Nomad Foods Limited (NOMD) Earnings Call Transcript & Summary

All right. Thank you all. A few people out in the hallway that will be striving back here, let them grab the seat, get comfortable. So bias and prejudice can be a source of rich opportunities in this industry. Companies and investors sometimes chase the hot new trend too far for too long, ultimately overpaying to gain exposure. That's a rich opportunity if you happen to be a seller. And sometimes, value or growth opportunities are overlooked because of a bias that a category of market is too mature or to commoditized. That can be a rich opportunity if you happen to be a buyer. This, of course, is the origin story of Nomad Foods, a company that ventured where few other food companies wanted to venture into the European frozen food market. Why? Surely, there's no profitable growth to be found there. But that's the bias that created the opportunity that over the past 5 years history turned into be a phenomenal growth story. EBITDA -- sales, EBITDA, EPS compounding at a 8.5%, 10% and 11% CAGR. That's top-tier growth by industry standards and management continues to see a rich pipeline of opportunities going forward. And to tell us how they've achieved this success -- what they have in store for the next 5 years is the firm's esteemed CFO, Samy Zekhout. Samy, thank you for joining us.

Thank you.

Great seeing you. I love to share, as always. So -- there's a big audience. So start with a quick primer.

Who is Nomad? What does your business mix look like today from a category and country exposure perspective?

Nomad is the leading frozen food business in Europe, in the savory frozen food sector. And we are now about EUR 3 billion business in net sales, a bit more than that. We are present in 19 countries, 23 manufacturing site, 8,000 people, I would say, overall. And we have the privilege to own brands like Birds Eye, Findus, iglo, Goodfella's, Aunt Bessie and recently acquired Ledo and Frikom overall. So big portfolio of great brands with great awareness and huge activity growth potential as we look forward.

And I want to talk about the growth potential, but I also want to talk about some of the near-term challenges that you, like everyone else in the industry have been facing. First and foremost, cost. Costs have been a big problem. In the U.S., most of the food companies have been hit with costs, cutting over the hump right now. They're just rounding the corner where price net of cost has turned into a surplus and we're all in gross margin recovery mode. It seems like Europe as a market overall is at least 6, maybe 12 months behind. I don't know. Is that true for you? Is that a proper characterization? What are you seeing on the cost backdrop?

Yes. We have gone through a substantial inflation last year, starting actually end of 2021. And clearly ramping up at the speed of sound in 2022. And when you look at the whole '22 year point-to-point Jan to December, we've been clearly experiencing about a 30% inflation on average. And that has clearly required us to readapt completely our approach to managing our own pricing -- development of our own pricing strategy to manage these elements that we are trying to compensate this cost impact on our let's say, input cost into effectively covering that through pricing, I would say, overall. What we're seeing now as we enter into 2023, and we are well entered into that, is definitely a moderation of that. So we are clearly moving into that territory of 30-plus percent that we ended up at the end of 2022 into clearly the mid-single, upper single-digit inflation. And for some of the category, we're even starting to see a moderation and potentially even a decrease for those categories that have clearly gone overboard. So the situation is looking definitely better. From a pricing standpoint, effectively, that has reduced the pressure as we move forward, and that leaves us much less pricing to do in order for us to compensate typically that calls pricing overall.

And is there more pricing to come. We're kind of the reset windows, price negotiations windows are primarily closed for the year I think.

Yes, I agree. But I think given the trend we've been in, I mean, overall last year, we had 3 price increases. In Jan-March, we had another one. And now we are left with actually quite a small amount to cover for the rest of the year. The name of the game at this stage has been, to be honest, to look and wait until we can as we continue to take our input cost base down because we are not completely covered for the year, and we are trying to opportunistically take position on the market to effectively buy at lower price, but we're reducing the inflation impact, reducing hence the price pressure so that we have over the half to take over.

Okay. And where you can be opportunistic. Geez, I think about your input costs, you buy vegetables, those are crop based once a year, like you got your peak crop, you negotiate, you've done. You just -- no opportunity to be opportunistic there. Packaging costs, I suppose you can be a little less covered. But is this a fish situation we're talking about, were you held back.

It could be fish. It could be other ingredients. But frankly, there are opportunities in the market. I mean the reality with the hike in price, the demand in some of the -- let's say, on the part of the portfolio that we are managing, I mean, sometimes goes down. And so therefore, some of the prices start to take, let's say, go back down. And so we are looking at definitely how to compensate the need for the year, the pricing if effectively the pricing goes down and for capacity from a cash standpoint whether we can afford or we can't afford, effectively, depending on the condition that we are. Effectively, fish is one, but there's a number of other elements in poultry and other elements on dairy that we can look at. Effectively, you're right, we're trying to make sure that we are managing the position in terms of pricing, inventory and clearly volume to be produced in over the year.

And you mentioned you price -- vast majority price, but I don't think you've realized at all, right? You've taken list prices, you've done 3 rounds. First round, you took list price, full list price flows through. Second one, you taper with trade spend. So you just don't -- so you move up by 100, you only get an 80 index or so. Third one, I imagine there's even more tapering there. So is -- of the list price that you've actually announced, how much is flowing through? And is there opportunity to taper like pull back on that trade spend as the year progresses?

So what we've done is we -- privilege -- you're absolutely right in the way you're describing the phenomenon because effectively, there's always a piece of effective pricing up, a piece of -- let's say, incentivizing the retailer to really work with us in the execution of the pricing. And the need for us to end up, hopefully, I mean, let's say, prices are the discussion of the retailer, but hopefully end up within the price range that's close to what we would like to see versus effectively what we hoped at the beginning. So there's always a bit of a lost in translation overall. So we've been playing more on the timing of the execution of that. That's why we've always kind of communicated that over '22 and '23, we try to recover the totality of the pricing as opposed to go really sequentially, spot pricing versus spot inflation. And by spreading that over time, we get to a point where, overall, the intent will be from a gross margin development standpoint to recover from, let's say, the input cost inflation that we have, everything surprising and then use revenue growth management as an enhancing strategy in order for us to get more from the portfolio that we have.

And that's to be caught up. The goal is to be caught up by the end of this year.

Yes. Exactly.

Which implies, of course, that you won't be caught up through much of the year. You'll be there by the end. But if you succeed, you get some really nice wraparound benefits into the following year.

Yes, absolutely. Absolutely. Yes.

Now some of the concerns that I've heard vocalized from investors following results, and I don't know why it came following the results because there's nothing really new or revealing results, in my opinion. Has been concerning consternation around what will private label do? Like you start to see those coming off these really high costs and private label is going to cut price and now you're going to have to chase it down. I've got a view, and it's not that view, but I don't want to bias you and lead a horse to water. So I'll let you -- what's your view on that? How would you respond to investors who are proposing that situation.

If you go back onto our message, I mean, to investors and analysts, I mean, several months ago, even until the middle of last year was, whether that you were expecting competition whether it was branded or not branded to clearly converge to other type of increases we are taking. And at the end of the day, we sell fish, we transform the fish, but the bulk of the price is really coming from 1, 2 or 3 critical ingredients. Same thing on pizza and so on and so forth. So the reality is there's an economic reality that will train people to price in line with what the inflation is impacting us by. The reality is that whilst branded goods more or less have taken price up more or less in line with what we have seen happening because the cost structure is probably similar to us. Private label and how discounters have not. And because of the competition that is inherent between retailers and hard discounters around shoppers, effectively has been a point of let's say, what's the right price, not to lose shoppers at one end versus another. So that has created a bit of a gap of about 10% that we have seen, particularly after the third pricing starting to stay. We had hoped that this was going to reduce over time. And it has in all fairness, it has reduced to about 6% or 7% by now. The impact on share is not visible, but it's an encouraging sign to see that effectively starting to go down. One of the conclusions we took out of the fact that this project has been taking quite long, is that we were not going to look at situation, frankly, arms crossed and looking at our share continuing to erode over time. And we have put in place plans to actually step up our promotion, if you want, in terms of price reduction, broader on very specific country, category, combination in some given markets. So as an example, if we have a fish finger product, which we believe is the leading SKU in one given market, whereby there would be an opportunity to potentially be deeper from a promotion standpoint, we would then potentially invest behind promoting that product. So the question is not about increasing the number of promotion. It's about effectively going after very specific targeted product and really go after intervening in order for us to clearly make sure that we would stop that leak in terms of share. And gradually, hopefully, the market would rebalance around pricing, and then we would go back to more conventional levels for promotions.

Yes, there's nothing new there. This is the same type of conversation we were having in February. When you gave your initial guidance. It was all around this. And you had budgeted, I believe, for some -- well, some money like a [ slush bond ] to be able to dip into for these purposes. But let's play it forward. Fish costs come down, making this up, fish costs come down, more likely that private label cuts price or more likely that this is the opportunity for retailers and private label manufacturers to recover the margin.

I think we can kind of really talk about them. I mean, on that one, I would say, given how much they have lost from a profitability standpoint by [ not ] pricing, yes, it would not be unlikely that they would probably potentially wait before taking, let's say, wait before reflecting the price impact on sales. They would probably absorb that in terms of beefing up their profitability over time until effectively the situation stabilized and then after they would potentially taking some pricing action at this stage. The whole idea that if effectively some of the input costs would go back down, it would primarily become a promotional gain, more than frankly list price gain from that perspective. Whether they would take price down at the same time, I don't know. I have to say that, that is questionable given the fact that they've taken a lot on their profitability and their margin during that period of time.

Yes. Yes. It feels like they're just trying to sort of weather the storm, and ride it out to better days and accept some lower margins. But it will be interesting to see how it plays out. Okay. And then sticking on the -- it's not quite a topic of cost, but I guess, it suppose it is. Where do we stand on fish supply and remind those online or on the line or in the room, you used to get a large portion of your fish from Russia. What is that ratio today? And how have you diversified.

We have undertaken so a year ago, effectively during the beginning in February during the start, I mean, at the start of the Russia-Ukraine war, I mean there has been a lot of concern about the fact that if you want the Russian fish ones representing a large proportion of our, let's say, supply base. We don't have any business in Russia, not to be very specific, but the reality that we were buying it -- really more than 50% of our fish overall. If you want from Russia, I mean, overall. And we had a number of projects already that identified the opportunity to decrease our exposure to either category of products or market or species. And so that situation exacerbated the imperative for us to accelerate some of these projects. One of them being farm fish, which clearly, we have been able to develop in a record time in about almost 6, 7 months and have been able to start, if you at the new supply of pangasius, which we call in the U.K. basa the kind of branding name I mean over there, which is a white fish. Let's say, white meat, fish, very similar to Alaskan product. We've run testing in terms of, let's say, where the consumer would notice a significant difference and so on. And actually, the consumer testing have been proven to be very effective overall in a way that people have reacted very positively, I mean, to the fish. And so now we're expanding basa and we started in the U.K., in France, in Germany, and planning effective to go across the region as we go forward. So that is going by the end of this year, it's going to represent about 10% of our total fish, consumption. At the same time, we've as well expanded the portfolio to new species. We had those species in the portfolio but we took them the different ways, which is particularly hake as an example, which is highly consumed in Italy, but we've tested it as well in other markets. And at the same time, frankly, we are trying to expand as well a different type of, let's say, optionality that we have from a fish standpoint between fillet and [indiscernible]. And so that overall has opened up the spectrum to reducing overall the exposure of Russian fish, completely in line with what we stated. We stated that by 2025, we would half our export to Russia as we move forward, and we are exactly, let's say, bang on track, I mean on that one. And Pangasius starting to really deliver some good results. The beauty with Pangasius is because it is farmfish and with the label of the Aquaculture Stewardship Council, the ASC, which is very important for us because the fish we have to grow in certain condition, well control to give the reassurance to our consumer that this is really high quality fish. The beauty of that technology or that approach is that we can scale up quite quickly. Not to, let's say, necessarily doubling very quickly, but we can start in case they will need them from that perspective. So the whole diversification on fish now is really ramping up very well. And the portfolio is much more balanced as we look forward between cod, between pollock, between hake, between pangasius, between [ wild cod ] and farm fish. And across the region as well, when you think about Russia, U.S., Africa and other parts of the world as well.

And I can see how this makes tremendous amount of sense in terms of derisking your supply chain...

Exactly. Exactly...

And making it more durable. What does it do to your cost structure?

In the short term, if you have everything else, let's say, being equal, it's actually about breaking it even fuel to growth, but we effectively now -- the inflation becoming a pretty much smaller overall. And even in some of the species, particularly on product, we see the market starting to go back down. Now overall, we should get some benefit at some point in time. So that's why one of the reasons why we did not want to go from one site to another and just say, top pollock and really [ let go ] full basa. We wanted to clearly get the opportunity of having a portfolio of species whereby we would still take benefits from the product which is very sensitive to the catch. And on the other side, the [indiscernible] basa base, which is more structured because of the production facility, the investment to capital and so on. So longer term, medium term, I would say it will have a positive impact, definitely in terms of cost and the cost should go down a little.

It will or the market will because pollock is going down.

Yes, the pollock only...

But then end up with a competitive disadvantage?

No, not really because at the end of the day, it depends, frankly, on how you market this fishes. I mean the basa is definitely farm fish. It will be a different price than pollock. Pollock is different price than cod and so on. So each and every of the white meat are not just white meat. They're clearly, we are trying to manage the intention, stability of the different products. But overall, if you want, we will have some species that will be clearly subject to market condition like pollock, some others that will be more driven by more of a manufacturing process and input and health as well.

Okay. okay. Let's talk about productivity. You've recently centralized a number of global business services. What was the time frame? How far along are you? And what does this unlock?

Yes. So first of all, we have started the project, as I had mentioned. I would say, let's say, a few times ago -- and we are in the process of centralizing all of the transactional activities within the company to really create scale and really be on the scale of standardization and simplification as well. We clearly need the market, is now calling for a requirement for better decisions, faster decision and higher quality of data and the ability as well to predict better. And for that, what we had found is effectively that centralizing all of the transactional activities, whether they were [ SG&A ], whether it were receivable or payable, it was really something that is important. To be fair, today, we have the shared services in different markets. But simply on different clusters, but simply not big enough to frankly leverage the scale that we wanted. So we had undertaken this project, starting actually the rollout now. So we're only rolling out 1 market, starting with the U.K. as we speak, U.K. and Ireland. And we're going to continue to roll out until 2024 -- end of 2024. So by end of 2024, we would have centralized, if not all of the finance transactional activities, and some of the procurement activities as well, demand planning and S&OP story. And a few other sales and operation planning and a few other activities. After that, once that is in full operation with the new infrastructure of SAP 4 HANA that we will be putting in place, which will allow a lot of the -- if you're interfacing of the information. We will be able to move to a next stage, which will effectively be more simulation, prediction and consolidation of other data that has not been in the system, particularly supply chain, insights and HR as well. So benefits to your point, which is when do we see the benefit. Benefit are already showing up now, but in a small level at a small level, continue to go into 2024 as well. And is going to restart to kick off by 2025 this time because this is really when you're going to have the full infrastructure.

I mean it sounds like it's almost a hurt in the near term. You're standing up capability, global centralized capability but you're not winding down the local country capability.

It's the transition element. It's -- I would call it, frankly, investment like in an investment, at some point, you have to frankly manage the transition. I mean, we have a EUR 3 billion business to manage. We have to make sure that the transition is really managed in the right way. So as really we phase out an activity in 1 market, you have to phase in the activity in the centralized location.

Sure.

And at that point in time, there's always a bit of an overlap during that moment. So that overlap is absolutely depend anybody, any one company that have done let's say shared service center has gone through that, and it's got a lift and shift. And so that your lifting, and then once it's affecting the new location, then you're shifting enough to implement the new systems in place. So there is definitely an investment over '23, '24 in particular, that will translate into a long range of benefits. And not only cost but unlocking revenues as well.

Yes, yes. The incremental data capabilities or predictive capability or modeling stuff you talked about.

Exactly.

But in the near term, those redundancies, can you size that price? Like how much are the redundant cost and how much could fall away?

Yes. I mean, we can -- I mean, I think this we can handle that. I mean we can give you a little bit of the detail. But I think -- the whole project is delivering very good return overall. I mean, great NPV. And there will be some impact, if you want, from an exceptional costs, which we had already experienced a first quarter of this year and which will continue over '23, '24. And after the benefit will start in 2025.