Wessanen's US arm gets the Phoenix touch

Related tags United states dollar

Operation Phoenix, the restructuring programme introduced earlier
this year by Dutch wellness foods group Wessanen, is already
bearing fruit, with the company last week announcing
better-than-expected third quarter figures. But the US business
continued to drag down results, prompting the group to unveil a new
package of measures there.

The company said that total sales for the third quarter of the year were 8.4 per cent higher than the previous year at €659 million, although this did not take account of an adverse currency effect relating to the US health food retail business, Tree of Life NA. At actual exchange rates, sales fell 1.7 per cent to €597.2 million.

EBITA for the quarter was €3.5 million, some 75 per cent lower than in 2002, even before the exceptional items relating to Operation Phoenix.

Ad Veenhof, Wessanen's new chief executive who introduced Operation Phoenix when he took over in the summer, said he was pleased with progress but said that there was still much work to be done, in particular at TOL in the US.

He said that a major analysis of the performance at TOL NA had revealed five main issues which needed to be addressed.

Firstly, he said, the company needed to improve its business processes, and to that end two new initiatives had been planned and partially implemented: the roll-out of a new IT solution and a more stringent reporting structure. Secondly, he said, costs needed to be reduced further, with the result that 500 jobs would have to go, in addition to the 300 already planned.

Three strategic issues were also identified at TOL NA: the limited fit between the company's competencies and certain new customers; the need to further integrate previous acquisitions; and the need to further develop the branded part of the business.

With such a substantial number of issues to be tackled, nothing short of a major overhaul of TOL was needed, and that is exactly what Veenhof has planned.

"From now on, TOL NA will focus on four core competencies: category management, building new (transatlantic) markets, branding and distribution. To position these competencies as key value drivers, the organisational structure and governance will be thoroughly altered. Three units will be set up: one focusing on brands, one nationally-controlled category management unit focusing on customer profitability and a lean, efficiency-driven distribution unit focusing purely on operational excellence."

TOL NA reported third quarter sales of €388.4 million, some 5.5 per cent lower than in the same period a year earlier as a result of exchange rate conversions. But sales in dollar terms continued to grow, resulting in sales at constant currency rates rising nearly 8 per cent to €443.5 million.

EBITA before exceptional items of €7.8 million (mostly relating to Operation Phoenix) dropped €6.3 million into the red, but Wessanen said that this was an improvement of €4.4 million on the second quarter as the restructuring programme continued to bear fruit.

The quarter also saw the termination of a distribution agreement with the US natural food retailer Wild Oats Markets just a year after it came into force. Veenhof said that the two parties had worked hard to try and find a means of making their partnership work - the target was break even by the end of the year - but that they had failed to do so, leaving them no alternative but to terminate the agreement.

The loss of the Wild Oats contract will result in a 10 per cent drop in sales at TOL NA, but Veenhof said that it would also help boost operating results there next year (as TOL will no longer have to contribute to the marketing expenses) and return a positive cash flow of approximately €30 million as a result of a decrease in working capital.

Tree of Life Europe, meanwhile, had a good third quarter, with sales rising 10 per cent to €111 million as a result of growing sales in the Dutch specialised store channel, a good performance from UK health food producer Kallo Foods and the consolidation of Natudis, a Dutch health food distributor in which Wessanen took a majority stake earlier this year.

EBITA before exceptional items was roughly in line with the previous year at €5.2 million.

The cereals arm, Dailycer, which will bear the brunt of the European restructuring under Operation Phoenix, posted flat sales in the quarter at €55.2 million. Continental European sales continued to increase, but UK sales decreased as a result of eliminating non-profitable products. Furthermore, the negative currency effect of sterling against the euro impacted sales by €1.4 million.

But the effects of Operation Phoenix - production efficiencies and further automation in the UK and France, the merger of two Dutch plants - are already being seen, with EBITA up 58 per cent during the quarter to €3 million.

Wessanen's convenience food group posted sales of €42.6 million in the quarter, a 7 per cent improvement on the previous year, driven by strong sales in the retail channel and acquisitions. EBITA was flat as the result of temporary higher production costs following the consolidation of production facilities in Germany and the Netherlands.

Launched in August, Operation Phoenix was expected to generate €100 million in annualised cost savings by the end of 2004 and a reduction in workforce of 800 to 1,000 positions. Now, nearly three months into the operation, Wessanen expects to achieve €100 to 115 million in savings and a total workforce reduction of 1,300 to 1,400 positions. The restructuring costs are estimated at around €45 million, primarily for redundancies, but also for non-cash items such as asset write-offs; some €7 million of this total was taken in the third quarter.

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