Q2 2023 Nomad Foods Limited Earnings Call

Good morning, and welcome to the Nomad Foods second quarter 2023 earnings call. Please.

Please note this event is being recorded.

Like now to turn the conference over to Anthony Mccallum head of Investor Relations. Please go ahead.

Hello, and welcome to the Nomad Foods second quarter 2023 earnings call I Am Anthony Carlo head of Investor Relations and I'm joined on the call by Stefan to Shoemaker, our CEO and San music food our CFO .

Before we begin I would like to draw your attention to the disclaimer on slide two 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.

<unk> 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 <unk> financial measures during the call today.

Non <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 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 payment and related expenses as well as noncash FX gains or losses, unless otherwise noted comments from hereon will refer to those adjusted.

Numbers that I will hand, you over to Stefan Thank you Tony and thank you for joining us on the call today Nobody had another strong performance in the second quarter, although sales momentum from the first quarter carried over into the sector. This was a fifth consecutive quarter of accelerating organic seats or world class teams delivered another great.

Set of results and we went on our way to fully executing the commercial and supply chain strategies, we announced at Cagny earlier this year today.

Today, we are raising our 2023 EPS guidance boosted by our solid first half of the recent performance.

And second quota share buybacks nomad has navigated many challenges over the course of our history and each time, we've come out as a stronger organization.

We adjusted Nimbly to Brexit and the COVID-19, pandemic and last year the old break of the Ukraine wall led to raw material supply challenges, we worked closely with our retailers to adjust our pricing to recoup inflationary cost.

This was necessary to ensure that we would have their wives resources to continue investing in our business over the long term.

We also successfully derisked our supply chain adapting office supply to include new species and geographies, while adding new sources of high quality farm fish or new farm fish products have become a cornerstone of our innovation platform. This year.

We though exciting buzzer launches fast becoming consumer favorites.

We have more launches planned is second half of the year across several new buckets in.

Importantly, we extended our debt maturities to 2028, and 2029 further strengthening our balance sheet and providing us more long term flexibility.

For 2023.

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 build volume and market share momentum.

We're pleased to share that we have accomplished or first two goals in the first half of this year.

Our supply chain savings program is now in full swing, helping fund top line growth.

Additionally, we have taken great strides in developing our revenue growth management capabilities, helping drive positive mix and manage costs.

We are now laser focused on the execution of the third leg of pasta at G. G on Ewing be investments program.

Oh, A&P will increase significantly in Q3 versus the same time last year.

Additionally, we returned to more normalized on your rate of it would be this year consistent with always true.

These rollouts will be aligned with the back to school schedule, starting in mid August and building momentum into September .

This increasing investments will head dry bulk volumes and our market share in the back half of the year and beyond.

And we expect improving results in the coming quarters.

In addition to all E&P investments, we also normalizing on compensation levels to ensure that we properly reward the great people no mass fundamentals remained strong cash flow performance is on target and our balance sheet is strengthening.

Looking ahead to the rest of the year, although new wind investments reaches the market, we expect to see improving market share and volume trends that should carry into 2024 and beyond with that I'd like to recap our second quarter key financial metrics, beginning with revenues quarterly revenues grew six 9% eight <unk>.

6% organic with a high teens pricing offsetting a high single digit volumes and mix declines gross margin was flat at 28, 2% headed by our pricing initiatives and cost control programs adjusted.

Adjusted EBITDA grew four 5% to $132 million due rule, while adjusted EPS came in at 40 euro cents per share flat.

Flat versus last year.

Primary to rising interest costs.

German dollar spot rates for Q2, adjusted EPS was <unk> 44, U S cents per share or.

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.

As we observed in our Q1 reporting some of the most important room Matthew repriced.

A moderating, but we have yet to see real deflation of supply chain continues to deliver excellent results and we are in a virtual cycle of customer service and cost management that should support our second half E&P push or service levels for the quarter Rose to 97, 8% up 90 basis points.

Maintaining this level level of service has been crucial in defending our market share in the ISO this level will be keynote pushed to regain momentum in the second half.

Additionally, our procurement remains disciplined and we are covered for more than 90% of raw materials for the year.

We've learned a great deal from the raw material inflation of the past few years, and we have become much more flexible and strategic in how we acquire key inputs. We've left the percentage of our raw materials and cupboards to take advantage of some favorable price trends developing in the market.

We've 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 E&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 return to volume growth in 2024.

Finally, with increasing visibility on our business and no return to share repurchase.

We are raising our 2023 adjusted EPS guidance to $1 54 Euro to $1 57 year old ship from our previous $1 52 zero to 155 per share. This represents an adjusted EPS range of $1 $68 to $1 $72 per share of current dollar sports rates.

This guidance excludes the impact of any potential future capital allocation.

The post pandemic pressures and macro environment of the past two years have challenged us to become a leaner and more efficient company.

I am pleased to say that the execution of about 2020 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 are successfully leveraging the powerful brands across market. It's good for the pizza in Continental Europe .

Last year, we successfully rolled out distribution outside of Goodfellas traditional strongholds of island in the UK specifically in spreads in Spain.

We launched good Phil has infringed in October last year with exclusive distribution gas pool until the end of 2022.

That excluded these dawn.

And we are now extending our distribution to all the large food retailers and friends and.

And expect to reach half of total distribution points.

We are leveraging promotions to both for the range and where possible using dedicated promotion freezers managed by your sales force or dramatic region is shaping up for another great summer and our supply chain is meeting the Chinese op high seasonal demand we had a good summer last year due to harsh weather and you end up.

<unk> thousand beds we.

We are also benefiting from new media and product innovation. This year, we are even better prepared to meet high seasonal demand, we build stocks through Q2.

Ensuring we have inventory to cope with peak season.

And that is no pulling through to consumers or service levels in the region remain in the high nineties building our revenue growth management capabilities and then the core pillar of our 2000 Twenty's reached with EG, we made significant progress in rolling out <unk> systems across the company the first half.

We are building dedicated RG and playbooks, resulting in more robust standardized reports and descriptive analytics.

This is supporting all end to end Adrienne processes in each market.

Ensuring greater facts based support for strategic decisions further enhancing portfolio value.

We are boosting A&P spend by more than 20% year on year with the bulk of that coming in the back half.

We expect E&P and aggregate to reach roughly 4% of sales by year end.

A significantly higher level, when compared to 2022, which was closer to 3% of seats.

This combination of promotion and advertising is being helped by moderate inflation environment.

In less pressure on margins, although new media reach of the consumer and our price gaps with competition narrow.

We are already seeing great green shoots of improving both volume and market share, especially in many of our must win battles and the Q2 Nielsen period in markets, where we compete we saw frozen food volumes at flat.

Finally backed by a good cash flow performance, we repurchased shares for the first time since the first quarter of last year.

We both nearly 53 million euros worth of shares this quarter, roughly three 3 million shares in total.

We have been and will remain opportunistic on share repurchase.

We continue to be optimistic about the second half outlook and beyond.

First the frozen food category across all markets is in good shape.

Performing the overall food category.

Frozen food sales are up double digits year to date and category volumes have turned positive and more than half of our markets improving sequentially than most others.

Second we get up or strong consumers messaging, the second quarter, emphasizing or broad based superiority through revamped advertising campaign support the majority of our must win battles.

This includes UK piece, Italy, fish and burgeon spinach.

India genetic region or service sales have been boosted by our innovation with new Pistachio King brand and your new campaign for Macho ice cream.

Increasing remains a great source of innovation plant protein and we want to reward these codes in Germany for new projects in the media with initiatives like this in place we are seeing a value share trend flatten or improving hospital market.

We expect this to pick up in the back half.

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

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

Turning to slide seven I will provide more detail on our key second quarter operating metrics, beginning with reported revenues, which increased six 9% to 745 billion euro of eight 6% organically.

With pricing offsetting volume losses.

Okay.

Second quarter revenues were negatively impacted by one 7% of unfavorable FX.

In an improving but still challenging cost environment, we delivered solid gross margin performance in Q2.

We delivered gross margin of 28, 2% flat versus last year.

This margin performance reflects the higher pricing.

Long gun GM execution and moderating costs.

As we look out to the back half of the year, we expect to deliver flat gross margin supported by price increases cost discipline and our execution.

Moving to the rest of the P&L.

Our gross profit grew 7% to 210 million euro in the second quarter with a stable margin.

Cost of goods sold increased to 535 billion Euro an increase of 7% or 35 billion euro versus last year.

Adjusted EBITDA of 132 million Euro grew more than 4% versus last year. Adjusted EBITDA margin landed at 17, 8% a decrease of <unk> B bonds. Finally Odyssey EPS of both euro cents per share was flat in Q2.

This translates to 44 cents per share in USA lockdown at current spot rates.

The cash flow slide eight.

Cash generation remains a top priority and our performance equal materially from the first to the second quarter more in line with our ongoing collaboration.

This should help keep us on track for our annual guidance target of 90% to 95% conversion.

The adjusted free cash flow of roughly $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 86 million of adjusted free cash flow conversion ratio.

Is that a significant step up versus a conversion rate of 25% in the first half of 2020.

I would expect some unfavorable working capital phasing from Q1 reversed.

In Q2.

As a result, working capital decreased <unk> 7 million six 8 million in the first.

Capex of 41 6 million versus last year.

We continue to support strategic investments in the business.

Changes in cash stock decreased 5 billion euros 13 billion, while cash interest was $17 million.

<unk> 5 billion.

As we flagged in Q1 of those things before we are now seeing the impact of higher interest charges from our November 2022 refinancing in Q2 with that let's turn to slide nine to review our principal degree guidance, which we are updating today. These guidance ebay the whitening exchange rates as of August.

2023.

First we are maintaining our organic revenue projections.

Mid single digits or could you conceivably, we expect pricing will more than offset volume declines.

And we are post when you put it all we expected EBITDA of more traditional and balanced mix of price and volume with significantly better pricing and better volumes were in the top line.

We project cash flow will be in line with our historical averages we.

We expect our cash conversion ratio to be in the range of 95%.

We expect overall adjusted free cash flow of roughly 200 million Euro all year.

Stefan mentioned earlier, given the increased visibility on our business and a return to share repurchase we are raising our 2023 adjusted EPS guidance last in Q1 report.

We now expect adjusted EPS in the range of one point or two one <unk> seven euro per share or $1 68, $1 $72 per share at current spot rates.

This excludes any additional impact of potential future capital allocation.

I will now turn decision that was the Q&A operator back to you.

Thank you.

Well now begin the question and answer session to ask a question in the press Star then one on your Touchtone phone.

If a user is speakerphone, please pick up your handset before pressing that Keith.

If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

At this time, well pause momentarily to assemble our roster.

The first question comes with.

Joe Tom Carter with Newfield Kroll. Please go ahead.

Okay.

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.

From the pure increase in spending amount is there anything else that youre addressing differently. This year is it.

A more capped in you know sort of communications refreshing the captain campaign are.

Are you trying to convert more consumer to fresh frozen and fresh how are you thinking about the actual I guess sort of messaging in the back half.

Thank you John Yeah, Okay excellent questions. The first thing is timing by the way.

Starting with the timing.

Three it's really something like a preparation of back to school. So it's really going to start with.

Okay.

Weak actually to have the maximum impact.

So that's the first piece independently from where are we going to go the second piece is more than ever we're going first with the must win battles in countries like the U K, Italy, where we have the highest rate of return on investments.

And then qualitatively speaking.

Really to your point I think it's a for example, captain which is an iconic figure for US is going to be you know, obviously, a hero for us, especially in countries like Italy.

And fingers or in UK with Captain Birdseye, and then obviously, we also going to need to be more aggressive in terms of claims in terms of value and quality security, which is not really something we start we're doing right now so that's going to be the let's say the.

Global the global pattern for 2023, and also more to come obviously for 2024 with the.

Key messages begging for big increase.

It's really going to start.

In something like a week to have maximum impact and then must win battles and then the best the best return on investments.

Okay. Thanks for that and just a follow up coming back to innovation and the innovation pipeline.

Private to the inflationary environment. We have now you had some pretty good momentum increasing emphasis on frozen meals, you know sort of that premium single serve space, the Virgin Mills and so on.

Given the environment now and you're getting enhanced focus on that sort of opening price point consumer how are you. It's definitely opportunity in premium single serve from here does that really is 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 and fish and we've really taken the opportunity to do two things at the same time, which is really to let's say step up you know the empathy.

The innovation in fish, but also go with something which is farmed fish with buzzer high level, you know high quality farm fish coming from from from Asia, which is which is doing two things first is we obviously stepping up innovation in fish and second we are diversifying away from.

Let's say a quarter or is it wide fish only so that's a big piece for us this year second pieces.

We're also taking a more let's say.

But can you speak approach compared to the past you may remember when we acquired the business in the in the.

With Philips that we said well you know, it's mostly UK and Ireland, well, because basically you're always going to full focus on no mantra, which is must win battles.

And 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 got food and then you don't really starting to develop in old Yada Yada yada.

The other retailers and this with pizza with basically wisdom with good fill us so because full rational basically.

Innovation is also the ability to move we have such a fantastic.

Number of Skus, the richness of our portfolio is amazing.

We can do with that is obviously to move from one country to another so you don't need to just lifting and then moving towards other country and that's the kind of things. We are doing right now at pizza by the way and so in terms of the affordability is a great example of how can we be.

A more affordable during you know price rise at crisis environment and pricing environment. So that's the kind of things we're doing with obviously more to come in the coming weeks and months because yes, we all our portfolio is moving well.

And innovation is really the key piece for them for the future for future algorithm as well.

Okay. Thanks Stefan.

Youre welcome.

The next question.

On slide theaters with B T. I G. Please go ahead.

Great. Thanks, sorry, if I missed that missed this comment on.

But just curious on the A&P investment it sounds like that pushed out a little bit further than I am than I anticipated.

I thought it was going to start a little bit earlier can you guys comment on that and has has the amount of investment changed your thinking there. Thank you.

No the amount of investment hygiene or the amount of investment has investment has absolutely not changed we remain committed to substantially our A&P in the year and what we've done is simply preparing our campaigns is in sync with the in store activity.

The intervention, we would do on some of the activity related to the must win battle. We are clearly focusing on so far is there is an intent to up the game, we clearly want to regain the share momentum we have great momentum going on right now and so with the incremental A&P that is about to come in the second half of Q3 moving forward in Q4, which is.

Going to be substantial together, we the 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 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 a lackluster growth in this category. Thank you.

Well, what we see is more stabilization of the sales across the board.

We are all all market share.

Where we are present is slightly increasing with.

UK decreasing a bit in Germany, increasing quite substantially.

And why do we always believed that green cuisine as in plant protein is remains a great category.

Ever dreamed of the kind of somewhat expectations in the past, which we still believe that this is something that is going to stay after after a while the difference also for US is we are not limiting ourselves to meet we have we have chicken we have of fish, we have vegetable and that's make that makes us.

In terms of plant protein and I'm talking about plant based protein.

That makes us very different from some other players in the category. So overall for us it's more stable than anything else.

We still keep investing in the category, we believe and invest in its category and at some stage is going to come back.

And we will be present.

Thank you very much.

Ladies and gentlemen, once again, if you wish to ask a question. Please press Star then one.

The next question comes with John The one thing with C. G F Securities.

Please go ahead.

Hi, Good morning. Thank you for taking my questions I don't know if you've mentioned this in your prepared remarks, but did you talk.

Talk about your pricing differential versus the private labels and how that's evolving.

In Q2, and how you expect that to trend over the next couple of quarters or so.

No I don't think we have.

<unk> responded to that question, but let me come with the fact, you may remember that we were talking about the 10% pricing difference.

And.

In terms of price difference compared to pre lets say inflation.

EBIT fix businesses.

Specific.

Then I know.

Last time, we mentioned it was more in the region of 7%.

The latest one 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 we need to is not only.

So it's substantial.

The increase in terms of A&P, but also starting in September so I'm very surgical promotion where needed.

And I think that part will also help us to reduce the gap.

That together, obviously with something that we see coming which is a mind the pricing environment for the future.

Got it. Thank you very much so the improvements so far and that gap or the closing of that 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 go get that got closer is that is that fair to say.

That's fair and I think John just to be Super clear.

Closing the gap I, just want to make sure that there's no confusion.

Reducing the gap that had widened there has always been a gap and there was a gap, which we've been operating 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 I think it is gap is starting to narrow down and to Stephen's point on that one it's exactly in your interpretation is correct.

Got it.

And then second I know you.

You've mentioned that last year was an exceptional year for you, especially in the Adriatic Judy heat waves, we're seeing that again, obviously this year, maybe even more severe or are you seeing similar performance in those regions or are there differences this year.

Given the specifics in underlying.

Geographies and inventories and then.

You can change the businesses over the years.

Why do we still very pleased that more than ever pleased by this acquisition and the performance.

The other headline.

Your point you're right.

I mean, you remember well last year, we were caught by surprise.

In terms of inventory building and we Miss some sales. Despite obviously I mean, obviously, a great season, and we've learned the lessons. So we already started last year in Q4 to build inventory so that those service level will be perfect.

This level at this stage is 99, 5% so that's not part of it that way.

And the team is doing a fantastic job. So Q1 Q2 was a bit let's say Q1 was a bit lower.

The weather was not great in that the weather was not great and it's something like let's say mid June . Since then you know with obviously is which which came at the right time, let's say the temperature has increased substantially and what we see is that the countries are doing really great.

Great job operationally sales wise.

So we're expecting another very very good year.

Great. Thanks, guys.

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

Thank you for your participation into onto their schools.

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 into the market, we expect our volume and market share performance to improve sequentially.

Frozen food remains a great value for customers and consumers.

And we our product category leaders.

We are 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.

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Okay.