Nomad Foods Limited (NOMD) Earnings Call Transcript & Summary

All right. Welcome back, everybody. Thank you. Thank you to Nomad Foods. I'm super happy to have you guys at the conference. Stefan Descheemaeker, CEO; and Samy Zekhout, CFO. Again, thank you. We're going to -- today's conversation will be entirely Q&A. And we'll just dive into it. We'll try to balance the near term -- because that is obviously very topical -- versus longer term, more strategic topics.

Let's just start at a very high level, as I'm sure we have a broad array of investors and knowledge bases in the room and listening in. European frozen food. What makes that a compelling category for Nomad in general? And how does the category look today? Just as a high-level start.

It's a super question. And actually, it's a question when we started Nomad 6 years ago, 7 years ago now, we could have become some sort of food conglomerate. We were starting with the merger of 2 leaders in the frozen food industry between Findus, Birds Eye and Iglo but at the same time, we could have become something like global food, whatever. And very early on, we came to the conclusion, why it's a great category that has much more to offer. It's affordable. It's convenient. We've come to the conclusion, it's very sustainable. We've gone -- we've worked a lot on that piece. And well, it's very healthy. When you think about the proportion of food which is healthy, it's very high. And we thought, well, we're starting over a very strong baseline from a strong position, and there is much more to do. And that's what we did by focusing on the key categories and also by going through a minimal approach, which was very focused, all about frozen food, and we intend to keep it that way. So a lot of good things. And then when you think about near term, well, recession time, it's not an if, it's a when. It's a category that is doing very well during these times.

Okay. So let's level set, pick up on -- from first quarter results, level set on guidance. High single-digit revenue growth is the target, low single-digit organic growth within that and double-digit EPS growth as it was before Russia, Ukraine, et cetera. The current pricing environment is obviously topical -- you're smirking, so I'm sure you've gotten this question.

No, not at all. Not at all. The first time.

I guess talk to us -- remind us of what you've done so far, whether more pricing is potentially needed and how both the consumer and the retailer so far has reacted.

So let me start with a few words and then I will give the word to Samy. Actually, the world is changing. And so the "rules" that were obviously important in the past are changing as well. So in the past, we only needed one price negotiation per year, but fine. It was 1% COGS, 2% COGS and you don't need more than one negotiation. When you're going through a, let's say, mid-teens in terms of COGS, where the things -- all the bets are off. And so very early on in the game, we said and people were looking at us with a bit of skepticism -- yes, we need a second wave and we will probably go through a third wave. So with that, I'm giving to Samy, just going to explain where we stand at this stage in this process.

Thank you, Stefan. I think our inflation outlook has been fairly evolutionary, I would say, starting with clearly a perspective when we came out of last year, the time we did our planning, at about, let's say, a mid-single-digit inflation. And as we got to CAGNY, we clearly realized that, that was not sufficient. And hence, we introduced the point of the imperative need to do a secondary price increase, I mean, during the year because simply, we move from mid-single to high single. The reality is that since then, the overall level of inflation has moved to the mid-teens, and that has required us effectively to expand -- I mean, the secondary pricing to the level we're executing right now. So it's definitely something new, I mean, to be very fair. Back in February when we announced that, I mean there were very few considering effectively that execution. And now the vast majority of people acknowledge the fact that, in fact, inflation is moving in a very dynamic way. So we've completed first wave now clearly in over Jan-March. And now we are getting exactly into the second wave of execution and rolling it out across the markets. And we're going through discussion. I mean, that are definitely not easy, but clearly retailers want to scrutinize the substance of our pricing recommendation in order for them to make sure that they maintain the traffic that they need from a shopper standpoint, and that, effectively, the impact on elasticity is manageable overall, I mean, throughout the year.

And how do you assess those concerns, retailer concerns, investor concerns over elasticity against a demand backdrop when it's a question of when, not if, in terms of recessionary pressure?

At this very stage, maybe let me try to give a bit the landscape. I mean in the past, you go back to virtually the last big price increase we had back in 2019, fish price went up. We had to pass the pricing. And clearly, this time, we're not amongst the only ones that had to price. I mean, price increase that are more, if you want, in the mid-single. We do have measurement tool to measure elasticity when you have one category, one sector, I mean that is moving price. Here, the problem is everything is moving. And so the concept of relative pricing is a very important one, which is very difficult to predict, I have to say. It's not just an element of food. It's within food. It's outside of food and so on. So we have to use models on the one hand, but on the other side, we have to be very close to the consumer and frankly, the retailer by monitoring in an empirical way the implication of that. So what we're seeing so far on the basis of the first price increase is limited move, very much consistent with the elasticity assumption we have. Now as we get into the second wave of pricing, which will be more subsequent but more consequent, then we will have to really closely look when it gets executed in store. Probably around summer time, we'll have a better reading at that time.

And price gaps as you move forward within a margin of comfort for you? Is that -- are price gaps at all a concern in any pockets...

Vis-a-vis private label?

Vis-a-vis, yes, private label or however you want to look at it. Well, even other categories potentially.

Even if you look -- you start looking with the private label, which is the obvious...

Yes. Which is 30% or so of the...

Well, it's a bit more. In most of the subcategories we have us, maybe another guy in the private label. Yes. Well, they're going through the same kind of COGS, so they have no choice. They will have to price. I would even argue that with the same amount of price they have to go through, on a relative basis, it's going to be higher. The question we don't -- and we don't have the answer, is what's going to be more important for the consumer? Is it going to be, oh, the brand is now growing price -- price-wise but it's growing less than the private label, or is the absolute number -- the amount. We don't know yet.

The percentage versus the...

We don't know that yet. The only thing that we know is we still have the promote tool. We also have what we call PPA, which is basically going from 15% to 13 to make sure that we're not breaking an important price point. So you still have a lot of tools to alleviate that piece.

In your categories, do you see an element of trade in into the category from away-from-home consumption that stays at home to mitigate some of the potential trade down?

The answer at this stage, the answer is no at this stage because what we see is -- you may have seen this overall around us, restaurants are full.

We noticed.

Restaurants are full. I guess it has to do with the psychology. We all have been stuck for 2 years. So we definitely need now to go and enjoy the rest of the life, yes? I think the moment of truth will really come in back to school and then I think reality will start to bite and not limited to a price but across the board. And then you will see probably trading down from restaurant to retail and from retail -- within retail from different kind of food. And I think we are well positioned from that standpoint as still being very affordable.

Great. Is your -- maybe are you seeing anything today or as you think about that kind of back to -- by the way, I kind of agree with you. I think it's -- we're all going to enjoy the summer and then realize things have -- then we'll have a moment of truth come September. But are you -- as you think about that potential inflection point, is it across the board? Are you -- is it low income consumers? Where does -- where -- how are you expecting it to evolve?

I think we have to adapt ourselves to different people coming in and potentially going out. So we -- there will be people coming from, let's say, upper side coming from restaurant. We need to be ready for these people. And so we're preparing ourselves as well with the right kind of assortment. And at the same time, we also need to be ready with things that are affordable for people, the risk of going out to some of the categories. So we're working very actively on both sides.

Okay. Fortenova, how is that progressing versus plan come -- in '22? And is the -- are the contributions to fiscal '22 that were assumed, which I think personally, were somewhat conservative as the year started, are they on track? Are they -- where are we?

No, I think we're very pleased with the acquisition. I think when you look at all of the parameters in terms of business development, innovation, pricing, execution, clearly, in-store presence, frankly, I would say, we're very, very pleased. We are having now a season that is just starting on the ice cream business, it sounds to be very promising. Clearly, we see a lot of potential in this business. I mean, most of the assumptions we have made during the acquisition work and the due diligence are being confirmed there. Of course, it's -- I'm not saying it's a walk in the park. It has its own challenge. But we have an amazing organization on the ground, a great leadership there. And frankly, we want to invest in this business to frankly, make one of these, let's say, make this region one of our key rockets moving forward, for sure.

We were not yet in ice cream. It's a very good business, by the way.

Okay. I mean in terms of integration, in general, has it been -- obviously, nothing is perfect, but has it been a smooth integration? Has it gone better than expected?

The answer is yes. It's been a very smooth one. We've spent -- we've put a lot of resources behind it because we wanted to also improve the integration. It's part of the model. So we want -- every time we want to improve the integration model for the next acquisition. So we've done this. We spent quite some money behind it, which is the right thing -- which was the right thing to do. And quite frankly, yes, we're very pleased. And we're starting now to phase it down because the team is more autonomous and has learned all the best practice we have. We're also learning from them, by the way. So no, it's been a very good process.

Great. From -- probably another topic you haven't ever talked about: supply chain. And generally speaking, the health of your supply chain inbound and outbound, but the latest on potential -- or not potential, but the latest on constraints around Russia -- whitefish specifically -- and mitigation strategies, should that become even more difficult?

Well, let me handle that piece. So it really started back in February, obviously, with the question, would there be a ban, no ban and all these things. So very early on, I think we put some sort of fish team, crisis team dedicated to this situation, short term, long term. So the first thing we did was to -- also to spot where we could buy additional whitefish because actually, we have the ability to be flexible in terms of -- provided the taste is about the same, which is what it is, most of the time. We can deal with this. And so the team has been very -- I mean, has been remarkable at finding the right stocks here and there. We always said, I mean, from the start, well, working capital this quarter, you know what, business first. So let's make sure that we have the right inventory in terms of fish. And we're doing the -- it's moving the right way, which is very good, by the way. That's one thing. Second, we also said, and I think we are one of the precursors, there's nothing new. Actually, last year, we always said we already said it to ourselves, well, 98% of our fish is whitefish. I think -- we think it's too much. And so we have to reduce that proportion, and we have to go to aquaculture. And we started then so something like a month ago, the team went to Vietnam, went to fish farms with the same kind of, let's say, quality obsession in mind. So moving from MSC, we have been one of the founders of MSC more than 20 years ago, and it's been doing well, by the way. Let's say the biomass has been preserved, cod and definitely pollock are not endangered species. And we want to do the same with pangasius, which might be the next -- the next fish for us. It's going to be ASC certified. It's not going to be MSC certified. We want to move forward. And we want to be the kind of pioneers we had been something like more than 20 years ago out of necessity. And some people then are telling us because what we can see is people more and more are aware that, yes, you have the Ukraine crisis, but you also have the food crisis. So never say never, but let's say the ban is probably a bit -- the risk is probably as down -- has gone up a bit since then. And some people are telling me, why do you need them to go to pangasius and that kind of things. It's more complicated and all those things. My point remains the same: no, it's the right thing to do. Strategically, we need to reduce this 98% to something which is more affordable. We need to -- especially in a different world because the world has changed in terms of supply chain. So we need to obviously have a diversity -- you need to diversify your supply chain. And that's the immediate answer, long term -- short term and long term for us.

In the near term, does that -- is there a way to think about how much that diversification costs in terms of additional inflation and over time, is there a scenario in which that higher cost normalizes lower?

Well, it's a good point. We're not there yet with the negotiations. On the face of it, pangasius is slightly more expensive than pollock. But again, starting point. For the moment, you'll be reaching a certain level, a lot of things will be possible and especially if you're coming with the long-term commitment. So we haven't had that conversation yet with the players. But definitely, we will have that conversation being...

Well, the arbitrage, I think, which is important there is missed sales versus costs. And I think it's absolutely indispensable given the role we play in the industry and in the sector that frankly, we meet the needs in terms of supply. So it's really critical. That's why, of course, cost is important. We can develop cost-saving program, but really, availability is critical as well.

And it's important to note that we also have this kind of conversation with the authorities, U.K. or EU. It's really part of, let's say, safety in terms of supply chain and then we're part of this. So we have to find solutions.

Yes. What about the role of Green Cuisine and plant protein? Does that -- does that become -- I mean, it's an important part of the portfolio strategy over time. Does it become even more important in this environment as a potential substitute or -- for the consumer? And do you -- does your approach to Green Cuisine change given some of the inflationary pressures and supply pressures on the fish protein side?

Well, in terms of cost, things it depends on the say, the product you're going to use, rice is less expensive than peas, for example. So we have different things. I would say for us, Green Cuisine has always been strategic and remains strategic or we are overinvesting in the category. On a year-on-year basis, our market share in frozen food being defined as frozen food in Europe, plant protein, has moved from 10% to 14%. So we're increasing market share. Our sales are increasing by 10%, but the market has slowed down right now. We believe it's more deep than anything else. It's also hard to digest COVID. We also believe that the category has more to do, has to -- I think there was a bit of too many SKUs. It's a bit cluttered. People not investing behind the category, just putting the product on the shelf. And there is a bit of naivety that needs to go get out of the category. We also believe that little by little, we need to get very close to price parity, and I think there are ways to get there. So -- but at the same time, long term, we believe it's a great category to be in, absolutely. And we're going to keep overinvesting behind it.

I guess, is it -- maybe it's too soon because you -- maybe it's just a matter of battling the here and now. But as you think about pricing, productivity, revenue growth management in addition to list price management, is there a time line to rebuild margins that is realistic? Or is it too soon to have that conversation?

Again, well, let me start and then I think when we're talking about the third wave, which is going to impact somewhat 2022, but in limited way because it's going to be 1 month, 1.5 months, [ some more. ] I think it's fundamental for us to start the year next year with the right level of gross margin so as to be able to reinvest behind the business. I think we're not investing enough at this stage. We would like to invest a bit more -- and for that, you have to have the right level of gross margin.

Yes, I think we've been more -- to be very transparent, we've been more in a catch-up mode. In other words, inflation has gone faster than our ability to price and the whole idea with this third wave, which is fundamentally an advancement of Wave 1 of next year, to be clear. And that will definitely position us ahead of the game so that then we can better plan. We have more visibility. We can effectively direct our investment with more force if you want behind all of our priorities and so on and so. It's really important that we exit this year with the relevant gross margin structure -- and I would say, total P&L structure -- that enable us to continue on our growth agenda.

So in that context, the level of -- so obviously, you're balancing and prioritizing near-term bottom line and free cash flow delivery somewhat at the expense of near-term investment that -- well, strategic investment that you'd like. Is there -- as we think about -- does that require a catch-up investment? Or is it just -- is it a pause and then you resume trend line? Or do you have to overinvest on the back of this period where you're not investing enough, if that makes sense?

What's important is that we bring back to a normalized view, we -- our business model is quite well known. With the must-win battle structure we have, we allocate our spending to really the most important category-country combination and with a very specific rigorous criteria. This year, we clearly had to make some tougher choice even within that. What we want to do is as we get into the next year is go back and really make those choices exactly in line with our agenda, which we view those categories, those category-country combinations are growing faster than the average. They have been huge contributor to the business. So it's important if you want to regain this agenda, which is accelerated growth, then better gross margin reinvestment into the business to drive the right level of EBITDA and then convert this EBITDA into cash, I think, is really essential. So for us, it's not fundamentally a catch-up. It's really returning back to normal, while effectively treating Green Cuisine as well as a key vector of growth, I mean, for the long term as well for us.

And in the meantime, -- over the last 12 months, we've been gaining market share on tough months.

Because it's not just you who is starved for -- right -- it's the whole -- okay. So amidst all that uncertainty, what gives you line of sight to the EUR 600 million in EBITDA targeted and the EUR 2.30 in fiscal '25?

Well, I think again, as we're going to go back to the right level of gross margin, as I think the whole industry is facing a recession, which is going to progress, I think you -- again, we need to digest the blip this year. We need to diversify away from some kind of fish. I think the whole thing is going to back to -- it's a different model. There will be differences, but I think what we're proving right now is that we're able to adapt ourselves faster than most of the people -- so that's what makes us feel very confident we're going to get there.

Okay. So the runway to get there -- and your historical growth has been both organic and inorganic through M&A. And clearly, right now, the prioritization is sort of organic investment, cash going to working capital as opposed -- right? When we emerge into some new normal -- when, not if, when -- what is the runway and the appetite for M&A as you see it? And do you think we emerge in a period of time where the prospects for M&A actually go up because the targets and the valuations for companies that have financial strength become more plentiful?

Well, I think the appetite hasn't changed. The appetite is, again, very focused. We're a focused company overall, organically and external growth wise. And so the focus is behind, let's say, frozen food in Europe. We still have a -- we still have a series of acquisitions to be made in that arena. I think we are the most obvious player. So we are going to deal with PE, but at the same time, while let's face it, we're the best driver of frozen food -- branded frozen food in Europe. It's not bad. So we have all the [ agility ] to do this. And then at some stage, we should not exclude going to other geographies, obviously. So we still have a lot to do, but we're going to do that, again, in a focused, considerate way. We've been through -- since '17, we've been through 4 acquisitions. They all have been very successful. We want to keep it that way.

Is anything changing now that makes you think that the way you approach and prioritize different category-country combinations changes? Or do you see new opportunities emerging that you didn't before? Or conversely, opportunities closing that you...

I think plant protein is probably opening a new avenue of growth. The question is, do we think we can capture everything with Green Cuisine? Or do we think that other brands or other concept are complementary? So that's -- we believe it's a very interesting avenue for us on top of what's already available in more traditional categories. Our traditional category is, again, you have 2 different playbooks. One is what -- the way we did it in the U.K., which we had Birds Eye. And then we complemented with pizza with Goodfella's and then the other one which is Yorkshire pudding, which is on basis, 2 fantastic brands, by the way. And by doing so, you really reinforce the whole business. We have become the undisputed category leader, and we have the right discussion, the right debate with the trade. I think we can do that with other countries -- in other countries. We can complement the existing range. And on top of that, there are still some countries where we're not present, we could do the [ passing job. ]

Just geographic expansion.

Both.

Yes. And what's the -- from a capital prioritization processes? Is there a -- maybe for Samy, from -- as you go -- as you progress forward, what's the -- in terms of how you're prioritizing capital today, right, which is a much more conservative prioritization to what you aspire to be in a more normal run rate, what are the milestones and the gates you need to go through before you can think more offensively?

We are thinking first to make sure that we secure our supply. And frankly, as we alluded to the point, let's say, using our cash to make sure that we have the level of inventory that is required to support the business. This year, we have as well some regulatory element that requires us to make an intervention on payables, which is called the unfair trade practices directive, that is impacting us. But as we normalize our cash performance, which is expected to happen as of next year onward and get more into the range of a 90% plus, if you want, free cash flow productivity. The whole idea is to go back and really assess the options of, let's say, whatever makes the most sense from a shareholder standpoint, which is effectively potentially M&A and buyback. I mean, clearly, and at that point in time, potentially even at some point, we may even want to consider -- pending effective Board decision on this one -- I mean, dividends as well at this point in time. So the whole idea would be to clearly manage along the lines of what is maximizing shareholder return on that basis. So nothing different versus -- I mean the beauty of the model is fundamentally that it is passing through these turbulences in a way where we adapt ourselves, but we clearly continue to be remaining around the focus on, let's say, delivering superior shareholder return. And that's, frankly, what's guiding our capital allocation.

And how much -- I guess, my sense is there was more of a sort of crisis stance a couple of months ago, right, when you were really trying to secure inventory and protect the business and position the business, mitigate potential risks. How much closer are you to normalized run rate today versus then? And barring some new shock -- or is it the end of the year when you sort of resume normalcy?

It's going to be more towards the end of the year. Clearly, I mean at this very state, frankly, you just want to make sure, I mean, that supply -- securitizing supply is really essential. We need to make sure that we have all of the ingredients -- let's say, available to produce what we have to produce. We believe that this is probably going to go throughout in the year. And until the end of the year, there should be a more normalization of our cash flow performance going into the following year. That's the idea.

And we will see Wave 1, Wave 2, and Wave 3 and also how the consumers are reacting...

Yes. And who knows what else happens.

Well, you know in this kind of situation, you know this famous thing -- someone said, waste a crisis is to be -- it shouldn't be wasted. Quite frankly, we've learned so much during this crisis, and it's going to stay as part of the DNA of the organization.

Great. We're coming to this -- I want to sort of come back to that notion at the end. But I also want to touch upon ESG and sustainability objectives. You have a number of objectives, I mean, rolling objectives, but a number that are sort of time line dated 2025. Does this crisis inhibit your ability to hit those targets or not? And what's your general progress towards those objectives?

The answer is no. That's one thing. Second, to your point, I think we started -- we're coming with short-term targets as opposed to something like 2050 or whatever, you don't know what's going to happen in 2050. And it's an easy statement, obviously. So '25 is really a real statement. It's SBTi. As you know, it's science-based. So it's everything but greenwashing. So something we hate. And so we wanted to be true to the targets. And overall, the target, we are either -- most of the time, we are ahead of time in terms of emission, for example. We're doing extremely well from that standpoint. And so most of the targets, we are ahead of time versus 2025, progressed between '19 and '22 so far. One thing where we are slightly ahead is packaging -- sorry, behind. We are slightly behind, is packaging. So all the targets, quite frankly, are in a good shape. And where we're also quite proud is, well, we are one of the 4 food companies in Europe being -- I mean, being part of the Dow Jones Sustainability Index, which is not bad.

On packaging, what's the root cause of being behind?

Some technical -- more technical things, finding the right material more than anything else, quite frankly. Nothing else.

And it's not near-term supply chain related? It's just structural...

No, no, no. It's -- but beyond this, emission ahead of time, ahead of target. We know that -- where our level of healthy food is, which is really great.

Sustainable farming...

Yes. So again, back to MSC certified or ASC certified, we are 98%, which is also ahead of target. So a lot of targets we're really doing well. This is an important -- a very important target, obviously, for us, as you know. Because then it's really -- and that's my obsession, it's sustainability that sells. Sustainability is fine. But at the same time, if you can convince the investors that it's an important component...

It's important for the consumer. Is it -- as you think about the stakeholders, right, ultimately for shareholders and for the consumer, but what's -- how important is it for retail customers, maybe even for your suppliers just up and down the value chain.

Well, we've been through a what I really believe is a state-of-the-art study -- an LCA study, which is life cycle assessment, which is you're taking a SKU from harvest to the fork. You're going through the whole process, including the retailers. And what you see is definitely in vegetable, it's obviously a lot of our SKUs -- actually, we're doing extremely well from the carbon footprint standpoint. And one of the reasons is waste. So I was a retailer in my life. And however fresh is fine, but after a few days of chilled after probably 10 days, 2 weeks, it's gone. So the waste level at the retail level is quite high, which has an impact on the real margin, by the way. I think -- I'm not sure that they're all including that part of the calculation that they should, because when you put your box in the freezer there for 1 year and even if you're including the cost, the energy cost, I can tell you it's a very good story. If you're on top of that, you're including then the same situation with your consumer and the average behavior in terms of waste, it's becoming not only a very good sustainability story, it's becoming a very good waste story, which then has an impact in terms of disposable income.

Great. We've got a couple of minutes left. I want to go back to not wasting a good crisis and the learnings that you have accrued. What are the biggest -- what are the biggest takeaways that you've acquired over the last couple of years that are going to -- when you get through this current crisis, will allow you to be even stronger?

The biggest one is I believe is this -- how important it is to diversify your supply chain. And it's kind of things -- I think it's not limited to us, by the way. But it's definitely -- it has become an obsession for us. And whoever is going to be able, in the future, to maintain to -- to make it safer, will have a huge impact. And then we're working very hard on that piece. The second piece is, I would say, revenue growth management is something while we have, I think we're bringing it to the next level.

I would say the last piece is, I think, building upon, frankly, our own DNA, which is staying focused, yes. I really think it's really important. We are guided by a very clear agenda. Our must-win battles is, to a large extent, I mean, have very clear choices. And this is the moment where there's so much going on that you can disperse yourself. And you really have to work very clearly on innovation, on cost-selling, on driving your pricing and doing everything to make sure that your product end up on shelves and communicating the right way. So that element of focus, which is frankly part of what made this company -- I mean, clearly enabling us to go through that crisis and emerging from it in a much stronger way, actually.

Had you chosen the conglomerate path, it might have been even more challenging.

Yes. Yes. I think -- I don't think we're smarter than a lot of people. We're just very, very focused, and that's our category. And so we're going to obviously develop, defend this category, the best we can. And I think it's worth it because it's a great category.

Great. We're out of time. Stefan, Samy, thank you very, very much. Thank you all for joining us.

It was a pleasure.

Thank you very much.

Thank you.