Nomad Foods Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 9, 2023

There are 8 speakers on the call.

Operator

Good morning, and welcome to the Nomad Foods Second Quarter 2023 Earnings Call. Please note that this event is being recorded. I would like now to turn the conference over to Anthony Bucalo, Head of Investor Relations. Please go ahead.

Speaker 1

Hello, and welcome to the NoMad Foods' 2nd quarter 2023 earnings call. I am Anthony Bacalhau, Head of Investor Relations, and I am joined on the call by Stephane De Schirmaker, our CEO and Samy Zikout, our CFO. Before we begin, I would like to draw your attention to the disclaimer on Slide 2 of our presentation. This conference call may include forward looking statements that are based on our view of the company's prospects, expectations and intentions at this time. Actual results may differ due to risks and uncertainties, which are discussed in our press release, our filings with the SEC and this slide in our investor presentation, which includes cautionary We will also discuss non IFRS financial measures during the call today.

Speaker 1

These non IFRS financial measures should not be considered a replacement for and should be read together with IFRS results. Users can find the IFRS to non IFRS reconciliations within our earnings release and in the appendices at the end of the slide presentation available on our website. Please note that certain financial information within this presentation represents adjusted figures for 20222023. All adjusted figures have been adjusted for exceptional items, acquisition related costs, Share based payments and related expenses as well as non cash FX gains or losses. Unless otherwise noted, comments from here on will refer to those adjusted numbers.

Speaker 2

With that, I will hand

Speaker 1

you over to Stephan.

Speaker 3

Thank you, Tony, and thank you for joining us on the call today. Nomad had another strong performance in the 2nd quarter As our sales momentum from the Q1 carried over into the second, this was our 5th consecutive quarter of accelerating organic sales. Our world class teams delivered another great set of results, and we're well on our way to fully executing the commercial and supply chain strategies we announced at CAGNY early this year. Today, we are raising our 2023 EPS guidance, boosted by our solid first half operational performance and Q2 share buyback. NoMad has navigated many challenges over the course of our history and each time We've come out as a strong organization.

Speaker 3

We adjusted nimbly to Brexit in the COVID-nineteen pandemic. And last year, the outbreak of the Ukraine war led to raw material supply challenges. We worked closely with our retailers to adjust our pricing to recover inflationary costs. This was necessary to ensure that we would have the right resources to continue investing in our business over the long term. We also successfully derisked our supply chain, adapting our fish supply to include new species and geographies, while adding new sources of high quality found fish.

Speaker 3

Our new found fish products have become a cornerstone of our innovation platform this year. With our exciting VASA launches fast becoming consumer favorites, we have more launches planned in second half of the year across several new markets. Importantly, we extended our debt maturities to 20282029, further strengthening our balance sheet and providing us For 2023, our strategic plans Include leveraging supply chain cost savings to fuel growth, building our revenue growth management capabilities to maximize the value of our portfolio and deploying new A and P investments to rebuild volume and market share momentum. We're pleased to share that we have accomplished our first two goals in the first half of this year. Our supply chain savings program is now in full swing, Helping fund top line growth.

Speaker 3

Additionally, we've taken great strides in developing our revenue growth management capabilities, helping drive positive mix and

Speaker 4

manage costs.

Speaker 3

We are now laser focused on the execution of the 3rd leg of our strategy, on new A and P Investments Program. Our A and P will increase significantly in Q3 versus the same time last year. Additionally, we will return to more normalized annual rate of A and P this year consistent with our history. These rollouts will be aligned with the back to school schedule starting in mid August and building momentum into September. This increase in the investments will help drive our volumes in our market share in the back half of the year and beyond, and we expect improving results in the coming quarters.

Speaker 3

In addition to our A and P investments, we are also normalizing on compensation levels to ensure that we properly reward our great people. Nomad's fundamentals remain strong. Our cash flow performance is on target and our balance sheet is strengthening. Looking ahead to the rest of the year, as our new A and P investments reaches the market, we expect to see improving market share and volume trends that should carry into 2024 and beyond. With that, I'd like to recap our 2nd quarter key financial metrics beginning with revenues.

Speaker 3

Gross margin was flat at 28.2%, helped by our pricing initiatives and cost control programs. Adjusted EBITDA grew 4.5 percent to €132,000,000 while adjusted EPS came in at €0.40 per share, flat versus last year, due primarily to rising interest costs. At current dollar spot rates, our Q2 adjusted EPS was US0.44 dollars per share. Our strong revenue performance in the quarter benefited from the double digit price increase that's rolled over from the second half of last year. As we observed in our Q1 reporting, some of our most important raw material prices are moderating, but we have yet to see real deflation.

Speaker 3

Our supply chain continues to deliver excellent results, and we are in a virtual cycle of customer service and cost management that should support our second half Our service levels for the quarter rose to 97.8%, up 90 basis points. Maintaining this level of service has been crucial in defending our market share and high service level, we'll be keen on our push to regain momentum in the second half of the year. Additionally, our procurement remains disciplined, and we are covered for more than 90% of raw materials for the year. We've learned a great deal from the raw material inflation of the past few years, and we have become much more flexible and strategic In how we acquired key inputs, we've left the percentage of our raw materials uncovered to take advantage of some favorable price trend developing in the market. We just started the process of covering for 2024.

Speaker 3

We lost about 1% value share this quarter, consistent with our expectations and due primarily to our pricing strategy. We expect our new A and P strategy for the year to address this challenge. With increased media and more intensive promotional activity, we expect improving volume and share performance for the rest of the year, setting us up for a return to volume growth in 2024. Finally, with increasing visibility on our business and our return to share repurchase, we are raising our 2023 adjusted EPS guidance to €1.54 to €1.57 per share from our previous €1.52 to €1.55 per share. This represents an adjusted EPS range of $1.68 to $1.72 per share at current dollar spot rates.

Speaker 3

This guidance excludes the impact of any potential future capital allocation. The post pandemic pressures and macro environments of the past 2 years Have challenged us to become a leaner and more efficient company. I'm pleased to say that the execution of our 2023 plans to drive commercial and supply chain efficiency has been excellent so far this year. Additionally, I'm excited about the upcoming A and P investments. A great example of how we are successfully levering the power of our brands across markets is Goodfella Pizza and Continental Europe.

Speaker 3

Last year, we successfully rolled our distribution outside of Goodfella's traditional strongholds of Ireland and the UK, specifically in France and Spain. We launched Goodfella's in France in October last year with exclusive distribution in CAF pool until the end of 2022. That exclusivity is done, We are now extending our distribution to other large food retailers in France and expect to reach half of total distribution points. We are leveraging promotion support for the range and where possible using dedicated promotion freezers managed by our sales force. Our Adriatic region is shaping up for another great summer.

Speaker 3

Now supply chain is meeting the challenge of high seasonal demand. We had a good summer last year due to hot weather and the end of COVID-nineteen trial events. We are also benefiting from new media and product innovation. This year, we are even better prepared to meet high seasonal demand. We build stocks through Q2, Ensuring we have inventory to cover peaks this season and that is now pulling through to consumers.

Speaker 3

Our service levels in the region remain in the high 90s. Building our revenue growth management capabilities is another core pillar of our 2023 strategy. We made significant progress in rolling out our RGM systems across the company in the first half. We are building dedicated RGM playbooks, resulting in more robust standardized reports and descriptive analytics. This is supporting our end to end RGM processes in each market, ensuring greater facts based support for strategic decisions, Further enhancing portfolio value, we are boosting A and P spend by more than 20% year on year with the bulk of that coming in the back half.

Speaker 3

We expect A and P in aggregate to reach roughly 4% of sales by year end, a significantly higher level when compared 2022, which was closed between 3% of sales. This combination of promotion and advertising is being helped by milder inflation environment, Putting less pressure on margins. As the new media reaches the consumer and our price gaps with competition narrow, We are already seeing great green shoots of improvement in both volume and market share, especially in many of our must in battles. In the Q2 Nielsen period in markets where we compete, we saw frozen food volumes at flat. Finally, backed by a good cash flow performance, We repurchased shares for the first time since the Q1 of last year.

Speaker 3

We bought nearly €53,000,000 worth of share this quarter, Roughly 3,300,000 shares in total. We have been and will remain opportunistic on shares repurchased. We continue to be optimistic about our second half outlook and beyond. First, the frozen food category across our markets is in good shape, outperforming the overall food category. Frozen food sales are up double digits year to date and category volumes Half turned positive in more than half of our markets, improving sequentially in most others.

Speaker 3

2nd, we kept up Our strong consumer is messaging the 2nd quarter, emphasizing our broad based superiority through revamped advertising campaigns across the majority of our muffin bottles. This includes UK Peas, Italy Fish and Belgian Spinach. In the Adriatic region, our Consumer sales have been boosted by our innovation with the new PestatIO King brand and your new campaign for mature ice cream. Green kreuzine remains a great source of innovation in plant protein, and we won 2 awards this quarter in Germany for new products in media. With initiatives like these in place, we are seeing our value share trend flatten or improve in half of our markets.

Speaker 3

We expect this to pick up in the back half. With that, I will now hand the call over to Sami to review our financial results and guidance in more detail. Sami?

Speaker 4

Thank you, Stefan, and thank you all for your participation on the call today. Turning to Slide 7, I will provide more details on our key Q2 operating metrics, Beginning with reported revenues, which increased 6.9 percent to €745,000,000 Up 8.6 percent organically with pricing offsetting volume losses as Stephan discussed earlier. 2nd quarter revenues were negatively impacted by 1.7% of unfavorable effects. In an improving but still challenging cost environment, We delivered a solid gross margin performance in Q2. We delivered a gross margin of 28.2%, flat versus last year.

Speaker 4

This margin performance reflected higher pricing, stronger GM execution and moderating costs. As we look out to the back half of the year, we expect to deliver flat gross margin supported by price decreases, Cost discipline and RPM execution. Moving to the rest of the P and L. Our gross profit grew 7% to EUR 210,000,000 in the 2nd quarter with a stable margin. Cost of goods sold increased to EUR535,000,000 An increase of 7%, up EUR 35,000,000 versus last year.

Speaker 4

Adjusted EBITDA of EUR 132,000,000 Grew more than 4% versus last year. Adjusted EBITDA margin landed at 17.8%, a decrease of 40 basis points. Finally, our adjusted EPS of €0.40 per share was flat in Q2. This translates to 0.44 This should help keep us on track for our annual guidance target of 90% to 95% conversion, and we expect adjusted free cash flow of roughly €250,000,000 for the year.

Speaker 5

This is crucial as we consider

Speaker 4

our capital allocation for this year and beyond. In the first half, we generated €86,000,000 of adjusted free cash flow for conversion ratio of 58%, A significant step up versus our conversion rate of 25% in the first half of twenty twenty two. As was expected, some unfavorable working capital phasing from Q1 reversed to our benefit in Q2. As a result, working capital decreased €57,000,000 to €68,000,000 in the first half. CapEx of €40,000,000 was up €6,000,000 versus last year.

Speaker 4

We continue to support strategic investments in the business. Changes in cash tax increased €5,000,000 to €30,000,000 while cash interest was up €70,000,000 to €55,000,000 As we flagged in our Q1 earnings report, we are now seeing the full impact of higher interest charges from our November 2022 refinancing in Q2. With that, let's turn to Slide 9 to review our 2023 guidance, which we are updating today. This guidance is based on foreign Change rates as of August 3, 2023. First, we are maintaining our organic revenue projections For the up mid single digits for 2023, we expect pricing will more than offset volume declines.

Speaker 4

As we approach 2024, we expect to develop a more traditional and balanced mix of price and volume with significantly less pricing and better volume driving the supply. With project cash flow, we'll be in line with our historical averages. We expect our cash conversion ratio to be in the range of 90% to 95%. We expect overall adjusted free cash flow of roughly EUR 2 €1,000,000 for the year. As Stefan mentioned earlier, given the increased visibility on our business and our return to share repurchase, We are raising our 2023 adjusted EPS guidance last updated in Q1 reporting.

Speaker 4

We now expect adjusted EPS in the range of €1.54 to €1.57 per share for $1.68 to $1.72 per share at current U. S. Dollar spot rates. This excludes any additional impact of potential future capital allocation. I will now turn the session over to Q and A.

Speaker 4

Operator, back to you.

Operator

Thank you. We will now begin the question and answer session. At this time, The first question comes with John Baumgartner with Mizuho. Please go ahead.

Speaker 4

Thanks for the question.

Speaker 6

Maybe first off, Stephane, wondering if you can speak a bit more The A and P increase you have lined up for the back half, aside from the pure increase in spending amount, is there anything else that you're addressing differently this year? Is it More Captain sort of communications, refreshing the Captain campaign,

Speaker 1

are you trying

Speaker 6

to convert more consumers to fresh to frozen from fresh? How are you thinking about the actual, I guess, sort of messaging in the back half?

Speaker 3

Thank you, John. Yes, it's an excellent question. The first thing is Timing, by the way. Starting with the timing, Q3, it's really something like a preparation of back to school. So it's really going to start, let's say, in less than a week actually to have the maximum impact.

Speaker 3

So That's the first piece, independently from where we're going to go. The second piece is more than never, we're going first to the Muslim battles In countries like the UK, Italy, where we have the highest rate of return on investment. Then qualitatively speaking, it's really to your point, I think it's, for example, Kaptan, which is an iconic figure for us, It's going to be obviously a hero for us, especially in countries like Italy with Captain Findus or in the UK with Captain Versailles. Then obviously, we're also going to be more aggressive in terms of claims, in terms of value and quality security, which is already So that's going to be the, let's say, the global pattern for 2023 and also more to come obviously for 2024. But key messages, big increase.

Speaker 3

2nd, it's really going to start in something like a week to have maximum impact and then Muslim battles and then the best return on investments.

Speaker 6

Okay. Thanks for that. And just a follow-up, coming back to innovation and the innovation pipeline. Prior to the Inflationary environment we have now, you had some pretty good momentum, increasing emphasis on frozen meals, sort of that premium single serve space, the veggie meals and so on. Given the environment now and your enhanced focus on that sort of opening price point consumer, how are you assessing the opportunities in premium, single serve from here?

Speaker 6

Does that remain as attractive going forward? How do we think about sort of that mix and margin accretion from innovation?

Speaker 3

Well, the thing is, To your point, I think we have a good momentum. That's the first piece. You also remember that last year, we were facing this question about Supply chain in fish, and we've really taken the opportunity to do 2 things at the same time, which is really to, Let's say step up the innovation in fish, but also go with something which is farm fish with BaZa, High level, high quality in the farmed fish coming from Asia, which is doing 2 things. 1st is, We're obviously stepping up innovation in fish. And second, we are diversifying away from, let's say, a white fish only.

Speaker 3

So that's a big 2nd piece is we're also taking a more, let's say, Opportunistic approach compared to the past. You may remember when we acquired the business in with Goodfella As we said, well, it's mostly UK and Ireland. Well, because basically, it's going to focus On our mantra, which is Muslim battles. And but when we see that there is a dislocation of a category like pizza In France, for example, we believe that we can play a role and that's what we've been starting to do even last year, Exclusivity with Carrefour and then really starting to develop in all the other retailers And this was with pizza, with basically with Goodfella. So because for us, basically, Innovation is also the ability to move.

Speaker 3

We have such a fantastic

Speaker 5

number of SKUs,

Speaker 3

the richness of our portfolio is amazing. What we can do then is obviously to move from one country to another. So you don't need to just listing and then moving to another country. That's the kind of things we are doing right now. It's Pizza by the way.

Speaker 3

In terms of affordability, it's a great example of kind of how can we be more affordable during price crisis environment in crisis environment. So that's the kind of things we're doing. But obviously, more to come in the coming weeks months because yes, we our portfolio is moving well and innovation It's really the key piece for the future for our future algorithm as well.

Speaker 4

Okay.

Speaker 6

Thanks, Stefan.

Speaker 3

You're welcome.

Operator

The next question comes with Peter Saleh with BTIG. Please go ahead.

Speaker 7

Great. Thanks. Sorry if I Missed this comment on, but just curious on the A and P investment, it sounds like that is pushed out a little bit further than I anticipated. I thought it was going to start a little bit earlier. Can you guys comment on that?

Speaker 7

And has the amount of investment Change your thinking there? Thank you.

Speaker 5

No, the amount of investment, happy there. The amount of investment has absolutely not We remain committed to substantially R and P in the year. What we've done is simply preparing our campaigns In sync with the in store activity and the intervention we would do on some of the activity relating to the Mushroom Battle, we are clearly focusing on. So For us, there is an intent to up the game. We clearly want to regain the share momentum.

Speaker 5

We have a great momentum going on right now. And so with the incremental A and P that is about to come, let's say, in the second half of Q3 moving forward in Q4, which is going to be substantial, Together with intervention in store and at some category level, we truly expect that there will be a sequential improvement of our share pattern as we move forward.

Speaker 7

Great. And can I just ask on green cuisine and plant based meat? What are you seeing these days in this category? Are you seeing any improvement? Or is it kind of more of the same on just kind of lackluster Growth in this category.

Speaker 7

Thank you.

Speaker 3

Well, what we see is more stabilization of the sales Across the board, we are off all market share where we are present is slightly increasing with U. K. Decreasing a bit and Germany increasing quite, quite, quite substantially. And while we always believe The green cuisine is in plant protein remains a great category. We never dreamed of the kind of somewhat expectations in the past, We still believe that there's something that is going to stay after a while.

Speaker 3

The difference also for us is we're not limiting ourselves to Meat, we have chicken, we have fish, we have vegetable, and that makes us in terms of plant protein, I'm talking about plant based protein. It's that makes us very different from some other players in the category. So overall for us, it's more stable than anything else, But we still keep investing in the category. We believe in investing in this category. And at some stage, it's going to come back and we will be present.

Speaker 7

Thank you very much.

Operator

The next question comes with Jeong Tawang Tseng with CGS Securities. Please go ahead.

Speaker 2

Hi, good morning. Thank you for taking my questions. I don't know if you mentioned this in your prepared remarks, but did you talk about your pricing differential versus the private labels and how that's evolving in Q2 and how you expect it to trend over the next couple of quarters or so?

Speaker 3

No, I don't think we have As such, we responded to that question, but let me come with the fact. You may remember that we were talking about 10% pricing difference I mean, in terms of price difference compared to pre, let's say, inflation, just let me be And then last time we mentioned it was more in the region of 7%. The latest that we see right now is more in the region of 5%. But again, it's a bit volatile as things are moving. We believe that it may change again because as you know, what we want to do in H2 is not only A substantial increase in terms of A and P, but also starting in September, Some very surgical promotion where needed.

Speaker 3

And I think that part will also help us to reduce the gap. That's together obviously with something that we see coming, which is a mild pricing environment

Speaker 4

for the future. Got it.

Speaker 2

Thank you very much. So the improvement so far in that gap or the closing of the gap so far has been from Private label is increasing price, but as you go forward, you may be targeting some pricing action of your own to get that gap closer. Is that fair to say?

Speaker 5

That's fair. And I think just to be super clear, it's closing the gap. I just want to make sure that there's no concern. It's again reducing a gap that has widened. There has always been a gap.

Speaker 5

And there was a gap which we've been operating and clearly growing share with that gap together with the rest of But that gap has increased. And now the good news is, I think that gap is starting to narrow down. And to Stefan's point on that one, it's exactly in your interpretation is correct.

Speaker 2

Got it. And then second, you've mentioned the last year was an exceptional year for you, especially in the Adriatic due to heat waves. We're seeing that again obviously this year, maybe even more severe. Are you seeing similar performance in those regions or are there differences this year given specifics and underlying geographies and inventories and how you've changed the businesses over the years?

Speaker 3

Well, we're still very pleased, more than ever pleased by this acquisition and the performance. That's the headline. To your point, I mean, you remember well, last year, we were a bit caught by surprise in terms of inventory building, and we missed some sales Despite, obviously, I mean, obviously, a great season and we've learned a lesson. So we already started last year in Q4 to build inventory Service level at this stage is 99.5%. So that's not bad, obviously, that way.

Speaker 3

And the team is doing a fantastic job. So Q1, Q2 was a bit let's say Q1 was a bit lower, The weather was not great and the weather was not great until something like, let's say, mid June. Since then, you know, weather, obviously, Which came at the right time. Let's say the temperature has increased substantially and what we see The countries are doing really, I mean, a great job operationally, sales wise. So we're expecting another very, very good year.

Speaker 2

Great. Thanks, guys.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Stefan Didier Schimaker for any closing remarks. Please go ahead.

Speaker 3

Thank you for your participation on today's call. After a challenging 2022, We have delivered strong organic sales growth and protected our margins in the first half of the year. We continue to provide excellent service to our retailers and we have a compelling innovations pipeline for the second half of the year. As we deploy new A and P into the market, we expect our volume and market share performance to improve sequentially. Frozen food remains a great value for our customers and consumers, and we are proud category leaders.

Speaker 3

We are on track to deliver ambitious financial objectives for 2023 and beyond. Thank you all. Operator, back to

Speaker 4

you. Thank you, sir.

Operator

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Have a great day ahead.

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Key Takeaways

  • Nomad delivered its 5th consecutive quarter of accelerating organic sales and raised its 2023 adjusted EPS guidance to €1.54–€1.57 per share (€1.68–$1.72 at current FX rates).
  • Supply chain efficiencies, including fish-supply derisking and raw material hedging, are funding growth initiatives, while debt maturities have been extended to 2028–2029.
  • Back-to-school A&P spend will increase by over 20% starting mid-August to rebuild volume and market share, with expectations for sequential share improvement and a return to volume growth in 2024.
  • In Q2, revenues rose 6.9% to €745 million (organic +8.6%), adjusted EBITDA grew 4.5% to €132 million, gross margin remained stable at 28.2%, and adjusted EPS was flat at €0.40 (US$0.44).
  • Strong cash flow and balance sheet metrics: H1 adjusted free cash flow of €86 million (58% conversion), Q2 share buyback of €53 million, and full-year free cash flow expected at ~€250 million with a 90–95% conversion ratio.
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