Nomad Foods Limited (NOMD) Earnings Call Transcript & Summary

Greetings, and welcome to the Nomad Foods acquisition of Fortenova's Frozen Food Business Group. [Operator Instructions] As a reminder, this conference is being recorded. And it is now my pleasure to hand today's call over to management. Thank you. You may begin.

Thank you for joining us on the call today. We are excited to announce our agreement to acquire the Frozen Food Business Group from the Fortenova Group this morning. With me on the call today are Chief Executive Officer, Stefan Descheemaeker; and Chief Financial Officer, Samy Zekhout. They'll be joined by our Co-Founders, Noam Gottesman and Martin Franklin, for Q&A following our prepared remarks. Before we begin, please note that the comments during today's call and the accompanying presentation contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are considered forward-looking statements. These statements are based on management's current expectations and beliefs as well as a number of assumptions concerning future events. We do not undertake to update any forward-looking information provided on this call, except as required by applicable securities laws. Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some of these risks and uncertainties are identified and discussed in the company's filings with the SEC. We'll also refer to certain forward-looking non-IFRS financial measures. Please review the disclaimers relating to these non-IFRS financial measures, which are included in the accompanying presentation for this call. One final note is that unless otherwise stated, we will be referring to the Frozen Food Business Group, also known as FFBG, as Fortenova throughout this call. And with that, I'll hand the call over to Stefan.

Good morning, good afternoon and thank you for joining us on short notice. We're thrilled to announce that we have entered into an agreement with the Fortenova Group to acquire their Frozen Food Business Group, which includes an iconic portfolio of brands such as Ledo and Frikom. These brands have incredible consumer awareness with unparalleled #1 share in several countries. They stand for high-quality food that is convenient and nutritious. And as you've come to learn, they're, in many ways, the Birds Eye, iglo and Findus of the Balkans. This acquisition expands our geographic footprint into 8 new markets in Central and Eastern Europe where we are currently not present, Croatia, Serbia, Bosnia & Herzegovina, Hungary, Slovenia and many more. And as you'll hear, the financial impact of this transaction is quite meaningful given its size, our synergy plans and the attractive underlying growth of these brands. With that, let's jump right into the details of the transaction. To repeat, we are acquiring the frozen food assets of Fortenova Group. As you may know, Fortenova is a Croatia-based conglomerate with operations, which includes retail, agriculture, beverage, spread and frozen food. The perimeter of this transaction is specifically around their frozen food business, including both frozen savory and ice cream. The purchase price of EUR 615 million represents a valuation of under 10x EBITDA when including approximately EUR 15 million of annual run rate synergies. This is an exciting transaction for Nomad, both strategically and financially. Strategically, it meets 3 important criteria. First, it expands our footprint into Central and Eastern Europe where we do not currently have a presence. These are developing countries where the opportunity for growth is approximately 2x of our existing Western European market. We are entering these markets with #1 brands, which are institutions in their respective countries. For example, Ledo is one of Croatia's most loved brands with consumer loyalty on par with brands such as Coca-Cola, [indiscernible] and [ Barilla ]. And second, it introduces us to ice cream, an exciting new product adjacency to our core frozen food portfolio. This is a new category for Nomad and one where we expect to learn a lot. And finally, given the strength of Fortenova's management team and its strong operational footprint, this acquisition also creates a platform for us to expand further with the expensive Central and Eastern Europe region. That was the strategic rationale. Let's now turn to the financial impact of this transaction. Firstly, this is an impactful and sizable transaction for us. We expect it to generate nearly EUR 300 million of revenues and over EUR 50 million of adjusted EBITDA in 2021 on an annualized basis. That creates a combined annualized revenue base of nearly EUR 3 billion and adjusted EPS base of over USD 2 per share in U.S. dollar. The attractive financial profile of this business will enhance our overall organic revenue and adjusted EBITDA growth profiles. We're expecting to realize approximately EUR 15 million of annual run rate synergies by 2024 and see a path to growing the adjusted EBITDA base of this business by approximately 50%. We expect this transaction to be high single-digit accretive to adjusted EPS in the first full year post close. Samy will discuss financing and capital structure in more detail, but the headlines are that we plan to finance these deals through cash and borrowings while maintaining a reasonable leverage profile. And finally, we expect the deal to close during the third quarter of this year. I'd like to provide you with some more details of this business. We covered many of these points already, but to recap, these are unparalleled market-leading brands in countries like Croatia and Serbia where the outlook for growth is nearly 2x that of Western Europe. Ledo and Frikom operates a similar global local model to our brands. For example, Ledo is known as a local brand in Croatia, although it also operates in other countries. The same goes for Frikom, which is the core brand in Serbia. The business has an even balance between frozen savory and ice cream, which each represents roughly 50% of sales. Similar to Nomad, the savory frozen portfolio here has strong representation within fish and vegetables. Ledo and Frikom both have strong market share, especially in the larger markets in Croatia and Serbia. And as a result, private label share is relatively low. Fortenova has a unique route-to-market in this region and co-distributes its savory and ice cream categories. Here, you see a snapshot of the different types of products that this portfolio offers, a wide range of high-quality frozen food staples with many similarities to our existing portfolio on the savory side. Fortenova has an incredible ice cream portfolio, ranging across multiple new states, price points and channels. One important area of exposure is Croatian tourism, which has effectively been closed for business over the past year. We look forward to the post-pandemic recovery here and learning more about this highly profitable and dynamic category. Looking at the map, you can see that Fortenova geographic footprint is meaningful relative to our existing business. With nearly EUR 300 million in revenue, this business will represent 10% of our combined revenues. Importantly, it provides us access to over 30 million new consumers, which is comparable to the average number of consumers in the U.K., Italy and Germany. And finally, on people. Fortenova has 3,000 employees, a fantastic management team and a culture that we think will fit perfectly within the Nomad Foods organization. We've developed a global local model over the years that realizes the benefit of pan-European scale and capabilities while adhering to each market's unique local characteristics and traditions. For example, while we set the Findus brand in France, Italy, Sweden and other countries, it is clear that food and consumer tastes are local. Our portfolio, marketing and route-to-market are adopted as such. And we intend to do just that with this acquisition. I'd like to contextualize the size and impact that this acquisition will have on the combined business. U.K., Italy and Germany, as you know, are our 3 largest markets. However, the Fortenova frozen food business becomes our fourth largest business when viewed as a combined region. It will be around 9% of our revenues. So it's quite meaningful to Nomad's total revenue base. On the right, we also show pro forma category mix, with fish and vegetables will continue to represent the large majority of our business. We have developed a repeatable M&A playbook and have exciting plans to leverage the combined scale and expertise of Nomad Foods and Fortenova. Our plans are very much in line with global local model that I just outlined. As the European frozen food leader in a pure play, we have scale, multi-geography expertise and strong discipline when it comes to expense and working capital management. We expect this to result in approximately EUR 15 million of run rate synergies by 2024. At the same time, we also believe we will learn and benefit from Fortenova in many ways. These are potential reverse synergies that we have not yet quantified. For example, there are an exceptional ice cream company. This is a category that is new to us and one we're excited to enter. Our business plan will be to optimize the local portfolio within the existing distribution. As we learn more, we will evaluate other ways of leveraging the operational footprint and innovation leadership on -- in ice cream. As I stated upfront, the acquisition of this business creates a strategic platform for growth in Central and Eastern Europe. We intend to do this both organically and inorganically. And finally, Fortenova has a unique and well-established route-to-market where we believe we have an opportunity to learn. With that, I will hand it over to Samy to discuss the financial overview of this transaction in greater detail. Samy?

Thank you, Stefan, and thank you all for joining us on the call today. This is an exciting day for Nomad Foods as the acquisition of Fortenova expands our portfolio into a new and dynamic European geography with an incredible branded portfolio of local jewels. In terms of deal highlights, we are paying approximately EUR 615 million to acquire this business, which equates to under 10x EBITDA, including synergies. You heard Stefan outline the sound strategic rationale for this deal. We expect it to be equally impactful from a financial perspective for the following reasons. First, we expect Fortenova to generate mid-single-digit organic revenue growth, 2x that of our existing business with an opportunity to grow adjusted EBITDA by 50%. Second, with synergies, we have a clear line of sight to over 20% EBITDA margin within 3 years of close. With nearly EUR 300 million of revenue expected this year, this business will represent approximately 10% of our combined annualized revenue base in 2021. On the same basis, this equates to adjusted EPS of over USD 2. We expect this deal to be high single-digit accretive to adjusted EPS in the first full year post close. And we expect the deal to close in the third quarter of this year and plan to reflect this business in our 2021 guidance at that time. In terms of capital structure, this transaction is expected to take our pro forma leverage up from [ 2.8 ] to 3.8. However, with the cash that we generate, we expect to deliver to under 3x by the end of 2022. Overall, we continue to maintain a moderate leverage profile and remain committed to a strong credit rating. You've seen this slide many times before. This is our stated M&A criteria, which we remain very disciplined on. This transaction checks all of the boxes that you see here, taking us into new categories, countries and channels, and has a clear path to grow, generate strong cash flow, and has a very compelling strategic and financial rationale. Finally, with the valuation under 10x EBITDA with synergies, we believe we paid a reasonable valuation for these rare assets. We have developed a strong track record for acquiring and integrating complementary frozen food acquisitions in Nomad formation in 2015. In fact, with combined annual revenues approaching EUR 3 billion this year, we have nearly doubled the revenue base of this business relative to where we first started as Nomad Foods in 2015 when we made our first anchor acquisition, the Iglo Group. This milestone has come through a combination of sustained organic revenue growth and a series of strategic acquisitions you see here on this slide. We have delivered superior financial results over the past 5 years with consistent performance year in and year out. Based on our current 2021 guidance, we expect to deliver a 5-year revenue growth CAGR of 6%, with balanced contribution from organic growth and acquisitions. This translates to an EPS CAGR of 13%. We remain committed to growing EPS at a double-digit rate, and the acquisition of Fortenova puts us in a great position to achieve the long-term financial targets that we are applying back in November. You see here that on a combined and annualized basis, we are a company with nearly $3.5 billion revenue and over $2 adjusted EPS this year. And with that, I'll hand it back to Stefan for closing remarks.

Thanks, Samy. We're delighted to be able to announce the acquisition of Fortenova Frozen Food Business Group. It is not every day that market-leading brands like Ledo and Frikom come to market. The Fortenova Group recognized the strategic value and long-term vision of the category that we offer as owners of these brands, and we certainly plan to further develop this business from a very strong foundation. While this is our second acquisition in 6 months, you should not assume that we are done. Our M&A pipeline is active, and we will continue to pursue unique opportunities as they arise. That could mean entry into new countries with also complementary categories in existing markets. And at the same time, we continue to drive strong organic growth in our existing business through our core portfolio of Green Cuisine and other white space opportunities. We continue to believe we are in the early stages of value creation and look forward to delivering the strong results that you've come to expect as shareholders in our company. And with that, we are happy to take your questions.

[Operator Instructions] Our first questions come from the line of Rob Dickerson with Jefferies.

Congratulations. I guess just the first question -- my questions are more modeling-based than strategic because I think the strategy makes sense. I guess just for 2021, you said EPS would be $2 or -- sorry, at least $2 per share, but that seems much higher than the high single-digit accretion in year 1. Is there anything kind of upfront that's weighted from time of close in the year-end that gives you kind of an unequally weighted bump this year relative to the go forward? First question.

Well, actually, as we said, we expect it to close in Q3. We mentioned that the EPS is effectively -- at $2 is effectively a pro forma and it is in line with the high single-digit accretion.

Okay. No, I appreciate that, Samy. And maybe my math is wrong. I was just thinking -- I saw its guidance was EUR 1.50 to EUR 1.55 for the year, right, in euro terms -- well, whatever. I'll circle back. No problem. So I guess the second question is just based on the growth target of mid-single-digit organic for the business. I guess, first, if you could just provide some color as to why you expect that business to be growing as quickly as it is, very simplistically. And then secondly, just on the EBITDA margin expectation and dollar growth potential, maybe just explain a little bit more why you think you can get some of the synergies out of the business, and maybe it should perform inefficiently as is. That's all I have.

Okay. Thanks, Rob. Well, the answer is quite simple to your first question. It's a faster-growing category in these countries. So the consumption is lower than in Western Europe and, obviously, in the U.S., and we see that there is -- definitely, there is an acceleration. So a lot of catch-up. And obviously, to be combined with our model -- with our flywheel model where we are going to be fully focused behind these brands, and so we've demonstrated that we can make it grow even faster. So that's that. And I think the big thing is again -- and it seems simple, but it's not. We're really so focused. We are pure play. We're a unique company from that standpoint as frozen food. And so this is the only thing we're going to be doing. And we did, as you know, with -- we're doing it in Western Europe with great brands. Again, let's say, these brands again are great brands. That's very important. It's very much the same as iglo or Birds Eye. And then we're going to apply, obviously -- being obviously local global, we're going to apply the same model. So we know that we're going to grow faster than what we're doing right now in Western Europe. So that's that. And at the same time, back to synergies, we're working very hard on the synergies. You know our model. Model is a bit different from other companies. We're investing first, that's quite important. We're investing for growth. And then you could see that the combination of the synergies that [indiscernible] a combination of costs but also obviously of top line. And while we haven't quantified yet because more to come is what we can learn from Fortenova, the model is very similar, but there are some -- also some interesting differences that probably we could apply back to Western Europe.

And then if I may, just a really quick follow-up. Just in terms of the ice cream side of the business, which is material, Stefan, I've heard you say a number of times before, right, 2 categories you love to be in would be frozen pizza and ice cream. Ice cream is here. For the time being, at least, it seems as if it's about kind of making the business more efficient, capitalizing on the close and wins where you exist already with the business, not expanding quickly into Western Europe with ice cream, that could come later. But we shouldn't be expecting that over the next couple of years. Is that fair?

I think it's -- I think, Rob, it's fair. I mean we -- it's the same thing. The first -- first thing first. We're going to learn from ice cream. I think it's really a great category. Makes a lot of sense, same brands, and we're going to learn a lot. And if at some stage, there are some opportunities abroad, we will obviously -- we will use these opportunities. But first thing first. So it's the same thing as -- Goodfella's is a great example. Goodfella's, we've really focused so much on the U.K. and Ireland. Now we are the largest -- by the way, it's the highest market share ever over the last 7 years, at least, which is a big difference. And that's exactly the kind of things we want to do. And then if at some stage, there are other opportunities for us, especially with our network, let's go for it.

Our next questions come from the line of Faiza Alwy with Deutsche Bank.

I was wondering if you could share a little bit more about the gross margins on the business because the EBITDA margins do look pretty high. So I'm wondering if it's lower SG&A versus gross margins.

More or less -- actually, the gross margin and the EBITDA margin are in line with the existing Nomad business, but they are higher when including the synergies. And we definitely have an opportunity for gross margin to move up as we develop our growth plan and our [indiscernible] and realize the synergies.

Okay. Great. And then could you share a little bit more about the seasonality in the business? So I know you said that ice cream is obviously a 2Q, 3Q focus business. Is there any way to quantify maybe how the seasonality is in terms of both top line and profitability?

Let's [indiscernible] that way. It's -- at this stage, I wouldn't go too much in the details of what it is exactly. But it's very clear that when you see -- or let's say, the Nomad savory frozen business is very much geared towards Q1 and Q4. So when you integrate this into the global Nomad, I think it will rebalance a bit the seasonality between the 4 quarters, which is interesting from that standpoint. Again, [indiscernible] obviously, time will tell. But at this stage, that's what you should remember. Remember, it should rebalance a bit the importance of the different quarters at the Nomad Foods level.

Okay. Great. And then just last one. This business was part of a bigger company. So are there any like costs required upfront to either stand up the business or any costs required to achieve synergies that might hit cash flow?

It's including in our business plan overall. As you know, it's part of the acquisition. As you know, I mean, when we take over business, I mean, there are integration costs. And our model for M&A is always to invest in the business that we acquired to really fuel profitable growth, and we have some time to make some upfront investments. That's all factored into our business plans.

Our next questions come from the line of Bill Chappell with Truist Securities.

This is actually Grant on for Bill. I guess first one, just on the recent business performance of the group. Just hoping to get some more context around that. What has it been growing at maybe pre-COVID? Is it in line with that mid-single-digit organic growth? And how do you see that or how have you seen that kind of changed over the past few years?

Well, let's say, before COVID, to your point, Bill, it was a very nice business, growing nicely, very much in line with the market, which is great. It shows something in terms of strength of the -- brand strength. Then obviously, came COVID. And then unsurprisingly, you have obviously the retail side moving up very nicely. It's very much what we have experienced, by the way, Bill, with our own business in Western Europe. And at the same time, unsurprisingly, for example, there is a bit of food service and also exposure to Croatia tourism, especially with the ice cream. And you can imagine that for example, in 2020, when the, let's say, the tourist market was literally closed. Obviously, that had an impact. More to come obviously this year. I think it's going to be a slow -- it's going to -- comes little by little a bit better during the summer. But then beyond this, quite frankly, I'm not an expert, and nobody knows exactly what's going to happen. I think what we see in the long term is these brands are moving very nicely, and we have a lot of tailwinds ahead of us.

Got it. And then actually, one on the competitive dynamics of that Eastern Central and Eastern European market. It sounds like with the lower private label share and a strong brand positioning, it may be a little less competitive than Western Europe. Is that fair? Or are there other strong branded competitors in the market as well?

Well, let's say, these markets are competitive by nature. So yes, private label is lower. It's lower than in Western Europe. The Western Europe number, it's more in the region of 40% plus, 40% plus. Here, we're more in the region of 20% plus. So that's obviously -- and then you have these fantastic brands. At the same time, you're going to have an interesting, let's say, 2 phenomenons. One is we definitely believe that let's say, the consumption is going to grow, and it's going to grow also on top of, let's say, the expansion of the modern trade. And at the same time, modern trade will also come with probably with a bit more private label. But again, this is something that is totally fine with us. As you know, it's something that's part of our business model in Western Europe, and we know how to deal with private label the right way. So that -- from that standpoint, it's not going to be different. The difference is probably intrinsic growth to -- back to Samy's point is higher.

Got it. And then last one for me, just on ice cream. What are some of the learnings that you're trying to get out of this business? Maybe before, it seems like you would expand it further into more Central European countries or potentially add an acquisition for Western Europe. What are you looking to learn about the business? And what kind of thought process or decision-making criteria are you looking at for organic expansion of ice cream versus acquisition platform to expand the ice cream business?

Well, we'll obviously -- we'll need to understand how it works, at the EBITDA level, at the -- obviously at the food service level, together with the other categories. At the same time, it's a brand-new category, Bill. But at the same time, it's interesting. We have a lot of our people that have a good experience in ice cream, and they like it. So I think we're going to learn a lot from, let's say, from the Balkans standpoint, but also based on the experience of our people. So from there, we will see how our -- what is -- how much -- how big is the importance of distribution versus the power of the brand and that kind of things. But again, nothing new from that standpoint. So actually, that we also need to understand, obviously, the combination and how synergistic they are with the savory frozen, which we believe is important and, again, how we can learn from this to apply to other countries. But it's a great opportunity for us. That's the only thing I can say. It's absolutely fantastic.

[Operator Instructions] Our next questions come from the line of Jon Tanwanteng with CJS Securities.

It's Charlie Strauzer for Jon. Just picking up on some of the other commentary and questions. Can you at this point pursue more acquisitions? Or do you feel like you have to digest this more for a bit before you're comfortable to kind of get the leverage range down as well? And it seems like FFBG would be a great platform for more tuck-ins in the Eastern Europe, kind of expand on that a little bit more.

Well, let me answer first financially. I mean are we going to end up after this acquisition with a leverage of 3.8x with a great free cash flow? As you know, it's a good [ figure ] -- cash machine and will be lower than 3 by the end of next year. So it's -- so we believe that there is no reason for us to stop. I would have said probably something like 3 years ago, let's digest a bit because besides the financial slide, we were not fully ready with our business model. But now in the meantime, I think we have learned a lot. And I think I really feel comfortable to be able, from the management standpoint, on top of the financial standpoint to do other things. Then obviously, you need to be ready. And as we know, as M&A, you need to be very -- you need to be proactive, but at the same time, you need to be ready when it comes. And at the -- I know that at some stage, there was some impatience when it would come. You need to be ready when these great opportunities do arise. And that's exactly what happened with Fortenova and these brands like Ledo and Frikom.

Martin, do you want to follow up to that one?

Look, I would just -- hi, Charlie. I would currently add that these types of properties don't come around all the time. Stefan has touched on this, and I'd like to emphasize it. I think that if another region that fits perfectly into our portfolio comes along, I don't think the timing is a factor, and we have more than adequate resources to -- and from a management and financial standpoint, to absorb another acquisition. These are great opportunities, and they have literally decades of runway with brands that consumers literally have grown upwards since childhood. So the intangible value of that is an opportunity. Obviously, we wouldn't want to miss should another region become available.

Our next questions come from the line of Andrew Olsen with UBS.

Samy, maybe just one for you. You mentioned that you were -- some impressive targets to expand the revenue base 50% and then have line of sight for 25% EBITDA margins within the first -- within by year 3, I believe. So feel free to correct me on those. But could you just give some of your -- what planning went into those targets? How much came from cost synergies versus revenue synergies? And then I guess how much is it going to come from expanding the current footprint? And then bringing some of those brands to Western Europe or, conversely, bringing some of your Birds Eye, what are the opportunities to bring some of your brands into this new region?

I'm going to give you a bit perspective. Just regarding the -- on the metric there. The organic growth of the business, the top line is mid-single digit. We mentioned that the adjusted EBITDA would be in the high single-digit percentage. And they are -- just to give you the perspective, they are twice, [indiscernible] overall. The metric that you need to keep in mind is that what we declared is effective that we are planning to grow our EBITDA base approximately by 50% over the planning horizon we had mentioned. And the growth is really [indiscernible], it's going to be balanced between [ effective costs ] and commercial synergies. Stefan is alluding to all of the opportunities we have. And honestly, there are a lot as well. I mean even part of the brand, [indiscernible] unique assets. From a cost standpoint, we are deploying some of the classic algorithm we have through the different parties, but we have not yet quantified some of the cross-selling opportunities. What affected the [indiscernible] driver in the rest of the Eastern European region or in Western Europe and vice versa at this stage. But if you think about our algorithm and our [ rich ] playbook, cost, procurement, expense management, NRM, all of that has been included, if you want, in the playbook that has defined the [ business plan ] and that supports the acquisition [indiscernible] very well.

Our next questions come from the line of Jacob Nivasch with Credit Suisse.

This is Jake for Rob here. Just a quick one here. I'm not sure if I missed it, but can you tell us what the revenue was or EBITDA was prior to the pandemic? Any color there?

We had actually -- we just mentioned that we had EUR 279 million, I would say, from a revenue standpoint. And I can get you to the specific number. I mean [indiscernible], I mean, the business was growing pre-COVID, and we're not going to [indiscernible] right now. We'll give you the [indiscernible] later on.

Got you. Okay. And then I guess -- and then on -- I guess on the synergy side, I guess, can you dig a little deeper there? What specifically -- I guess, where do you see synergy creation most acutely? Is it perhaps -- are you -- is it sharing innovation across platforms? Is it perhaps try to expand the plant-based offerings maybe in Eastern Europe? I guess any color there would be helpful there.

Absolutely. No problem. I think on that one, [indiscernible], as I was mentioning before, I mean, within our playbook, we have delivered, let's say, a strategy that [indiscernible] and are proven to be very -- working very well. Procurement, for instance, we buy globally our ingredients. And frankly, having that leverage and benefiting the Fortenova business, I mean, it should be a plus. From an operational expense, as we have mentioned, we have developed very aggressive [indiscernible] program within manufacturing and logistics. And we have best [indiscernible] the CapEx footprint. On expense and working capital management, the business has done very well, but I think we do have [ approaches ] that have been proving to extract value even further. And on the commercial side, when you look at the portfolio that Fortenova has in the part of our portfolio and our know-how, we can really drive a fair amount of, let's say, top and bottom line synergies driven by leveraging towards our toolkit, our marketing efficiency, our NRM, our [indiscernible] base. So there are clearly a number of areas we have mentioned that's clearly going to be a huge contributor to the value creation of the business.

There are no further questions at this time. We do appreciate your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.