Q3 2021 Nomad Foods Ltd Earnings Call

Taken less and fitness products.

And finally.

As of last month, 1% of our existing factories are on renewable electricity.

And achievement that we are very proud of.

We took two important steps to further advance our sustainability strategy during the third quarter.

First we joined the race to zero announcing plans to significantly reduce our greenhouse gas emissions.

We've approved science based targets across our operation and our supply chain.

These targets, which includes a 50% reduction in our observations with some scope one two and three emissions by 2025.

Consistent with the reductions required to keep global warming to one five degrees.

Second we're also collaboration with Blue and the Liu to introduce self culture seafood to Europe.

This agreement the first of its kind in Europe underpins, our commitment to sustainable growth and the development and scaling of emerging technologies.

Brunel, who is a leader in cell culture seafood and has developed a breakthrough technology that aligns with our purpose of serving the world with better tools. We're excited to see what the combination of the solar cell culture technology, and our brands consumer side scale and go to market can lead to in the coming years.

Finally.

We completed the acquisition of 14 robust frozen food business.

Transaction, which is expected to result in over $2 of adjusted EPS on a combined and annualized basis in 2021.

Based on current Forex rates.

Fourth and nobody is a business with significant strategic value to nomad foods and with multiple levers for value creation.

14 of our resembles our existing business in many ways. It has market leading brands in later and freedom.

These brands have incredible consumer awareness in their respective markets.

And similar to Birdseye igloo in finished represents high quality frozen food in countries like Croatia, Serbia, and many others in the Atlantic region.

50% of the business is in frozen savoury with a high concentration in patient vegetables.

<unk> portfolio.

We believe we bring significant commercial and operational expertise in these categories across capabilities, such as portfolio strategy sales insights marketing and revenue growth management.

<unk> also has a leading ice cream portfolio, which is highly synergistic with the savory side of the business and introduces a highly profitable and interesting category to our portfolio.

While it is very early days I can tell you that the organization is excited to join the Nomad foods semi and is looking forward to the challenge of delivering their business objectives.

The acquisition of <unk> expands our geographic footprint into a number of new central and eastern European markets, many with market leading share positions when.

When we announced the acquisition earlier this year, we expected the business to generate approximately 53 million euro.

Adjusted EBITDA.

The latest plan is for this business to slightly over deliver the spend in 2021.

With revenue expected to grow mid single digits.

We have several work streams underway to ensure a timely and successful integration.

Consistent with our M&A playbook, we plan to increase the level of advertising expense and providing the full suite of capabilities that have fueled our base business.

From a financial perspective, 40, nobody is expected to be high single digit accretive to adjusted EPS in 2022 with a mid single digit organic revenue growth profile and the path will be the margin expect exceeding 20%.

We are thrilled to welcome the 3000, new employees to Nomad foods and <unk>.

Look forward to updating you on progress in the coming months.

It has been a year since we all sit our first ever Investor Day last November.

We had these events to provide our investors with a more detailed perspective into our business and our leadership team.

We also introduced 2025 financial goals at that event.

Notably our goal of two euro and 30 of adjusted EPS, which represents a CAGR of over 10%.

With 2021, nearly complete and the 14 of acquisition now closed I.

I am pleased to say one year later that we remain on pace to achieve our objective that we load it laid out by 2025, if not sooner.

I will now hand, the call over to Sami to review, our financial results and guidance in more detail semi.

Thank you Stephane and thank you all for your participation on the call today.

Turning to slide seven I will provide more detail on our key third quarter operating metrics, beginning with revenues, which increased 4% to 599 million euro.

Revenue growth was driven by three three percentage points from the acquisition of Finland, Switzerland, two percentage points from favorable FX translation and a slight decline in organic revenues as we anniversaried elevated consumption.

Organic revenues declined one 4% versus 2020, but were up mid single digits versus 2019.

Frozen food category demand continued to normalize during the third quarter, reflecting increased consumer mobility and a steady return to the <unk> meeting.

Against this backdrop, we achieved market share expansion in our branded retail business, which included strong year on year revenue growth from Green cuisine.

Our non branded business decreased 15% as foodservice continued to recover from depressed year ago levels.

Gross margins were 28% during the quarter, reflecting a 240 basis points decline versus the prior year.

This comprised of 200 basis points from higher raw material costs, and 40 basis points of dilution from the inclusion of <unk> in the Sweden, whose initial gross margins are below the company average.

Gross margins were effectively flat through the first nine months of the year, reflecting strong procurement execution and raw material deflation during the first six months of the year.

We are currently in the middle of our 2022 planning process and like others expect a higher level of inflation next year.

Our goal will be to mitigate inflation to all levers available.

Our business is in good health.

Brands have market, leading positions and we have strong revenue growth management capabilities that will enable us to navigate the current environment.

Moving down to the rest of the P&L.

Adjusted operating expenses declined 14% year over year, reflecting a comparable level of A&P spend versus the prior year and the decline in indirect costs.

Adjusted EBITDA increased 4% to 123 million Euro and adjusted EPS increased 17% to 35 euro cents for the quarter. These.

These metrics once again represents record performance and growth on growth.

Turning to cash flow on slide eight we generated nearly 100 million euro of adjusted free cash flow through the first nine months of the year.

Waiting to 45% cash conversion.

As you know our third quarter represents a seasonal low in our working capital and cash conversion cycles.

We continue to expect significant improvement across both metrics by the end of the year.

As we shared with you last quarter, we have a number of factors, notably a catch up of inventory as a result of Covid and higher Capex. This year that will limit our ability to achieve our long term target of 100% adjusted free cash flow this year.

With that said, we're expecting a notable improvement in our conversion rate in Q4 and remain committed to this target over the long term.

With that let's turn to slide nine to review, our 2021 guidance, which is based on foreign exchange rates as of November the second 2021.

We are reiterating our guidance for 2021, adjusted EPS of $1 50 to $1 85 euro per share, which translates to growth in the 11% to 15% range and has us on a glide path to achieving our longer term financial objectives.

Our guidance now includes a seasonal operating loss from 14 of our during the fourth quarter.

As a reminder, we expect this acquisition to be high single digit accretive in 2022.

Had we owned 14 over at the start of this year, our adjusted EPS would that mean over $2 on a combined an annual basis.

Our 2021 guidance assumes a modest decline in organic revenues for the year with the expectation that we will continue to achieve market share expansion.

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

Yeah.

And we will now begin the question and answer session.

Please use the raise hand feature to ask a question.

Our first question will come from Andrew Lazar from Barclays.

Andrea Please feel free to ask me ESL.

Yeah.

Okay.

Great can you hear me.

Yeah. Good morning, Andrew Andrew Good morning, good morning.

So the question I guess first off a few weeks ago. When you updated investors on your organic growth expectations for the year, you had mentioned that normalizing category growth rates and key markets in Europe that we're reopening and you talked a bit about that again again today I guess I'd like to hear your thoughts on how this thought process squares.

With your belief and really that of most other packaged food companies at this stage that some of these new households gained during the past two years could well be sticky longer term with all the new habits and.

Britain work sort of arrangements and things of that nature.

Just got a follow up.

Or or thought process hasn't really changed I think to.

To your point I think we see that it's a very volatile environment.

People mobility, increasing restaurant is open.

People are returning back to work.

Can see definitely not no two five.

Five days a week so that that this is coming to fruition, but at the same time, we can see that the.

The level of sales remains very robust against them.

You know just comps.

And when you compare with the pre Covid to know we are we are in very good shape and this also index.

And that's important to highlight this before.

The impact of inflation, which is just getting really going to come in in 2022. So how does it change the only thing that has really changed but the industrial somehow has the sales as well as the higher level of inflation.

That's helpful and that leads into my next question, which is and obviously you had far less inflation. This year than many of your peers in the U S. And therefore did not have to lean in heavily on the pricing lever and as you talked about it would seem inflation could be a bigger headwind in 'twenty two.

So I'm trying to think how we think about the opportunity for pricing, which in Europe I realize there are more limited windows I guess in terms of timeframe to take it and if successful would the timing be such that that.

The impact of pricing might not kick in until more fully until maybe after <unk> of next year or what's the how does the timeframe typically work in Europe in terms of getting agreement on pricing with key customers and then when it can be effective on the shelf. Thank you.

Well, it's a it's an and.

Listing question, Andrew because as you know Europe is a constellation of many different countries. So it is very much in a staggered process.

But definitely we already studies, so I think we'd have more visibility.

That's the way I mean doing a <unk> release for Q4.

We will in the middle of these conversations somehow with advanced somewhat less would advance.

Overall, you know that so I.

I think we always have.

I think we've executed well in terms of pricing.

Thus with.

No I think we've lost no very strong revenue.

Let's say revenue management muscles, and we are going to use this muscle.

Right Oh actually so that so we are very we are very determined.

Thanks very much.

Our next question will come from Robert Moscow from Credit Suisse.

Robert Please feel free to ask it yourself.

Hi, Thank you.

I guess two follow ups.

What level of cost inflation do you expect to experience.

Within your business in 2022, I mean is it like high single digit as a double digit it sounds like it could be quite significant.

And then also can you give a little bit more unfortunate like like what you've seen so far.

Within the four walls.

You said that sales are tracking a little bit ahead of expectations.

And can you talk about the consumer environment there.

And maybe even some due diligence you're dead on on inventory in the trade.

Sometimes businesses that are acquired my mic load inventory before transaction did you make sure that that didn't happen.

Hi, Robert I'm going to take the first one and the funds are going to go on before the Nevada on the on the inflation side I would say <unk> seen that in 2021.

We experienced a low single digit inflation level and we've been communicating about that and that's why we've been navigating through the year and.

Gradually fuelled step up I mean towards the end of the year, we expected actually in 2022 to be higher.

And we will give you more detail at this time, we are going to really give you more color more color on 2022, but I would say a higher but not as high as what you have seen.

From other U S companies, we have a profile that would be different.

Energy or logistics or supply issues are quite similar across the board with our brand portfolio is quite a different versus other businesses. So a net of the two though to your question specifically I would say higher this up is not as high as what you had seen from others.

And to your question.

Another question about for enrollment.

Enrollment since I would say we are one month in the in the company. So we spend a lot of time, we have a very well structured integration team working together with the with the T. Mo there. So it's so far it's really doing well.

The energy level is very high the very pleased to be really part of a pure play frozen food.

Thing as opposed to Columbia, Maryland, conglomerates concepts. So that's very important.

Yes, yes.

Well so your question, which is basically.

Where are they lowering.

That way.

That's one of the question well actually it doesn't matter too much one way or the other way what you see right now is anyway.

Synaptics remains.

Remains good which is good which is good news.

Seconds anyway.

Behavior without being captured in the working capital adjustments.

So I.

I think that's that's that's been taken care of.

What do you mean by working capital adjustments.

Well you know if you are let's.

Let's say if you at some stage you know Youll group from independently you up for example, you are increasing your level of winter inventory all the way around making sure that you're going to have a normal level of working capital across the board. There is no hiccup just before the deal before closing and so that does it.

Got a formula that you did that.

Using which is fine and we haven't seen anything anything significant one way or another but that's what I meant okay. So nothing significant.

No.

Oh consumers sorry.

Sorry, consumer survey for both Robert as consumers consumers are doing fine I think at this stage, what we've seen as.

You know, we always the learning, even though ice cream, which is great category by the way.

And doing fine I think we see already a big any of the offer of open improvement. This this schedule in Q <unk> three.

Three during the summer season with tourists coming back which is great, but I think it could be more next year and in terms of February frozen.

Overall, it's a very very robust you know our business, you'll know that they'll be very pleased with our overall market share within nomad being more in the region net sales, 20%, 30% plus in Western Europe, you are talking about 50%. So it's a it so these brands.

We believe that the old brands like like ego Fender's iconic I can tell you in this country is little freedom are just fantastic breads.

So overall, it's a good dynamic.

So the consumer there is getting back to normal mobility, but youre not seeing a negative impact on the category like you are in the U K.

Well the frozen category and you know, it's all done don't forget that Youll have a combination of of on trade in Australia.

<unk>, which is much more prolonged than the rest of our business. So let's say.

Entrees, which suffered the loss of all of whom which suffered a lot is coming back and there.

There is a bit of a decline in terms of but very much in line with the rest of the business.

Hum in the loss rates and retail so low overall, it's very much in line nothing nothing.

And difficult and different debates you work through them the rest of the business with one significant difference, though there is more.

On trades.

Which is good for us, but it didn't exist.

It was tough during COVID-19 noise, that's coming back.

Got it thank you.

Youre welcome.

Yeah.

The push up there would be no other questions.

Shannon or.

Are there any more questions in the queue.

Yeah.

Okay.

Yeah.

It looks like not at this time.

So we haven't had a lot of advances towards your question look fine.

Thanks.

Hi will.

That concludes our question and answer session I will now turn the call back to Nomad foods CEO Stefan desk maker for concluding remarks.

Thank you Shannon and thank you for your participation on <unk> third quarter 2021 earnings call.

We are navigating through a volatile macro macro backdrop by delivering all needs of financial objectives.

And investing in the long term health of our business.

We are on pace to achieve another year of double digit adjusted EPS growth in 2021.

And I'm excited to integrate the recently acquired for the Novartis transaction, which we expect to be high single digit accretive next year.

In summary remain we remain on the glide path to achieving if not exceeding the 2025 financial goals that we set at last year's Investor Day, and look forward to updating you on our progress when we next report on fourth quarter call in early 2000 and consume.

Yeah.

Okay.