Nomad Foods Ltd (NOMD) 2023 Q2 法說會逐字稿

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.

Hello, and welcome to the Nomad Foods Second Quarter 2023 Earnings Call. I'm Anthony Bucalo, Head of Investor Relations and I'm joined on the call by Stefan Descheemaeker, our CEO; and Samy Zekhout, 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 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 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 2022 and 2023. All adjusted figures have been adjusted for exceptional items, acquisition-related costs, share-based payments and related expenses as well as noncash FX gains or losses. Unless otherwise noted, comments from here on will refer to those adjusted numbers.

With that, I will hand you over to Stefan.

Thank you, Tony, and thank you for joining us on the call today. Nomad had another strong performance in the second quarter as our sales momentum from the first quarter carried over into the second. This was our fifth 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 earlier this year.

Today, we're raising our 2023 EPS guidance, boosted by our solid first half operation performance and second quarter share buyback. Nomad has navigated many challenges over the course of our history and each time we've come out as a strong organization. We adjusted nimbly to Brexit in the COVID-19 pandemic. And last year, the outbreak of the Ukraine war led to raw material supply challenges.

We work closely with our retailers to adjust our pricing to recover inflationary costs. It 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, adopting our fish supply to include new species and geographies while adding new sources of high-quality farm fish. Our new farm fish products have become a cornerstone of our innovation platform this year with our exciting Basa launch is 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 2028 and 2029, further strengthening our balance sheet and providing us more long-term flexibility.

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&P investments to rebuild volume and market share momentum. We're pleased to share that we have accomplished our first 2 goals in the first half of this year. Our supply chain savings program is now in full swing, helping fund top line growth. Additionally, we've taken great strides in developing our revenue growth management capabilities helping drive positive mix and managed costs.

We're now laser focused on the execution of the third leg of our strategy, our new A&P investments program. Our A&P will increase significantly in Q3 versus the same time last year. Additionally, we will return to a more normalized annual rate of A&P this year consistent with our history. This rollout will be aligned with the back-to-school schedule starting in mid-August and building momentum into September.

This increased A&P 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. In addition to our A&P investment, we're also normalizing on compensation levels to ensure that we properly reward our great people. Nomad 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&P investment 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 second quarter key financial metrics, beginning with revenues. Quarterly revenues grew 6.9%, 8.6% organic with high-teens pricing offsetting a high single-digit volume and mix declines.

Gross margin was flat at 28.2%, held by our pricing initiatives and cost control programs. Adjusted EBITDA grew 4.5% to EUR 132 million, while adjusted EPS came in at EUR 0.40 per share, flat versus last year due primarily to rising interest costs. Our current dollar spot rate of Q2 adjusted EPS was USD 0.44 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 imported raw material prices are moderating, but we have yet to see real deflation. Our supply chain continues to deliver excellent results, and we're in a virtual cycle of customer service and cost management that should support our second half A&P push.

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 higher service levels will be key in our push to regain momentum in the second half of the year. Additionally, our procurement remains disciplined, and we have covered for more than 90% of raw materials for the year. We've learned a great deal from the raw material inflation over the past few years, and we have become much more flexible and strategic in how we acquire key inputs. We've left the percentage of our raw materials and covers to take advantage of some favorable price trend developing in the market. We just started the process of covering for 2024. We lost about 1% value share this quarter, consistent with our expectations and due primarily to our pricing strategy.

We expect our new A&P strategy for the year to address this challenge. With increased media and more intensive promotional activity, we expect an 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're raising our 2023 adjusted EPS guidance to EUR 1.54 to EUR 1.57 per share from our previous EUR 1.52 to EUR 1.55 per share. This represents an adjusted EPS range of $1.68 to $1.72 per share at current dollar spot rates. This guidance excludes the impact of any potential future capital allocation. The post-pandemic pressures and macro environment over 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&P investments. A great example of how we're successfully levering the power of our brands across markets is Goodfella's Pizza in Continental Europe. Last year, we successfully rolled our distribution outside of Goodfella's traditional strongholds of Ireland in U.K., specifically in France and Spain. We launched Goodfella's in France in October last year with exclusive distribution in Carrefour until the end of 2022. That exclusivity is gone, and we're now extending our distribution to all the large food retailers in France and expect to reach half of total distribution points. We're 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 and our supply chain is meeting the challenges of high seasonal demand. We had a good summer last year due to hot weather and the end of COVID travel bans. We're also benefiting from new media and product innovation. This year, we're even better prepared to meet high seasonal demand. We've been stocked through Q2, ensuring we have inventory to cover peaks this season, and that is now pulling through to consumers. Our service levels in the region remains in the high 90s. Building our revenue growth management capability 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're 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're boosting A&P spend by more than 20% year-on-year with the bulk of that coming in the back half. We expect A&P in aggregate to reach roughly 4% of sales by year-end, a significantly higher level when compared to 2022, which was closer to 3% of sales. This combination of promotion and advertising is being helped by a milder inflation environment, putting less pressure on margins. As the new media reaches the consumer and our price gaps with competition narrow, we're already seeing great green shoots of improvement in both volume and market share, especially in many of our must-win battles.

In the Q2 Nielsen period in markets where we compete, we saw frozen food volumes at flat. Finally, backed by good cash flow performance, we repurchased shares for the first time since the first quarter of last year. We bought nearly EUR 53 million worth of shares this quarter, roughly 3.3 million shares in total. We have been and will remain opportunistic on shares repurchase. We continue to be optimistic about our second half outlook and beyond.

First, the frozen food category across our market is in good shape, outperforming the overall food category. Frozen food sales are up double digits year-to-date and category volumes have turned positive in more than half of our markets, improving sequentially in most others. Second, we kept up our strong consumer messaging in the second quarter, emphasizing our broad-based severity through revamped advertising campaigns across the majority of our must-win battles. This includes UK Peas, Italy fish and Belgian Spinach.

In the Adriatic region, our summer sales have been boosted by our innovation with the new Pistachio King brand and the new campaign for Macho ice cream. Green Cuisine remains a great source of innovation plant protein, and we won 2 awards this quarter in Germany for new projects in media. With initiatives like this in place, we're seeing our value share trend flatten or improve in half of our market. We expect this to pick up in the back half.

With that, I will now hand the call over to Samy to review our financial results and guidance in more detail. Samy?

Thank you, Stefan, and thank you all for your participation on the call today. Turning to Slide 7. I will provide more detail on our key second quarter operating metrics, beginning with reported revenues, which increased 6.9% to EUR 745 million, up 8.6% organically with pricing offsetting volume losses as Stefan discussed earlier.

Second 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. This margin performance reflected a higher pricing, strong RGM 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 increases, cost discipline and RGM execution.

Moving to the rest of the P&L. Our gross profit grew 7% to EUR 210 million in the second quarter with a stable margin. Cost of goods sold increased to EUR 535 million, an increase of 7%, up EUR 35 million versus last year. Adjusted EBITDA of EUR 132 million 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 EUR 0.40 per share was flat in Q2. This translates to $0.44 per share in U.S. dollar terms at current spot rates.

Turning to cash flow on Slide 8. Cash generation remains a top priority, and our performance equal materially from the first and the second quarter, more in line with our historical averages. 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 EUR 250 million for the year. This is crucial as we consider our capital allocation for this year and beyond. In the first half, we generated EUR 86 million 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 2022. As was expected that some unfavorable working capital saving from Q1 reversed to our benefit in Q2.

As a result, working capital decreased EUR 57 million to EUR 68 million in the first half. CapEx of EUR 40 million was up EUR 6 million versus last year. We continue to support strategic investments in the business. Changes in cash tax increased EUR 5 billion to EUR 30 million, while cash interest was up EUR 70 million to EUR 55 million. As we flagged in our Q1 earnings report, we're 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 exchange rates as of August 3, 2023. First, we're maintaining our organic revenue projection for the first mid-single digits for 2023. We expect pricing will more than offset volume declines. As we approach 2024, we expect to develop a more traditional and balanced mix of price and volume with significantly less pricing and better volumes driving the topline. With project cash flow will 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 250 million for the year.

As Stefan mentioned earlier, given the increased visibility on our business and our return to share repurchase, we're raising our 2023 adjusted EPS guidance last updated in Q1 report. We now expect adjusted EPS in the range of EUR 1.64 to EUR 1.57 per share or $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&A. Operator, back to you.

(Operator Instructions) The first question comes with John Baumgartner with Mizuho. Please go ahead.

Maybe first off, Stefan, wondering if you can speak a bit more to the A&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? Are you trying 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?

John. Yes, It's is 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. So that's the first piece independently from where we're going to go.

The second piece is more than ever. We're going first to the must-win battles, in countries like the U.K., Italy, where we have the highest rate of return on investments. Then qualitatively speaking, it's really to your point, I think it's, for example, Captain, which is an iconic figure for us, is going to be obviously a hero for us, especially in countries like Italy with Captain Fingers or in the U.K. with Captain Birdseye.

And then obviously, we're also going to be more aggressive in terms of claims, in terms of value and quality, superiority, which is already something we start -- we're doing right now. 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; second, it's really going to start in something like a week to have maximum impact and then must-win battles and then the best return on investments.

Okay. And just a follow-up. Coming back to innovation in 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 steak, the veggie meals and so on. Given the environment now and your -- I guess enhanced focus on that sort of opening price point consumer, how are you assessing the opportunities in premium single-serve from here? Does that remain as attractive going forward? How do we think about sort of that mix and margin accretion from innovation?

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 farmed fish with Basa, high-level, high-quality in a farmed fish coming from Asia, which is doing 2 things.

First is we're obviously splitting up innovation in fish; and second, we're diversifying away from, let's say, a quarter earlier white fish only. So that's a big piece for us this year. Second 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 the -- with Goodfella's, that we said, well, it's mostly U.K. and Ireland. Well, because basically, it's going to focus on our mantra, which is must-win 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 basically with Goodfella's.

So because for us, basically, innovation is also the ability to move. We have such a fantastic number of SKUs, 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. And that's the kind of things we're doing right now. In pizza, by the way, in terms of affordability, is a great example of kind of how can we be more affordable during price crisis environment.

So that's the kind of things we're doing, but obviously more to come in the coming weeks and months because, yes, we're all -- opportunity is moving well and innovation is really the key piece for the future algorithm as well.

The next question comes with Peter Saleh with BTIG.

Great. Sorry if I missed this comment on, but just curious on the A&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? And has the amount of investment changed your thinking there?

No, the amount of investment -- Peter, the amount of investment has absolutely not changed. We remain committed to what substantially our A&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 must-win battle we're clearly focusing on.

So for us, there is an intent to up the game. We clearly want to regain the share momentum. We have a great momentum going on right now. And so with the incremental A&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, which we expect that there would be a sequential improvement of our share pattern as we move forward.

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?

Well, what we see is more a stabilization of the sales across the board. We're -- our market share where we're present is slightly increasing with U.K. decreasing a bit and Germany increasing quite substantially. And well, we always believe that Green Cuisine is, in plant protein, is remains a great category. We never dreamed of the kind of somewhat expectations in the past, but we still believe that there is something that is going to stay after a while.

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, that makes us very different from some of the 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.

(Operator Instructions) The next question comes with Jon Tanwanteng with CJS Securities.

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?

No, I don't think we have as such, we responded to that question, but let me come with the fact. You may remember Jon that we were talking about a 10% pricing difference in terms of a price difference compared to pre, let's say, inflation just let me be very specific. 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 the game because as you know, what we want to do in H2 is not only a substantial increase in terms of A&P, but also starting in September, some very surgical promotions where needed. And I think that path will also help us to reduce the gap. That together, obviously, with something that we see coming, which is a milder pricing environment for the future.

Got it. So the improvement so far in that gap or the closing of the gap so far has been from private labels 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?

That's fair. And I think Jon to be super clear, it's closing the gap. I just want to make sure that there's no confusion. It's again reducing the gap that has widened. There has always been a gap and there was a gap which we've been avoiding and clearly growing share with that gap together with the rest of our business model activation, but that gap has increased. And now the good news is that, that's gap is stating to narrow down. And to Stefan's point on that one, it's exactly and your interpretation is correct.

Got it. And then second, you've mentioned that 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 the specifics and underlying geographies and inventories and how you changed the businesses over the years?

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, so that our service level will be perfect. Our service level at this stage is 99.5%. So that's not bad. I would be that way and the team is doing a fantastic job.

So Q1, Q2 was a bit -- lets 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, weather, obviously, which came at the right time, let's say, the temperature has increased substantially. And what we see is the countries are doing really, I mean, a great job operationally sales-wise. So we're expecting another very, very good year.

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

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 innovation pipeline for the second half of the year.

As we deploy new A&P to 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're proud category leaders. We're on track to deliver our ambitious financial objectives for 2023 and beyond. Thank you all.

Operator, back to you.

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