressly disclaim any and all liability for the contents of, or omissions from, this document, the information or opinions on which it is based and/or whether it is a reasonable summary of the securities in this document and for any other written or oral communication transmitted or made available to the recipient or any of its officers, employees, agents or representatives.
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6 Davy Research

Share ownership policy
Davy allows analysts to own shares in companies they issue recommendations on, subject to strict compliance with our internal rules governing own-account trading by staff members.
We are satisfied that our internal policy on share ownership does not compromise the objectivity of analysts in issuing recommendations.
Conflicts of interest
Our conflicts of interest management policy is available at www.davy.ie/ConflictsOfInterest.
Davy acts as stockbroker to ARYZTA.
The remuneration of the analyst(s) who prepared this report is based on various factors including company profitability, which may be affected to some extent by revenues derived from investment banking.
Davy is a registered market-maker in the securities of ARYZTA on the Irish Stock Exchange.
Davy is a registered market-maker in the securities of ARYZTA on the London Stock Exchange.
Davy may have acted, in the past 12 months, as lead manager/co-lead manager of a publicly disclosed offer of the securities in ARYZTA.
Investors should be aware that Davy may have provided investment banking services to, and received compensation from, ARYZTA in the past 12 months or may provide such services in the future. The term investment banking services includes acting as broker as well as the provision of corporate finance services, such as underwriting and managing or advising on a public offer. From time to time, Davy may hold a position or deal in the securities referred to in this report. Should an instance arise where Davy has a holding that exceeds 5% of the issued share capital of a company, this will be disclosed in this report.
Other important disclosures
A description of this company is available at www.davy.ie/RegulatoryDisclosures.
A summary of our standard valuation methods is available at www.davy.ie/ValuationMethodologies. All prices used in this report are as of close on the previous trading day unless otherwise indicated. A summary of existing and previous ratings for each company under coverage, together with an indication of which of these companies Davy has provided investment banking services to, is available at www.davy.ie/ratings.
The data contained in this research note have been compiled by our independent analysts, based on a combination of publicly-available information and the analysts assumptions and modelling. Further information is available upon request.
This document does not constitute or form part of any offer, solicitation or invitation to subscribe or purchase any securities, nor shall it or any part of it form the basis of, or be relied upon in connection with, any contract or commitment whatsoever. Any decision to purchase or subscribe for securities in any offering must be made solely on the basis of the information contained in the prospectus or other offering circular issued by the company concerned in connection with such an offering.
This document has been prepared by its authors independently of the company or companies covered. Davy has no authority whatsoever to give any information, or make any representation or warranty on behalf of the company or companies. In particular, the opinions, estimates and projections expressed in it are entirely those of the analysts and are not given as an agent or financial adviser of the company or companies.
In the UK this document is restricted to (i) persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial
Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order") or (ii) high net worth entities falling within Article 49(2)(a) to (d) of the Order.
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Davy Securities distributes third-party research produced by its affiliate, J & E Davy.
Davy Securities is a member of FINRA and SIPC and is regulated by the Central Bank of Ireland.
Davy Securities does not act as a market-maker.
Neither Davy Securities nor its affiliates hold a proprietary position and/or controls on a discretionary basis more than 1% of the total issued share capital of this company/these companies.
This information was current as of the last business day of the month preceding the date of the report.
An affiliate of Davy Securities may have acted, in the past 12 months, as lead manager/co-lead manager of a publicly disclosed offer of the securities in ARYZTA.
Investors should be aware that an affiliate of Davy Securities may have provided investment banking or non-investment-banking services to, and received compensation from, ARYZTA in the past 12 months or may provide such services in the next three months. The term investment banking services includes acting as broker as well as the provision of corporate finance services, such as underwriting and managing or advising on a public offer.
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Confidential © Davy 2011.
7 Davy Research