Nomad Foods Limited (NOMD) Earnings Call Transcript & Summary

Good afternoon, everybody. I'd like to welcome back Nomad Foods to our Staples Conference. With us today from Nomad are CEO, Stefan Descheemaeker; and CFO, Samy Zekhout. Before I hand it over to Stefan for just some opening remarks, I would just say Nomad has continued to be one of the most sort of productive and predictable solid packaged food companies that we follow with very sustainable and consistent low single-digit organic sales growth, margin expansion and then the added kicker of accretive M&A. So this is a story that's come together very nicely under the leadership team we have here today. And we're excited to get a better look and a deeper look into where we go from here. So with that, Stefan, let me turn it over to you. And then when you're done, we'll be back with some discussion on some key topics. Thanks again for being here to both of you.

Thank you.

Thanks, Andrew. And we both, Samy and myself, we're really delighted to participate at your -- the Barclays back-to-school conference. And again, thanks for inviting us again. That's really great. If you allow me, I will start with a few brief remarks that probably will be very interesting for those new to Nomad. The first thing is just to calibrate the whole organization. We are the undisputed frozen food leader in Europe. We have big iconic brands: Birds Eye, as you know, Iglo or Findus. And they all stand for quality, for obviously, affordability. So they're big brands. They're really doing extremely well. And just to give you a bit of idea of what the scale of the organization is. So if we include in Fortenova that we're going to complete the acquisition during the fall, revenue-wise, around $3.5 billion and an EPS of $2. So since being formed in 2015 with our 2 founders, Noam Gottesman and Martin Franklin, this company has really been focused on shareholders' value creation. Based on, to your point, Andrew, a quite simple business model, it's, to your point, modest "organic" revenue growth, leading to strong free cash flow, double-digit EPS growth and then quite attractive returns. Over the last 4 years, that's what we've been doing. Total revenue CAGR on an annual basis is around 7%, including M&A versus 1% to 2% for food and adjusted EPS on an annual basis, again, in terms of growth is 13%. Again, how we've been able to do this, market share increase, EBITDA margin increase, strong free cash flow and then on top of that, obviously, a very strong capital allocation between very specific M&A targets and also share repurchase. And the next 5 years from that standpoint will not be different. So what we're going to do, we're going to apply this very same model, model that we keep improving year after year. So there will be improvements during that journey, obviously. But that's going to be the main foundation. So the foundations, as such, are very strong. It's starting with the category. Frozen food is a strong category. There has been a resurgence of frozen food over the last years. It's been made even more apparent with COVID-19. And obviously, on top of that, we have, let's say, very strong tailwinds with things like health and sustainability. They're doing very well with frozen food, and I'll come back on that one later. The portfolio is also very strong. Portfolio is -- 10% now is digital. And I can tell you, again, frozen food is doing extremely well in terms of e-commerce. 95% of our business is home retail. And again, we know that structurally, people will spend more time back home. And in terms of health and sustainability, 95% of our portfolio is considered as healthier meal choices. So again, very, very strong basis. From that point of view, we -- then we have developed a playbook, a business model, as I said, which seems to be simple. But again, what really makes a difference is the rigor with which we are applying the model. The model is based on facts. Strong demand behind categories like fish, vegetable, plant protein, point number one. Point number two is we've developed what we call our core business, our Must Win Battles. These are the categories where we have the highest market share, the highest growth potential and the highest gross margin. And by the way, fish, plant protein and vegetable, most of the countries are part of this core Must Win Battles. And from there, we are obviously very, very, very systematic in terms of where we're investing. We're investing behind the 70%, which is the total of our Must Win Battles, the core business of our sales, and that's we're investing our money, our time, our resource, our talent. And we're not deviating. That's the first part of a business model. The second part of the business model is the M&A. And again, very same rigor. We are investing behind frozen food in Europe. That's the pattern, and we're not going to deviate from there. 2021's been a quite active year. We started the year with the acquisition of Findus Switzerland. That was the very last piece missing for us in terms of brand. And we're going to finish the year with the completion of the acquisition of Fortenova, countries like Croatia, Serbia, Bosnia and other countries in the region. And so why it is big value shareholders -- it contributes to shareholder value creation? Quite simple again. We are, as we said, the undisputed leader, so we can apply scale. It is all categories. So we believe we have some skills. And from there, obviously, we can then leverage and generate synergies and then ultimately value. So that's the combination of both organic and M&A. So in summary, I would say that Nomad is not your typical food company. We were growing before COVID-19, we've been growing during, and we're going to grow again for many years after COVID. Our shareholders are very aligned with us and vice versa, by the way. And our playbook, which I explained, we're going to -- obviously, we're going to keep improving this playbook, but it's going to serve us for the future. And we know that with that playbook, we're going to keep generate strong performances and in 2021 and for many years to come. So with that, I'll hand it back to you, Andrew, for the Q&A.

Perfect. Thank you for those comments, Stefan. And maybe we start off with how -- you talked about your growth algorithm, which is based on organic growth -- revenue growth, cash flow and accretive capital allocation. Starting with organic revenue growth, if we remove sort of COVID from the equation, you've delivered consistent growth since 2017 at a time when many food companies have really struggled to grow. Can you talk a bit more about the core drivers? What's been the secret sauce, if you will, behind the company's success to date? And what gives you the confidence to continue along that trajectory, most importantly, once we get past the COVID comparisons?

Well, to make it simple, Andrew, I think it's really 3 words. One is this focus. A lot of people are talking about focus, but I can tell you, we are focused. Second is leadership in most of the categories and in most of the countries where we are present and then combined with operational discipline. I think these are definitely the key elements of -- for success so far. We -- every year, we're checking whether it's working, whether it's not working. What we see is this concept of core categories is absolutely important for us. Most of the time, we have a market share that is around 50%. We have the highest margins, and it keeps growing. So that is obviously a question of capital allocation or resource allocation. And we're not deviating. It's working, and we keep improving it. So that's, in other words, the secret sauce.

Plant protein has been a massive area of growth within food. And you entered the space in 2019 with your Green Cuisine brand. Can you maybe provide a bit of an update here? You've been targeting EUR 100 million in realized revenue by 2022, which you appear well on pace to achieve. So how do you -- how does Nomad think about the growth potential of the business beyond '22? And how do you view the sort of current competitive landscape of the plant protein category that you're involved in?

Well, to your point, I think we're performing well. Growth has been very robust. As you know, we started in 2019, so we started from scratch. And now within plant protein, frozen food, our market share in Europe is around 15%. So not far, by the way, from the global market share we have in Europe across all the categories. So we're growing fast, and we keep growing, which is great. Again, we are focused. We have a few subcategories. And we know that what we're doing is a bit the same as the rest of the categories. We are democratizing the category. We leverage our distribution in all the countries, which is great. We're using the brands in each and every country. So Birds Eye in the U.K.; Iglo in Germany, for example; Findus in Italy. And we know that these brands have great prudentials in terms of health, nutrition and sustainability, which again goes well with plant protein. And it's a great opening in all these countries and obviously, with the retailers and ultimately, with the consumers. So obviously, at the same time, we're learning a lot because it's a new category. But this is, again, the same kind of direction we want to take using our scale, but also using, obviously, the credibility of our brands.

If we move down to margins, you've done a good job of expanding EBITDA margins over time. How do we think about the margin opportunity moving forward? And are there areas where you think you need to invest further, whether it be A&P, indirect, price and things of that nature?

Our long-term algorithm, Andrew, is organic sales growth of low single digits and EBITDA growth of mid-single digit, as you know. There is some modest margin expansion built in that plan, and the magnitude will fluctuate in any year, as we've already shared. And our expectation is for both gross margin and SG&A to contribute. Within gross margin, we continue to execute our revenue growth management strategy, and we leverage our portfolio mix to our advantage. And within SG&A, we continue to invest in A&P, which is fundamental for our success, while being very disciplined around indirect costs.

Great. If we stay on the topic of margins, inflation has been a key topic. What are you seeing across your portfolio? I know it's early. But how do we think about Nomad's expectations for inflation in '22? And does Nomad feel the need to take pricing to cover the anticipated inflation? And if so, what gives you confidence that you can get that pricing through?

Yes. We are seeing inflation like most of the FMCG companies actually. And the cost pressure is more acute in areas like oil or logistics or freight and packaging. With that said, we do believe we are uniquely positioned for 3 reasons. The first one is that we have a strong portfolio, which is anchored in fish and veg where inflation is not as high as in other food companies. The second point is that we have scale and really deep expertise in buying that allows us to buy at attractive prices. And the third one, which is helping us now, which is FX, actually. And all in, we have managed the 2021 P&L extremely well, and that has given us good visibility into our EPS guidance for this year without having to take material pricing intervention. Next year, we expect inflation to be somewhat higher and something that we plan to mitigate through all the levers that we have been using in the past, including productivity and price.

Great. For your history, M&A has been an equally important driver of revenue growth alongside organic growth. And as you said, '21 was an active year. Starting first on Fortenova, recognizing that you still need to close the deal, how is the business performing? And remind us why this is a business that you're excited to bring into the Nomad portfolio?

Well, Andrew, let me start with how the business is performing. It's performing well. So I think it's going to be something like around EUR 50 million EBITDA on a full year basis. And we believe that's part of our business plan that we can improve this number by 50% over time with a combination of synergies and best practice. So back to your second part of your question, which is why we like the business. Well, again, I will repeat the same words that I've been repeating in my intro, which is it's frozen food. So we think we understand that category. That's hopefully because that's the only category where we are. So we kind of understand it, and we like it. Again, market-leading brands, iconic leading brands, you may say what these -- what are these brands, but Ledo and Frikom, these are equally brand that are -- that stand for a gain for quality, for affordability in the countries where they are present, very much like in Iglo, Findus or Birds Eye. So that's the second piece. The third one is leadership. Again, we are leaders in most of our countries in Western Europe. Same thing in these countries, Croatia, Serbia, Bosnia, same thing. So leadership. And then at the same time, good size. It's around EUR 300 million of sales. It's about 10% of our business. And we've been able to finance this acquisition through cash that we are a highly cash-generative organization and at the same time, with a very inexpensive debt. So the combination is great. And from there, with the playbook that we know, we know that is available to us, we're going to generate, as I said, synergies. So that's simple but compelling reasons. I would put it that way.

Yes. And a big portion of Fortenova's sales come from ice cream, which is a new category for Nomad. And certainly, while ice cream plays in the frozen space, in our view, there are some investors concerned that ice cream is a vastly different category relative to others in which Nomad plays. I guess how do you view the similarities and differences between these 2 in terms of operations, consumer behavior and the like?

Well, it's a very good question. And it's a question obviously that we had when we first contemplated the business. But the reasons are quite simple. The first thing, which is very obvious, you're talking about the same brands, in frozen food and in ice cream. That's one thing. The second thing is the route to market. We're talking about 120,000 freezers across these countries. The route to market is the same. So again, a lot of synergies. The third one, as you know, that we like it, a lot of people like it, but we definitely like it is leadership. These brands are leaders again in ice cream in their respective market. The margins are very, very nice. And so that's what we like. There are differences. Differences are, for example, it's more, let's say, seasonal -- it's a more seasonal business Q2, Q3. So Q4, obviously, you don't eat that much ice cream, that's very clear. It only represents 5% of our business at this stage. So it's nice to have a bit of seasonality in our business. So it's not a problem at all. And last but not least, it's a regional business. So, let's say, our objective is not to become the worldwide leader in ice cream. But this is based on the very strong business in that region with very strong protection. And we believe it makes a lot of sense. And by the way, we also learned 1 thing or 2 out of this. So again, a lot of good reasons to get there.

Great. And following the recent acquisitions of Findus Switzerland and Fortenova, is Nomad willing and able to do more deals in the near term, both from a financial perspective but also on operational and integration one?

Well, Andrew, in, let's say, in -- the short answer is yes. And we expect pro forma leverage to be in the low, mid, let's say, 3s by the end of the year and below 3s by the end of next year. And that leaves us with a good amount of flexibility from a financial perspective. I mean, operationally, we have been developing our integration capabilities for these type of scenarios. And depending on where we are on the integration of Fortenova alongside M&A opportunities, we always have the opportunity to stagger the timing of integration, if necessary, to secure a strategic acquisition without creating a necessary risk.

Great. And what does the current M&A pipeline look like? Aside from European frozen food, what type of assets in terms of maybe geography, size, categories and such is Nomad focused on?

Well, Andrew, I think you remember, I said we're not a typical food company. So we like focus, we like focusing in organic growth, and we like focusing M&A. So it's much less question of an aside. I think we like frozen food in Europe. We have a well-defined set of targets. We know the M&A game is such that you need to be ready but patient as well. It's going to come. We're going to remain disciplined. We're less focused on size for the sake of size. We're not going to deviate from that standpoint. And that's what we have. But I can tell you the portfolio is rich enough to justify to be patient and to do the right things. And again, synergies are there. The business -- today, overall business are more expensive than in the past. So synergies are absolutely critical in the value creation. So that's why we like it.

Great. If we pivot to the near term a little bit, I'd like to revisit some of the factors underlying your guidance. But before doing so, there seems to be a lot of focus on your guidance, of course, of 1% to 2% organic revenue growth, which would be really a phenomenal achievement on top of last year's 9% organic growth. So understanding there are many moving parts this year, can you help us better understand how dependent your EPS and EBITDA guidance are on this revenue outlook?

Sure. Let's start with EPS which we expect to grow between 11% and 14% versus the prior year. This will mark another year of double-digit growth despite having to anniversary peak COVID demand a year ago actually. And our visibility and confidence level is high in effect. I mean we've managed inflation well and have good visibility into our raw material exposure for this year. Our pricing is set. We are driving productivity in our supply chain. We continue to tightly manage our expense while still investing in the long-term health of the business and our brands. And we are seeing good performance from Findus Switzerland, a business which we have acquired and integrated earlier this year. The organic revenue growth is one assumption underlying our EPS plans. And as you said, 1% to 2% would be an exceptional achievement on top of the performance last year and represent MSD percentage growth on a 2-year compounded basis. This has been the plan all year and it remains unchanged. We expect actually H2 performance to improve based on a positive market share inflection and a return to a more normal progressional guidance, a recovery of the foodservice and growth in our international business. We're seeing actually a steady return to market growth -- market share growth over the past 3 months, which is really encouraging, and our core portfolio continues to perform very well. And last, I would say, while COVID has created some obvious demand tailwind, it is also -- it has also presented a number of operational challenges, like capacity constraints, trucker shortages and restricted travel, which has impacted some of our international plan. We plan to manage these through, but given all of the fact that we think we'll be closer to the 1% and to the 2% of that range. And back to EPS, we have a number of levers that gives us confidence in not only achieving our guidance but also building up a great business as we incorporate Fortenova and continue to execute our playbook on our base business.

Great. Let's be on the topic of sales and near-term performance. It seems like the area where, as you mentioned, you have the most control is market share. You lost a bit of share in 2020 and the first half of '21, and it sounds like that was really primarily driven by capacity constraints. How has share trended more recently? And what are your expectations for the rest of the year?

Well, to your point, Andrew, we lost a bit of market share and we hate it. There have been a series of reasons, mostly driven by supply chain constraints and then obviously, all the impact, indirect impact, like, for example, you reducing promotion as a result and all these things. But back to your first -- your question and back to what Samy said, yes, we've been regaining market share since May. So May, June, July. And what we see early signals, but at least we can -- we have a pretty good view with the large countries. We should gain market share as well in August, again, not -- we don't have the final numbers, but it seems to be very solid. From that standpoint, again, for the second part of the year, we definitely believe that we should gain market share during the next round of month, next month until the very end of the year. Beyond that, obviously, we don't know yet. That's -- you can't plan market share. But we have great plans to achieve this. We -- in terms of supply chain, we're in a much better shape. The demand, however, very different from one country to another is getting more normal. So with all these reasons and, obviously, then the right commercial plans, we are confident that we're going to keep gaining market share.

Great. Let's turn our attention to the longer-term story. At your Investor Day last fall, you introduced 2025 targets for a 2% to 3% year-over-year organic sales growth and EUR 2.30 in EPS. I guess what are the potential risks and opportunities? And does Nomad's '25 targets include the benefit from the recently announced Fortenova acquisition? And if not, how quickly does Nomad believe that this could accelerate the time line?

So let me start with the point about Fortenova. So that's coming on top, obviously. It's a like-for-like, the 2% to 3%. So that would be too easy, obviously, to add acquired sales. But definitely, we also believe that Fortenova, on a like-for-like basis, will help because we think that the growth rate will be closer to mid-single digits, which is about twice the rate -- the growth rate we have for the rest of the business. So that's a part, that's for Fortenova. So now we're coming back to the 2% to 3%. The first thing, as I said, is the category is very strong. It's sound. We have very strong credential, and we have very strong tailwinds, as we said, in digital, in terms of health and sustainability. I think we can do more, we can do better from that standpoint. And we have what it takes to do this. The content is great. Now we need to leverage that even further. The second piece is our playbook, again, back to this focus, religious focus in terms of organically. We still believe -- we believe that the core categories or the Must Win Battles can deliver more, as we said. Highest growth potential, highest margin and the highest market share. So again, that's going to work. We need to make sure that we're not going to deviate for this. And on top of that, which is obviously different now that we move into some, let's say, more important sales volumes in terms of Green Cuisine. Green Cuisine is coming on top of what we had before 2019. So that will help. International is going to take a bit more time. But again, will help also in the next 5 years. And we also believe that there are other things that we have in mind. It's too early, but that we should also be in a position to leverage. So with all these reasons, we definitely we believe that we can achieve this 2% to 3%, which is, again, a bit higher than the "modest" organic revenue growth that we mentioned to start with.

Great. And we've got about, in our remaining, call it, 2 minutes or so. As CEO, what keeps you up at night? And where do you expect the company to be sort of different over the next 5 years versus the past 5 years?

Well, let me start with -- first, I sleep reasonably well. But when I don't sleep well, I think it's a combination. You've heard me using the word rigor and disciplined and focused many times. And I think what we have ahead of us is a lot of opportunities. And the point is to how to make sure that we're going to do [ and, and, and ] with the same rigor, which is easy "when you have only one, you're adding M&A, that's okay." I think we're dealing with this, and we took us 2 years to do this. Then we're coming with Green Cuisine and other things that are going to come, and that's the ability, obviously, to do these different things at the same time. So that's absolutely fundamental. And that's obviously more -- a bit more difficult, but the opportunities are such that we have to be able to go that way. But to your second question, which is where we think we're going to be in 5 years. Let's say, Fortenova is the first step in Central and Eastern Europe. There should be others. So when we're talking about undisputed leadership in frozen food in Europe, that's going to be really Europe and not limited to Western Europe. So that's the first thing. Second, I really believe that frozen food has a great future. And so we're going to -- as a market leader, we're going to obviously leverage and build on these things like health and safety and sustainability. So that's going to be very important for us. And on top of that, as I said, you have Green Cuisine, you have plant protein, you have other things that will come, I'm pretty sure that will be probably more tech-related. And I think that's -- frozen food is doing well, and we're preparing ourselves for this. But definitely, the portfolio will be different in 5 years and for the right reasons.

Great. Well, I think we'll have to leave it there. I want to thank you, Stefan and Samy, for being with us today. We appreciate it and look forward to tracking all the progress as we go forward. Thanks, again.

Thank you.

Thank you very much, Andrew.