Nomad Foods Ltd (NOMD) 2017 Q3 法說會逐字稿

Good day, and welcome to the Nomad Foods Third Quarter 2017 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Taposh Bari, Head of Investor Relations. Please go ahead.

Thank you, operator, and thank you all for joining us to review our third quarter 2017 earnings results. With me on the call today are Stéfan Descheemaeker, our CEO; as well as Jason Ashton, our interim CFO.

Before we begin, I would like to draw your attention to the disclaimer on Slide 2 of our presentation. This conference call may make forward-looking statements that are based on our view of the company's prospects at this time. Actual results may differ due to risks and uncertainties, which are discussed in our press release, our filings with the SEC as well as this slide in our investor presentation, which does include cautionary language.

We will also discuss non-IFRS financial measures during the call today. 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 as well as in the appendices at the end of this slide presentation that is available on our website.

Finally, please note that certain financial information within this presentation does represent adjusted figures for both 2016 and 2017. All adjusted figures have been adjusted for exceptional items, restructuring and transaction-related items. And all comments from here on will refer to those adjusted numbers.

And with that, I will hand you over to Stéfan.

Thank you, Taposh, and thank you, everyone, for joining us on the call today.

We delivered strong third quarter results, highlighted by 5.9% organic revenue growth and 120 basis points of gross margin expansion, which resulted in our adjusted EBITDA of EUR 79 million and adjusted EPS of EUR 0.24 per share.

Based on our year-to-date performance, we are raising our full year guidance and now expect 2017 adjusted EBITDA of approximately EUR 325 million to EUR 327 million.

Q3 represents a third consecutive quarter of positive organic revenue growth and market share expansion for Nomad Foods. These results are a testament to our strategic focus on growing the core of our iconic brands and relentless execution by the entire organization.

Turning to the quarter -- to the third quarter highlights. First, we generated another quarter of strong organic revenue growth; second, we continued to expand our gross margins; and third, we once again deployed capital in an accretive manner. I'd like to spend a few minutes on each of these points, beginning with revenues.

Third quarter organic revenue growth of 5.9% based upon the 2.2% growth that we realized during the first half of the year. Once again, our top line growth was driven by the combination of market share gains and category growth.

In Q3, we gained nearly 1 full percentage point of market share against mid-single-digit category growth, resulting in 9% sellout growth for branded business.

Q3 results reflect another quarter of solid execution, along with category growth that was above average. To put these numbers in context, on a trailing 12-month basis, our category has grown approximately 2% versus our brand sellout growth of 4%.

Organic growth continues to be driven by our goal, which many of you know as Must Win Battles. This part of our portfolio grew 10% in the quarter. Equally important, we continue to see sequential improving sales trends outside [of our goal].

We experienced strong breadth of growth at the country level, with 10 of our 13 core countries, including the U.K., realizing organic revenue growth during the third quarter.

It is very encouraging to see our strategy yielding results across most of the markets where we operate.

Sweden, which declined 1% in the quarter, has yet to achieve growth in the country level, due to the loss of low-margin industrial and private label sales from the factory closure early this year. Nevertheless, we remain optimistic about the long-term growth prospect in Sweden, due to its attractive frozen food category attributes and our 30% market share in the country, which ranks as the second highest of any country in which we operate.

Third quarter gross margin expanded to 120 basis points due to a combination of: one, favorable mix as a more profitable core portfolio outperformed in our highest-margin geographies; two, commercial margin improvement from net revenue management efforts such as promo efficiency and pricing actions; three, we continued to see successful implementation of price increases in the U.K. against foreign exchange driven inflation.

We continue to view gross margin expansion as a key driver of long-term value and are pleased with the progress we are making to date.

Finally, we had another active quarter of capital deployment, with the repurchase of approximately 7.1 million shares as part of Pershing Square's sales in September.

While this marked the second time this year where we have been opportunistic buyers of our stock, I would reiterate that our willingness to pursue M&A is unchanged and remains a high priority of cash use.

2017 has been a good year for our company, and I remain encouraged by the prospects for our business into 2018 and beyond.

As the global packaged food landscape continues to evolve, we're fortunate to be operating from a position of strength, with healthy category growth and solid execution working in our favor. Our category, savoury frozen foods, aligns well with changing consumer preferences and continue to grow across Western Europe. Our iconic portfolio of frozen food brands has #1 or #2 market share position across 85% of our core markets.

Organizationally, we are optimizing the right balance between global and local as we benefit from the financial resources, scale and operational capabilities of a world-class FMCG company, while recognizing that food is local, that regional market expertise activation is, in fact, a competitive advantage.

And finally, and most importantly, we're just hitting our stride. As a brand category leader, we have a critical role as category captain in ensuring, as we not only sustain but build upon the growth of the frozen food category. We understand that these are growth initiatives that will take time to translate into results, reflecting our long-term commitment to the frozen category. To that end, we will look to build upon our growth through adjacent innovation along consumer trends like health and wellness and convenience.

In summary, we're proud of the work that we have accomplished thus far in 2017, but continue to strive for more.

With that, I will hand the call to Jason to review our third quarter results in more detail, along with an update on our full year guidance.

Thank you, Stéfan, and thank you all for joining us on the call today.

Third quarter reported revenue increased 4.4%, with organic revenue growth of 5.9%. Organic revenue growth was driven by volume and mix growth of 4.1% and pricing growth of 1.8%. Reported revenue growth was offset by approximately 150 basis points of FX translation.

Slide 4 illustrates the quarterly progression of our organic revenue growth, with an overlay of our core portfolio or Must Win Battles since 2016. We have good momentum in our business and believe 2017 sets the foundation to sustained growth in the years to come.

On Slide 5, we show organic revenue trends across our 3 largest markets: U.K., Italy and Germany, as well as the remaining countries in our portfolio. Each of these groups experienced growth in Q3.

As Stéfan mentioned, the U.K. represents one of the more notable improvements in Q3, with revenues inflecting to positive 2.5% growth. Performance in the U.K. was driven by continued success in fish fingers and coated fish as well as the activation of Must Win Battles across our poultry line earlier this year.

Turning to Slide 6. Gross margins expanded 100 -- 120 basis points to 30.3%, with mix, price and promotions as contributing factors. Mix was driven by category and geographic performance. We also continued to make good progress on net revenue management, which is resulting in better price and promotions, net of cost inflation.

On Slide 7, I will review our operating performance during the third quarter. I will skip revenue and gross profit commentary, which I just discussed in detail. Operating expenses were up 27% year-over-year, driven by more normalized indirect expenses.

The EUR 71 million of operating expenses we realized in Q3 was slightly better than our expectation of approximately EUR 75 million, due to phasing of some expenses into Q4.

Within operating expenses, A&P increased 3% and indirects increased 43% year-on-year. As we have previously outlined, this year's Q3 indirects reflects a bonus accrual versus last year's Q3 results, which included a reversal of the bonus accrual in the first 9 months of 2016.

Resulting adjusted EBITDA was EUR 79 million, representing 17% of revenues. Adjusted EBITDA declined 8% year-over-year, reflecting the aforementioned factors. Depreciation and amortization of EUR 11 million declined to last year due to the closure of our factory in Sweden earlier this year.

Adjusted net financing costs were EUR 13 million, down 30% year-on-year, reflecting the improved cost of capital following the successful refinancing of our debt in early May. The effective tax rate was 23%, in line with previous quarters.

Leading to adjusted EPS of EUR 0.24 for the quarter, which grew 9%. This was due to 2% growth in adjusted profit and a 6% year-on-year reduction in our weighted average share count. The Q3 share count fully reflects our June 2017 repurchase, but only partially reflects our September 2017 repurchase.

Turning to cash flow on Slide 8. For the first 9 months of the year, the key drivers in the operating cash flow performance, aside from the EBITDA movement are: working capital, as we had expected, showed an outflow of EUR 25 million in the period, primarily due to the intake of the annual agricultural harvests; pensions and other provision movements provided a net inflow of EUR 2 million; adjusted CapEx, which excludes nonrecurring Findus integration costs of EUR 3 million, increased by EUR 10 million year-over-year, driven by the transfer of production in Bjuv, Sweden, to other factories.

Adjusted cash tax paid was EUR 5 million higher than prior year, owing to a change in the phasing of payments. This excludes EUR 19 million of taxes paid related to the previously discussed settlement of onetime legacy tax issues. Restructuring and nonrecurring cash flows of EUR 71 million were largely driven by severance costs, associated with the closure of production facilities in Sweden and a further integration of the Findus Group, where we are rolling out the Nomad ERP system.

Adjusted cash interest paid decreased EUR 12 million compared to 2016, driven by savings from our debt refinance in May. This delta excludes onetime refinancing fees of EUR 14 million.

We are pleased with adjusted free cash flow delivery of EUR 149 million and operating cash flow conversion of 80% through the first 9 months of the year, and remain on track to deliver adjusted free cash flow in excess of EUR 200 million for the year.

Turning to Slide 9, on our updated thoughts on 2017 guidance. Based on our year-to-date results and visibility into the remainder of the year, we are raising our 2017 guidance. We now expect 2017 adjusted EBITDA of EUR 325 million to EUR 327 million versus the prior range of EUR 320 million to EUR 325 million.

Our updated EBITDA guidance represents high single-digit growth versus 2016, when excluding 3 offsetting factors this year, notably currency translation, an extra trading day in last year's base and this year's reinstatement of bonuses.

Full year guidance assumes that organic revenue growth will grow approximately 3% in 2017 versus prior guidance of growth in the low single-digits percentage range. We continue to expect free cash flow to be at least EUR 200 million for the year.

I'd like to provide you with a few more thoughts around full year 2017 guidance, which is based on foreign exchange rates as of November 27, 2017.

For both the full year and the fourth quarter, we now expect organic revenue growth of approximately 3%. Full year reported revenue is expected to include a 220-basis-point offset related to currency translation and the anniversary of a leap year comparison, with the FX translation impact to Q4 being approximately 30 basis points.

Gross margin rate is expected to be ahead of 2016, with Q4 showing the greatest year-on-year improvement.

A&P investments are expected to be comparable to last year. We expect underlying indirect expenses to decline versus 2016, but this will be more than offset by the reinstatement of bonuses.

On cash flow, we continue to expect to generate adjusted free cash flow of at least EUR 200 million. We expect this figure to be offset by EUR 105 million of restructuring and nonrecurring cash charges. Also included is a settlement of legacy tax issues, which we continue to anticipate will be in the EUR 30 million to EUR 40 million range.

That concludes our remarks. I will turn the session over to Q&A. Thank you. Operator, back to you.

(Operator Instructions) Our first question comes from Brian Holland with Consumer Edge Research.

Starting with the guidance, obviously, not a full flow-through of the Q3 beat. I just want to break that apart that a little bit, and make sure I understand. Did any of the strength in Q3 steal -- whether that's shipments or anything like that, sort of more discrete that might have stolen from Q4? I mean did your Q4 -- does your Q4 internal outlook change at all based on anything we saw in Q3? Or are we just kind of staying, I guess, relatively conservative? How would you sort of view that?

So I think the only flow-through to Q4 was through operating expenses. So operating expenses were lower in Q3 due to the timing, and they will unwind in Q4. So that leaves the upside in Q3 coming from better sales and gross margins, which is reflected in the updated guidance.

Okay, got it. And then, obviously, not expecting it would appear by the guidance a similar sort of magnitude of organic sales growth. I presume that, that's primarily driven by lapping Germany, et cetera. Can you just sort of talk about the particular strength in Q3, and why maybe expectations should be -- like why we wouldn't expect that to continue going forward?

Yes, I think it's a very good question, Brian. It's very simple. We're gaining market share and we're going to continue to gain market share, to make it simple. At the same time, and it's very good news, the industry is really doing well. Q3 was a bit probably on the high side with 4%, which is probably lower than the average, which is more in the region of 2%. And to your point, we're starting to anniversary some more, let's say, less easy comps in Germany. I think the combination of these 3 things has -- makes it -- yes, we're very pleased with what we're doing. Very pleased with the Q3 and the beginning of Q4, but obviously, at the same time, yes, it's -- the industry is going to already come to a more "normal level."

Okay. And last one for me -- I'll pass it on -- is, you said Q3, I believe, you said the composite categories that you compete in were up 2%. You can correct me if I had those numbers wrong. But can you give us the composition of that growth? How much of that is pricing versus volume? And maybe just a little background there, what's driving the category? Is it excitement around stuff that you and maybe others are doing? Is it just price-driven? Just how we think about that in the sustainability of growth, particularly in the frozen door going forward, as folks have generally understood that to be a category that's been under pressure for some time in your markets?

Actually, Brian, for Q3, it's 4% as opposed to 2%. It's a combination -- in all categories. And it's a combination of 3% price and 1% volume, where, let's say, the [MAP] at this stage was volume flat, and price up 2%. So that is the one thing. The second thing is, yes, indeed, why -- I mean, do we -- I mean, is it growing? I think, again, playing the category is -- I mean, playing the category leader is obviously -- has an impact. When we have some very leading market position in some categories, like fish fingers, for example, in Germany. And then we're growing big time, it has an impact on the industry. So it's a virtuous circle. But these are the MAP at this stage.

Our next question comes from Bill Chappell with SunTrust.

Can you talk a little bit more just -- not just your top line growth in the quarter, but for the whole category? Trying to understand how much of that was volume versus price? And then also kind of what you think of as we look to next year on pricing. Now, I imagine most of the commodity inputs were in, at least, for the first half. Are we going to have another round of pricing? Or would that actually be a headwind for price?

If you're looking at the 2018, obviously, it's -- I'm not going to go to any guidance, [in any of those things], but it's very simple. It's overall, it's as -- most of the FMCG, there is some a bit of inflation, but it's quite reasonable more in some countries than in others. But overall, it's still very benign, so which is good. And in the meantime, and you heard us saying that we -- our ambition is also, obviously, to build the growth and to win for the growth of the whole industry. So right now, it's growing, and we don't see any reason why the industry wouldn't grow on top of this [overall] market share.

And Bill, in the third quarter, category grew 4%: 1% from volume and 3% from price; 4% being roughly double the industry growth rate over the past 12 months.

Got it. Just digging into that a little bit. I mean was that led by meals, fish fingers, vegetables? I mean was there any one driver? Or was it kind of across the board?

Quite frankly, it was really when you see -- it's really across the board. Obviously, fish finger -- I mean, let's say, fish is a big category for us, and that we've been leading, obviously, the growth. So that's definitely a big contributor to the growth. But overall, when you see the different categories where we're in, industry is growing, as ready meals, and veg and fish.

Okay. And I think probably the most impressive part of the quarter was the turnaround with the growth in the U.K. Can you give us a little more color? Do you feel like, as a retail landscape, that has settled down? And -- or are you just kind of outperforming and kind of taking back the share you had lost over the past few years?

I think what we've defined, our core business, we are starting to gain market share. It's really the result of a relentless execution, again, focused behind these things making sure that all the components of a category would be in good shape in terms of packaging, in terms of obviously trade margin, in terms of in-store execution, and in terms of quality. And that we've been doing this one-by-one-by-one. It was very sequential and well executed. And that -- and it's -- that's the reason -- that's why we're doing well.

Is the industry -- is retail going better? I think it has stabilized a bit. But still, you can see the people like there's Aldi, Lidl still making some good progress. And I don't see any reason why they wouldn't continue that way. So we -- it's the environment where we are in, which is absolutely fine by us. And we think we can grow across the board within the retail landscape.

Got it. And last one from me, Stéfan. Why haven't do you think made an acquisition this year? Just there are so many opportunities out there. They seem to be -- you now seem to be -- the core business is kind of running in the right direction. Is it the sellers are waiting for a higher price? You're focused on bigger deals? Just the right thing hasn't come up? I mean, just trying to understand why something (multiple speakers)

It's very simple. I mean, I think we're going to -- we're not going to deviate. We have a series of criteria, which is: we want to, obviously, buy market-leading brands, business with competitive advantage, strong management, cash flow and, obviously, synergies. And so that's the kind of criteria that we are applying right now and we're going to apply. If at some stage that there is something we need to announce, we will announce it.

Our next question comes from Steven Strycula with UBS.

So my question would be, just want to drill in a little bit more into the implied guidance for the fourth quarter and to understand what really drove category strength in 3Q. Specifically, you commented that the category is up 4% versus where it has been trending closer to 2%. I want to understand, is that more due to the phasing of price increases rolling through across the industry? Or is it the retreatment of private label? Is it just anniversarying against easy weather compare? Can you help us unpack that a bit and explain why you're implicitly guiding to a slowdown in 4Q versus 3Q? And then I have a follow-up.

I think it's a combination of the different points you mentioned on top of also a bit of weather. You remember that some people were complaining in the ice cream arena that Q3 was difficult for them for weather reasons, and it goes the other way around for us. But that's definitely one reason. There was a bit of pricing, indeed, and at the same time, indeed we -- and that's more specific to us. We were still -- obviously had -- we're regaining market share versus last year with campaigns, especially in countries like Germany. So that's the combination of the different elements where we think, again, we will be -- we would love to be around. But again, that's we think the market -- this will going to go back to something closer to 2%.

And Steve, regarding the guidance (multiple speakers)

Okay, that's helpful. And then as my follow-up, I wanted to understand, I think on the last call, you highlighted that in terms of cadence that the fourth quarter would really be the highest absolute gross margin rate of the year, which would imply being a fourth quarter gross margin of 31.5% or better. I just want to make sure I understand that properly. And then what is the cumulative synergy realization for the Findus, call it, by 2017 year-end? A lot of people just want to know what is incrementality for 2018?

Starting with the gross margin one...

Yes, we continue to expect significantly stronger year-over-year gross margin in Q4, as we previously guided in the last call. And that's due to the following factors: the anniversary of a full 2016 harvest and some operational supply chain issues, particularly in Sweden; the pricing realization is coming through in the U.K.; and good momentum on our net revenue management program as the year progresses, which is driving the growth margin expansion in the fourth quarter.

And back to your question of synergies, Steve, it's very simple. We remain to -- bottom line, we remain on plan to realize the synergies of EUR 43 million to EUR 48 million range by the end of next year.

Then giving a bit of color on '17, which has been a important integration year, we closed the legacy factory. We have repurposed productions throughout our production network. We commenced all ERP implementation. And also, very importantly, we implemented net revenue management across the network, especially in the Findus countries, which quite frankly, I mean, we're not very advanced from that standpoint, which has been very good for us.

So over the last 2 years -- so at this junction, we -- everything is very much integrated. So we've been very -- we're working very hard in '17. And we have at this stage, we successfully realized some savings actually sooner than originally anticipated. So bottom line, more synergy in '17. And overall, the EUR 43 million, EUR 48 million remains, obviously, the target.

(Operator Instructions) Our next question comes from Rob Dickerson with Deutsche Bank.

This is Kanika Goyal on for Rob. My first question is that there was a resizable step-up in organic sales growth in U.K. and other countries in the quarter. Is that something that we should view as sustainable performance in the near term over the next couple of quarters? Or was there something in this quarter's results that were more onetime in nature?

Let's move that way. I think your algorithm is rather simple. We are in a growth industry, but obviously, the industry is the industry. I feel that [includes] -- I don't think you should count on something like 4%. That would be probably a little bit premature. And second is, obviously, that we are gaining market share. I think these are the 2 main factors. So growth in an industry that is growing, and we're growing ahead of the industry. And from there, obviously, you can understand what kind of -- what is sustainable. And the last piece is, in some countries are probably more advance than others. So U.K. started a bit later than countries like Germany and Italy.

Okay, great. And given your current category performance combined with your conversations with retailers, along with the 2018 innovation pipeline that you have, how do you view your top line growth potential next year?

I think from that standpoint, I will repeat what I have just said is, obviously, our objective is to gain market share in the growth -- in the category that is growing, and obviously more to come during our Q4 announcement.

Our next question comes from Jon Tanwanteng with CJS Securities.

Just to add to the prior M&A question. Can you give us a bit more color on the pipeline? Do you see more or less opportunity or competition versus 3 to 6 months ago? And has anything changed in the landscape in terms of valuations and your ability to find or integrate an attractive asset?

Let's say, 6 months ago or 1 year ago, I don't think we were looking actively at M&A. I think it would have been a big mistake, by the way. So we were looking right under -- the first priority was to make sure that the fundamentals would be restored. So at this stage, we're looking at a few things. So we'll update you when we have something to announce. And obviously, believe me, we will stay true to our criteria.

Okay, great. Jason, you mentioned roughly EUR 4 million of pushed out expenses into Q4, any color on that? And what was pushed out, and why?

Not much color. I mean, there was a small amount of phasing on A&P and both indirects, but nothing too specific.

Okay, great. And finally, maybe it's a bit early, but do you have any preliminary thoughts on the nonrecurring items other than legacy tax issues that may impact your cash flow for 2018?

There will be some nonrecurring payments into 2018. We're still implementing ERP across some of the remaining legacy Findus markets. And we have some continuous improvement projects running through the business, but one would expect to be a sizable reduction in this year's nonrecurring cash payments.

So Jon, stay tuned. We'll give guidance on our fourth quarter call in March. But as Jason pointed out, we do expect the total cumulative nonrecurring number to come down very meaningfully in 2018 versus 2017.

Okay, great. And just to be clear, are there any other legacy tax issues we should be concerned about?

No.

And it appears there are no additional questions at this time.

Okay. With that, thank you. As I said, our third quarter result demonstrates another quarter of progression. We have a high-quality portfolio of iconic brands with market leadership positions and operating in an attractive category. We have solid momentum into the year, and believe we are well positioned to carry momentum into 2018. And I look forward to updating you on our progress when we report fourth quarter and full year 2017 results in March. Back to you, operator.

This concludes today's conference. Thank you for your participation. You may now disconnect.