Q4 2020 Nomad Foods Ltd Earnings Call
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Good day, and welcome to Nomad Foods fourth quarter, 'twenty and 'twenty earnings Conference call.
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Brief question and answer session will follow the formal presentation.
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Today's conference is being recorded at this time I'd like to turn the call over to Poach Berry head of Investor Relations. Please go ahead.
Thank you for joining us to review our fourth quarter 2020 earnings results with me on the call today are Chief Executive Officer, Stefan desk maker, and Chief Financial Officer, Sam user accounts.
Before we begin I would like to draw your attention to the disclaimer on slide two of our presentation.
This conference call May make forward looking statements that are based and our view of the company's prospects expectations and intentions at this time, including consideration related to the impacts of COVID-19.
Actual results may differ due to risks and uncertainties are discussed in our press release, our filings with the SEC and this slide and our Investor presentation, which includes cautionary language.
We will also discuss non <unk> financial measures during the call today does not <unk> financial measures should not be considered a replacement for and should be read together with <unk> results users can find the <unk> to non <unk> reconciliations within our earnings release and in the appendices at the end of the slide.
<unk> available on our website.
Please note that certain financial information within this presentation represents adjusted figures for 2019 and 2020, all adjusted figures have been adjusted for exceptional items acquisition related share based payment and related expenses as well as noncash foreign exchange gains or losses, and all comments from hereon will refer to those adjusted numbers.
And with that I will hand, the call over to Stephane.
Thank you. It's a portion thank you all for your participation on the call today.
I Hope you and your loved ones continue to stay safe during these unprecedented times.
It has been nearly 40 years and so our lives change following the onset of the COVID-19 pandemic.
And Nomad, Oh, and sorry organization that has risen to the challenge of supply and in Europe with the iconic brands.
While ensuring the health and safety of our employees.
As you May have seen we reported our fourth quarter and full year 'twenty and 'twenty result, this morning.
Consistent with our announcement at Cagny last week, we ended the day on the very strong note with Q4 results and ahead of our prior expectations across all key metrics.
The headlines for the fourth quarter organic revenue growth of nine four and 5%.
And by and eight 6% increase and volume and mix.
And the 0.9% increase and price.
We achieved 160 basis points of gross margin expansion to 31, 5%.
Marking our strongest quarterly gross margin rates and over two years.
Adjusted EBITDA of 119 million Euro and that's just the EPS growth of 19% to 38 euro cents per share.
Do you see the financial highlights for the full year 'twenty 'twenty.
For illustrative purposes, we're showing these figures in both euros and U S dollars the currency in which all stock trades overall and incredible yield performance as we completed the fourth consecutive year of organic revenue.
The EBITDA and adjusted EPS growth.
Turning now to the highlights of the quarter and the year as I mentioned organic revenues grew nine 5% to four.
And head of our recently updated guidance of high single digit growth.
We were pleased to end the year on a strong note as demand for frozen foods began to accelerate and late October net.
If momentum build throughout the quarter and the husky carried over into 2021.
We continue to see broad based strength across our portfolio with fish fingers coated fish poultry and plant protein amongst the strongest performing sub categories.
We manage the business by focusing on both long and short term priorities towards 'twenty 'twenty.
A great example is our strategic decision to look at 10 billion euros of investments behind Green cuisine, or go and new consumer retention.
Most of these investments was deployed during the fourth quarter, resulting in a 30% increase in and E&P strength year on year.
Mitra, we dedicated a lot of Boeing and GE and changing demands and fulfilling orders to the best affordability and converting strong profits into into free cash.
And as you've seen our results I'm pleased to say that we generated 345 million of adjusted free cash flow and 'twenty and 'twenty and all time records and nearly 120 million and bureau higher versus the prior year.
Our stronger performance in 'twenty and 'twenty was complemented by a series of capital allocation actions.
We initiated $300 million share buyback program and March 'twenty and 'twenty at the onset of COVID-19, and we're quick to repurchase a significant and multiple stock under $17 per share.
We followed that up by tendering nearly 500 million or stuck in September.
In aggregate, we repurchased over 600 million euros of both stock, resulting in a significant reduction and all shake gold as we enter 2021.
We have also been active on the M&A front.
And of our tender offer announcement in August we clearly articulated a focus and protium and the European frozen foods acquisitions, where we believe we have a strategic advantage.
Since then we successfully completed the acquisition of Kinder, Switzerland.
Which further expands or European geographic footprints.
And just last month, we entered into exclusive discussions with reporting of our group to acquire a day frozen food portfolio.
This is a business with strong brand positioning and a significant operational footprints across the bulk and region.
We're making good progress and reporting of our process.
And look forward to updating you in the coming weeks.
So that was a bust and then precedent and 'twenty and 'twenty that many of US we never forget.
And for us at Nomad, a fourth consecutive year of sustained robust financial performance.
And as you can see here, we plan to continue building on our strong foundation and momentum by growing our top and bottom line again in 2021.
Our semi will outlining Xerox, we have a strong set of plans that will underpin our ability to achieve what will be another exciting year for nomad foods.
Before I conclude I'd like to remind you why we are as excited as ever and the growth respectable company in both the near and long term.
And you see all three pillars of growth.
First our core portfolio, which is anchored and frozen fish and vegetables.
Koby Donuts EBITDA growth categories that are aligned with one more nutritious diet and a more sustainable food system.
Demand for these categories have been growing for us.
Covid, which introduced millions of new consumers into our portfolio last year has only accelerated the debt movements.
We have brands that are local jewels across Europe, and thanks to the support of R&D and marketing teams remain as relevant as ever with todays consumers.
Second is our commitment to breakthrough innovation with Green cuisine.
This is a business that we have taken from zero to 30 million Euro and USD two years.
And we won't stop there we have plans to grow revenues to over $100 million by the end of next year.
As we presented at Cagny last week Green cuisine is though in local markets and <unk>.
Was Europe fastest growing frozen meat free brand and 'twenty 'twenty.
We are developing fantastic new products across a variety of need states and seeing strong response from retailers and consumers.
And third our efforts around M&A as we complemented our goal with strategic acquisitions into new geographies and categories and channels.
Putting it all together, we have the white space opportunities to continue to generate top tier performance and the package food space and 2021 and beyond.
And with that I will hand, it over to semi to discuss the results in more detail and outline our guidance for the coming year Sami.
Thank you Stephane and thank you all for your participation on the call today.
Turning to slide eight we provide more detail and our key fourth quarter operating metrics, beginning with revenue, which increased four 7% to 658 million euro driven by nine 5% organic revenue growth.
As expected this was offset by three 2% relating to a calendar shift and one 6% of foreign exchange translation.
Organic revenue growth exceeded our prior expectation and was once again driven by our branded retail portfolio, which grew 12% during the fourth quarter.
Growth continues to be most pronounced within our core product, namely fish fingers and coffee tea, where demand is particularly robust.
Strong growth and our branded retail business was offset by a non branded channel, which represents approximately 10% of sales.
Specifically, we experienced mid single digit growth and private label sales and nearly 30% decline in food service due to the impact of restricted movement across Europe.
Our gross margin expanded 160 basis points to 31, 5% during the fourth quarter, reflecting favorable mix pricing and promotion.
Moving down to the rest of the P&L adjusted operating expenses increased 15% year over year.
This includes a significant increase in A&P, which grew 30% or 10 million euros versus the prior year.
You may recall, our decision to allocate part of our incremental profit in 2020 towards strategic investments.
Most of this investment was indeed deployed during the fourth quarter.
Adjusted EBITDA increased 3% to 119 million Euro and adjusted EPS increased 19% to 38 euro and for the quarter, reflecting the significant share repurchase activity. We have conducted in Q4 last year.
Turning to cash flow and slide nine we generated 345 million euros of adjusted free cash flow in 2020, equating to 131% cash conversion.
As Stefan mentioned, we had an exceptional year of cash performance in 'twenty and 'twenty, we set a new record for our company.
This was driven by higher EBITDA, and discipline, and working capital management, which more than offset year on year increases in capex and taxes.
While Covid certainly played a factor last year, specifically regarding inventory, which we need to be rebuilt over the coming months. This performance was also largely driven by cash breakthrough intervention that we have been making since 2019 around structurally improving our working capital efficiency.
As we look out to 'twenty 'twenty, one we expect to deliver another year of strong cash performance in line with our longer term target of 100% conversion.
Based on our share price today, this would equate to a free cash flow yield of approximately 7%.
With that let's turn to slide 10 to review, our 'twenty and 'twenty, one guidance, which is based on foreign exchange rates as of February 20, <unk> 2021.
We expect to achieve another year of double digit adjusted EPS growth in 2021, as we look to build on our strong momentum exiting 2020.
This guidance is based on the floating factory.
Total revenue and adjusted EBITDA growth of approximately 3% to 5% and organic revenue growth of approximately 1% to 2%.
For modeling purposes, we are assuming a weighted average share count of approximately 179 million for the year.
In aggregate, we expect 2021, and adjusted EPS to be and a range of approximately $1 50 to $1 55, Euro which equates to a U S. Dollar equivalent of approximately $1 83 to $1 89 earnings per share.
As a reminder, this guidance does not reflect and potential a question that may result from our exclusive discussion to acquire the frozen food portfolio of default and of our group.
These discussions are ongoing and we expect to have an update for you in the coming weeks.
On slide 11, we outlined 'twenty 'twenty, one guidance relative to history, but you can see here is our commitment to delivering sustainable financial performance every year.
2021 will mark our fifth consecutive year of growing organic revenue adjusted EBITDA and adjusted EPS.
And importantly, this performance builds on the strong year that we have achieved in 2020, representing robust growth on both a one and two year basis.
As we outlined at Cagny last week, you see here the building blocks supporting a robust plan for 'twenty and 'twenty one.
We expect to achieve these goals through a combination of the macro tailwind operational lever and capital allocation actions outlined here on slide 12.
That concludes our remarks I will now turn the session over to Q&A. Thank you operator back to you.
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Yes.
Okay.
Yes.
Okay.
Thank you. Our first question comes from Andrew Olson with UBS. Please proceed with your question.
Yeah, Hi, good morning, guys.
I just wanted morning, Andrew.
Hey, good morning.
I wanted to dig more a little bit into the drivers of the top line and the organic sales guidance.
And you gave at Cagny and and are reiterating today.
Where do you have the most confidence and that guide and how much does it depend on maintaining some of the Covid games that you had in 2020.
Just trying to think through kind of the underlying growth and.
The base business first.
Maintaining some of the lapping effects.
And.
If you let me let me let me take that one Andrew and then let me let me step back a bit first.
I think were where we were quite different is as and when you see a bit of whole journey and though.
Before Covid, we had the.
Three consecutive years of growth.
And it doesn't come by chance I think we worked a lot on our brands. We worked a lot on all on our business model and it paid off and then and then it obviously came COVID-19 one.
And year, and obviously, we grew nicely, but like like many other people, but very importantly, as well, we've also and reinvested as you know and.
The $10 million at the end of the year, which obviously serves as well.
Paul.
For the beginning of this year and and later so that's a that's a bit you know what what we have accomplished over the last the last use I think way, where we are quite different is as we have and we have just.
Fantastic categories. When you think about fish, which is 40% of our business that's nice margin.
<unk>, which is 20% plant protein up and coming.
And this you know and in frozen and frozen food, which is which is doing very well know and obviously and beyond it's obviously and natural it's a natural tailwind, they're all growing which is very nice day.
And you'll have Covid, obviously win which gave opportunity to all these people new consumers and millions of consumers to try and that's why by the way we invested behind retention, which was very important to remember that scandal program, which put together last year, we announced issue. We explain why we're doing this and we see the result.
And and that's that's very nice and then on top of debt. Obviously, you have green cuisine, which is also moved from zero to $30 million and less than two years and as you know we have the plan to increase that up to $100 million or beyond the 100 million and in the next two years, so with all day.
These things on top of obviously of the plan that we've put together business model. Yes, we we believe that 2020, when one sees a dwindling and we're going to grow by 1% to 2%.
It's obviously and so.
Obviously ambitious because it's on top of eight 5%, but you know that's that's.
That's the culture of the organization we delivering.
And I think we have the best plants, we have ever had.
So that's why we think you will be going through to make it work and then beyond 2021, I would put it that way.
We think again debt with all the things we have is that the growth.
Growth is is only starting so we have a we know what we have and ahead of us and 'twenty 'twenty, one and beyond and we are very excited with this and then obviously you know we also have things that are coming like Switzerland debt. We just completed the low end of last year.
And obviously fortinet nobody's and option, obviously that we we and as we announced you know it's an interesting plan also and the bulk and so a lot of good things between let's say the natural growth of bulb must win battles as we say.
Green cuisine and also obviously.
A very focused M&A plan behind frozen foods. So that's all the reasons.
Okay, great. Thanks, and then just as a follow up.
Just specifically and the marketing spend it was good to see that.
That 30% increase come through it and <unk>.
Which brings a high single digit for the year in terms of that advertising line and how.
How do you think through your kind of overall marketing levels do you think that you'll have to increase even further for our support and Switzerland.
Sami.
And sitting here with him and his story.
SG&A would be we'd be about flat year on year and towards 'twenty one to the game in 2020 for the reason that we are that you had mentioned and investing behind their green cuisine.
Mr and backhaul, which we know are paying off and the other piece, which was important for us.
And that beyond redemption as we have mentioned.
But we clearly the intent is to continue to invest behind our brands.
We have strong plans behind the core business and the eye and Switzerland, and we will always try to balance it drove the need for supporting the brands and they're driving the appropriate how Orion.
<unk> advertising before.
Perfect. Thanks, guys.
Thank you. Our next question comes from John Tan when Tang with C. J S. Securities. Please proceed with your question.
Hi, Good morning, it's Pete Lucas for Jon.
And just how the industry and trade negotiations have progressed, so far this year in terms of pricing shelf space and promotions any meaningful difference and also any meaningful difference you're seeing between trends on the continent and the U K given all the dysfunction that we've seen with the Brexit and various different lockdowns.
And it's a good question the Brexit, let me hazards and Brexit first because you know its been a favorite topic for well. So many years. So the good news is behind us so.
So we still more than ever we and our in AR and the tax free zone between Europe, and U K, which is great. We always said, it's great for US that's the best result, and quite frankly I can tell you by when the deal was announced on December 24th It was a very nice it was a very nice gift is it is it.
Is it perfectly smooth at this stage no. You'll have you can imagine you have and we see some logistics issues and day, which makes the things a bit complicated, but we've been extremely well prepared.
It's a we know that it's going to be fine. So that's a that's a big thing for us.
Oh, it's Brexit and and we so pleased by the way. We can always also think about doing more and more positive things are more interesting things that just playing defense with with Brexit, which is which is absolutely great and back to your question about the negotiations well it let's say a negotiation with a trade it.
And with the trade is not going to change.
And sometimes you'll have a bit more inflation, sometimes you'll have a bit less inflation. This year, we have a bit more or less inflation, which I would say ultimately make things a bit a bit easier.
And so I don't think there is anything specific compared to previous years that are worth and I was mentioning the.
Obviously, you know we need to deliver we also said last year debt you know it wasn't it was it was a year of high demand and still it's Peter Yeah, all the high demand, which makes to some extent and know that piece of the conversation with the trades.
A bit easier.
And yeah, that's that's that's when and where we stand.
You know I think I think go a conversation with the trade is all about brand building and what the trade margin and which is overall and noise is in good shape as well so nothing nothing specific to mention and nor will difference between UK and Europe.
Helpful. Thanks, and just one more for me can you talk about our synergy and accretion potential from vendors, Switzerland. Do you think you've realized most of that this year or do you think it'll be a longer term process.
As you exit 'twenty one.
We are we always at the calendar and we're just going to be here with you.
And the yoga and transition I mean, as we get into that to the EBITDA is part of the time of year right now.
We as the yarn investments over weighted with the liquidity playing for us in terms of planting the seeds for if you think about the playbook that we have been applying in the path for albeit deal goodwill as it has been working really well when you look like yet how the business is.
He is doing today is we are pleasant simply our playbook around frankly, where we are clearly having a strong competitive advantage I mean, the focus on diversity and battle.
Kelly the extra spend that we can give to our topline through and our over the.
Focus on our costs debt and we will actually drive the synergy that we had planned for and the yet to come for Kelly. The plan is on track and and.
Kelly the economics are have been let's say put together in that context.
Great.
And that's in line with with what we've been doing to your point and semi with with good fillers and and the non basis first investment behind and there was some.
And sometimes asset that there'll be a bit of orphan assets and under invested and are we starting with debt which is.
And go long term is the right thing to do.
Great. Thanks, I'll jump back in the queue.
Okay.
Yes.
And as a reminder, if you would like to ask some question. Please press star one on your telephone keypad and confirmation tone will indicate that your line is and the question queue.
Thank you. Our next question comes from Bill Chappell with Suntrust. Please proceed with your question.
Thanks, Good morning.
Good morning Bill.
I just wanted to talk about kind of the surging demand for frozen and kind of the end of the end of the year and and and also what it's done for other categories. I mean, I remember maybe it was.
Three or four years ago, one of the thoughts from from Nomad was to move into the into breakfast items and that didn't really work, so well because Europeans didn't particularly like frozen breakfast items like fresh but kind of wondering if if that's changed is as people have been locked down and and accelerated and whether they are you know maybe it opens up other categories with.
And frozen for you to expand a you know as we've kind of had a behavioral change over the past 12 months.
Yeah, and when it's a it's a very good question bill, but if it comes and it goes back to the very yes, and so forth strategy, which is about resource allocation and the way we want to play in frozen foods.
And hence you know or definition of must win battles.
Most of and bottles or co op co categories, our categories, where we have leadership, we have good margin and we have growth potential.
And back to this breakfast question and.
No I think it would have taken ages and take so much resource to get there that it doesn't make any sense and it's with and serve the category. The other categories as well and that's why we've gone to these core categories that we are calling must win battles and I can tell you. They are doing extremely well, yeah, EMEA art and it's mostly.
And fish in in the inland and vegetable and then and some local categories. Obviously like for example, pizza with boot fillers or other audio categories and local categories, and we're not going to deviate from that.
So we need market share, we need growth potential and we need gross margin. So that's that that but besides that we remain ex we're also extremely focused behind frozen.
We know last year, we've just confirmed and frozen as where we are where we are winning and where we want to play.
And we are the leaders.
And and by the way, it's an extremely good category and for a variety of reasons between the.
And let's say obviously good for your help with for your.
Planet compile and combined with the with categories like fish vegetables or plant protein and so on top of also ecommerce and is doing well. So we definitely believe that you know it would be.
Just a mistake today to move away from this combination of focus behind frozen and within frozen and behind the must win battles, including obviously when cuisine and it serves us well we have a lot of deal wins, we have the block you know all or let's say or more of our modus operandi.
Our business model for the existing business and also for the business, we want to acquire within and also obviously the same.
And the same frozen foods category.
Got it no. Thanks, I appreciate the color and.
On Green cuisine.
Help me understand kind of the.
The thought process on the marketing and advertising and net.
It certainly done well and and how quick but it seems like there are a lot of lot of a lot of competition and jumping in and will be more and so is it are you looking at this and we just need to build out the brand equity and and grow and and build brand awareness or are we getting into.
To a land grab where you really need to make a splash.
And in terms of getting the brand out there because before the there's so much noise and the category, where it'll be tougher for consumers to understand it.
Well the good news and village is it's and it's the category and chilled and frozen by the way is growing very fast and we as a category leader in frozen and we need to make sure that we're going to have the category to grow even faster.
So that's the starting point, so all week and we and you know this company and the past years and years ago did the same with other categories. We need to do the same first is obviously is to make sure that we're going to grow the category and it's starting with with a with obviously some differentiation with the <unk>.
We believe and that's what our consumers and our retailers are telling us that we have a product superiority.
Great. You know you know that for example last year, let's say in December we got the award of the best product for frozen food products, you know in the UK, we though with all Nugget's day, great. There was a product superiority and so but that's one one element the other day and in a month is obviously we have also superior.
In terms of distribution network now recovering we have.
Net one could cause of retailers across Europe. So that's sort of another element. The third one is to your point is we decided we deciding to we decided as you know to focus a lot and to put.
Quite a considerable amount of money behind that behind the category and behind Green cuisine in terms of brands brand building, which is also what it is so all these elements are part of the flywheel that we have developed.
The difference is probably even more aggressive because it's a new category and this is a category, which has a lot to offer with also by the way very nice margin and we're making very good progress. So that's that but it's a it's a big focus for us as you know.
But you don't see it as a land grab right now, it's not a try to get anywhere and everywhere as fast as possible.
Well no.
You need to make sure that people understand and know the older consumers understand what it is so it's a wide space to some extent. So that's that's what it is but it's how to increase or to develop a new category and we've been good and that in the past and.
And are we going to do with the game.
Great. Thanks, so much.
Thank you very much.
Okay.
Okay.