Nomad Foods Limited (NOMD) Earnings Call Transcript & Summary

I'd like to welcome Nomad Foods back to our Global Staples Conference today. With us this afternoon for our virtual fireside chat, our CEO, Stefan Descheemaeker; and CFO, Samy Zekhout. Thanks very much to you both for spending some time with us here today. Sorry, we're not doing this in person, of course, but good to be with you both nonetheless.

Good afternoon, Andrew.

Good afternoon. So yes, as I mentioned, we'll do this in a fireside chat format, and maybe why don't we just -- why don't we kick it off with the first question.

I think maybe it makes sense to start out with the recent announcements around the more refined M&A strategy and Dutch tender offer. As these would seem to suggest to us sort of a next chapter, so to speak, in the way Nomad is approaching capital allocation. So first, regarding the M&A strategy, perhaps a year or 2 ago, it seemed the company could well be much more open to opportunities further outside of its core European frozen portfolio. The refined approach now explicitly focuses on European frozen assets. We like this approach and believe such assets offer the best returns for Nomad. I wanted to get a sense of what drove this more refined focus?

So it's -- you have obviously remember, Andrew, that it's -- Nomad is still a relatively young company. We've just celebrated our 5-year anniversary. And you use the word steps, and we're using very much in the organization, the word journey. And so that's exactly where we are. You remember that we started as a speck back in 2015. I didn't even know what the speck was, by the way. And then we've moved to an investment company and then we are in this sweet spot that I like very much myself, believing very much in focus where now we have really become a large size European CPG company, and you can check the numbers, they're very interesting. And this, obviously, with being -- while being a pure play. And I like this concept of pure play. You would have told me 5 years ago, how do we feel vis-a-vis the frozen food industry. I would say, at that time, it was a bit sleepy. And I don't think we were the only ones, but obviously, we've worked very hard during that time first with our market share, then second, with ourselves and with the rest of the organization and the industry. And I think the perception and the quality, by the way, of the category has improved and so have the growth rate. So where we thought, okay, fine, it's just something which is flat. We see that with a bit of traction we can make it as a very, very attractive category. And the consumers start to understand that. So that's a big thing. So in other words, where the world was very broad, we've seen ourselves as the leader in Europe and in a category that has -- is becoming increasingly attractive. So that's the first piece. The second piece is -- and I'm sure you will agree with me is as a pure player in being as the leader of the frozen food industry. It's definitely in terms of synergies in M&A, the best way to create value because you know your playbook. The playbook, by the way, is improving, let's say, every time we're doing a deal and in so organically. And so we're becoming better at that. And obviously, it's a playbook that works very well being a pure play. So that's the -- this combination of these 2 elements, it's a better industry than it was 5 years ago; and second, being a pure-play consolidator, so it's a very good way to generate value for the shareholders. Yes, then it has come to the point that we thought it was useful to refine to clarify vis-a-vis the investors what we are becoming right now. So that's long story short. That's the full reason why we think in order that it makes a lot of sense to clarify where we stand. And personally, I very much like it.

Great. Thank you for that. Regarding the Dutch tender, what drove this decision as well as the timing? Is it the strength of cash flows combined with the more focused M&A approach or something more on top of this? And as part of that, does management and/or the founders, so you, Stefan, Martin or Noam, plan to participate in the offer?

So let me start with the second question and then we'll leave it to Samy. The answer to your second question, the answer is clearly from me, for Noam and for Martin is, no.

So let me come back on to your main question, Andrew. And I think you hit exactly on the point. It was actually a combination of the 2 factors, I would say that you had mentioned, which is the 1 on M&A, which was the fact that if you want over our assessment of the broader M&A agenda, I mean has led us back to EU frozen. I mean, we had looked at a variety of options there. But the more we are looking at this, the more effectively it sound better for us and much more value-accretive to, frankly, refocus ourselves on EU frozen. And given the size of the deal that we're more midsize in nature, if you want, that would have required us to carry less cash than needed, if you want, versus a larger, broader, if you want a global transformational, I mean, deals that we could have considered for that. The second point is, we are quite pleased with the performance of the business, actually. When you think about the growth that we have, when you think about the balance sheet performance that we have, we clearly now leverage a 2x ratio on net debt versus EBITDA. And when you look effectively at the level of cash that we are generating, which represent about 100% of our net earnings, if you want. That really put us in a position where we feel very comfortable in, frankly, executing this transaction overall. And last but not least, I think what's important is that we are looking always at all possible if you're on best use of capital allocation and feel free that this one was probably the best possible at this present time.

Great. Thank you for that. I think there were probably 2 investor concerns around the tender offer specifically that I wanted to give you both a chance to address. The first one is that Nomad is now repurchasing shares at, let's say, $25 a share. After having issued an equity offering 18 months ago at about $20? And the second is that this somehow implies a negative outlook on future acquisition potential. So I wanted to try and get your perspective on those investor concerns if you can.

Okay. I'll take that one, and Stefan will add any perspective, of course, on that. So I think I'll take the question in reverse order, Andrew. Let me be clear upfront. I think investor should not really interpret the tender, tender offer as a negative M&A signal. I think when you think about the situation is after the deal, our overall leverage, I mean, we'll have moved to about 3x overall. And we will have about EUR 500 million cash on our balance sheet, which will definitely be more, this is significantly more than what we need to operate the business. The second point is, as you know, we generate roughly between EUR 200 million and EUR 300 million cash per year, I mean, driven by the operations and the quality of the cash management that we have. And so that, combined with the other is really going to give us effective enough horsepower when you put everything together, we'll have ample cash to execute the strategy that we have from an M&A standpoint. And what this does signal, though, is that what's very likely is that we will keep the composition of our portfolio, let's say, the same, which is the EU frozen concept will be there to stay with a focus on retail. And regarding if you want the first question, when we did the equity raise about a bit more than a year ago, we clearly had been doing that in order to effectively create more cash power in order to execute what we felt at that time was in the horizon, which is a potential -- set of potential larger deal, effectively transformational. We kept our M&A criteria quite strict and frankly, our disciplined paid off, I mean, on that, and we did not do what we thought we could do at this time. And when you look at the financial discipline that this was clearly creating, it was -- you have to remember that before the equity raise, you had to ForEx, let's say, leverage. And coming out of the equity raise at the end of Q2 at the time we are at 2x effective. We clearly had enough cash not only to run the operation, but we have more cash than available to execute what we wanted to do. And effectively, when we put all of the 2 factors together, we felt -- and the prospect of the business, we feel that it was appropriate to do this program and buy our share effective for the price that we have announced, I mean, overall and continue to run the operation and execute our M&A strategy, as we have stated.

Got it, thank you. Maybe just taking a step back, and I'd like to address the -- maybe more broadly, the state of play in the industry at this point. For me, having covered the packaged food space for some 25 years now. And I started when I was 14, by the way, so don't think I'm that old yet. I've been truly impressed by the agility of the industry to sort of pivot where needed, to serve consumers while also keeping everybody safe and I know none of this has been easy or perfect, but the industry has responded quite effectively. And we'll get into specifics in a moment for Nomad. But maybe just -- I was curious what stuck out to Nomad on sort of the industry's response so far.

I totally agree with you, Andrew. I think the industry responded remarkably well. So we're very proud of what our teams have accomplished in our 13 factories. But to be fair, when you look at the bigger picture in the food industry, I think overall, people have reacted extremely well. So I can only speak about what we -- what our people have accomplished, but I'm sure that other people in other organizations must have done the same. So it's been a combination of real sense of duty. It was very interesting to see that people felt there is a duty in the food industry, we have to feed the population, all citizens, and it was very clear, it was existing in many of organizations. And then at the same time, you obviously, you have to make sure that you're going to take care of your people, and so we -- I think very early on, we took the right measures, making sure that our people would be safe. We came up with things like, for example, a portal that measure that -- which is now plain vanilla, but probably in March, it was not. The social distancing. And so we've measured those every time and every day, where we're standing, where we're standing in terms of contamination. On contamination, and we've been able to keep it at a very, I mean, at very -- it's always too high, at very good level. And I think at the same time, we've been able to deal with the retailers, making sure that we would focus on the right SKUs, which was absolutely necessary. So we've done all these things together. We also managed to stop for a while the traditional A&P program. We've put it back in Q3 because anyway, it wouldn't have made any sense to go traditional during this very untraditional time. So we've done all these things, which is partly supply chain, but also obviously, the collaboration with the business units, learnings, a bit more CapEx here and there, a bit more SKU optimization for the future. But overall, very pleased.

All right. Pivoting to fundamental trends. We're now more than 2 months into 3Q. So maybe we can start off with whatever update you can provide on kind of what you've been seeing more recently for the business and sort of the market overall. In July, I think Nomad mentioned it was running up double digit. I don't know if you've seen much in the way of sequential deceleration. And I ask, because with Nomad guiding to high single-digit year-over-year organic revenue growth for the full year, this implies, call it mid-single-digit year-over-year growth in the back half, which, of course, while still elevated, perhaps could still potentially prove conservative, depending on sort of what you're seeing more recently.

On that Andrew, I think we're not going to get into providing you monthly sales reserve. The one thing I can tell you is building on the point that you have highlighted is that we have a very strong September ahead of us. And we've got a lot of clearly business, I mean, to deliver. Based on everything that we see, and we expect at this stage, we are clearly maintaining the guidance that we provided about a month ago. I mean, that's absolutely -- clearly, everything is in line with our expectation at this stage. Of course, I mean, a lot of things can change. I mean, with the school reopening and frankly, all of the outdoor, I mean, dining change and so on. But so far, if -- we're clearly on the goal to -- are on our way, frankly, to deliver our goal for the year and for the quarter.

Great. I'd like to talk through maybe recent consumer behavior and consumption patterns. I mean, first of all, many have described this crisis as kind of the greatest CPG trial experiment of our lifetime. And Nomad too as discussed on the last call. I think it was a 4-point year-over-year increase in household penetration across its 3 largest markets, which we know can generally be a key precursor to brand development. So maybe what can you tell us thus far about how this is playing out for Nomad in terms of repeat purchase? What that might mean for how sticky some of this recent trial could be by new or lapsed users? So in other words, maybe what sort of retention rate might we expect from Nomad over time?

Well, to your point, it's very high. It's -- which is great. We're still experimenting a lot of things, as you can imagine. I think you mentioned it's the biggest experience over the last 25 years, and I can't disagree with you. So we're testing a lot of new and interesting things. But what we've seen so far is, for example, in Q2, you take your 2 largest countries, U.K. and Italy. And let's say, the rate of repurchase has been something like, oh, twice has been something like around 40%, which is 10% higher than it used to be. So that's one thing. The second piece, Andrew, is -- and nobody knows exactly to your point, how long it's going to last, but nobody knows exactly how long it's going to last. But the longer it stays it definitely in that category where people have tried frozen food, which is overall doing extremely well. And the longer they -- we -- obviously, we have the situation, the longer they will try. And I think the change, the likelihood of having them as new consumers and loyal consumers in the future is going to be higher. At the same time, we mentioned we're going to invest something like close to EUR 10 million in the second half of the year, just behind these new consumers behind Green Cuisine, behind all these things. That's exactly to your point. I think it's absolutely fundamental for us to retain these people, but at least at this stage, it looks very good.

Great. How does share of trial and repeat look for NOMAD? So trying to get a sense of how that looks, let's say, vis-a-vis competitors in key markets.

Overall, to make it simple, our rate is higher than competition. Again, it has to do with big brands and obviously, trustworthy brands. And at the same time, also, to be fair, the fact that most of our competitors are in frozen, let's say, in potatoes, could be in pizza, but they're not multi-category. The fact that we are multi-category is -- it definitely helps because people then trying the first time birds eye in peas, then go to fish fingers, then go to pancakes or to crabs or whatever. So that has a big impact for us. And it's part of, obviously, of the strength of the portfolio in our countries, right.

Maybe sticking with consumer behavior. I know you've talked about the opportunity to convert new frozen food eating habits more broadly into permanent repeat consumption. I guess what gives you the comfort of what insights can you share that consumers will continue these newer eating habits for a longer period of time, maybe even after some things kind of normalize? And how do you sort of plan to maximize that opportunity?

Let me start, Andrew, with the numbers that I'm sure you know, is -- sorry, I'm going to state the obvious. It's 10% of the consumers at this stage today, at least pre-COVID, who are consuming frozen food. At the same time, you have this good old number, which is 30% of the other consumers would consider going to frozen food. And it's been there for many years. So nothing new because it's a marketing story, I think, what does it take to take these guys? So the first thing is -- and I think it's been -- we've been working very hard behind this to improve the quality. And obviously, at the same time, to improve the perception people do have of frozen food. This has been, COVID, at this stage a catalyst because people, to some extent, had to try frozen. And what they see is what is -- they like it. So we definitely think that by coming up with the right pressure points, we're going to be able to keep part of this 30%, definitely. So it's -- but again, it's a journey marked with a big shock that is COVID.