Nomad Foods Limited (NOMD) Earnings Call Transcript & Summary

So welcome back to our fireside chat with Nomad Foods. With me today are CEO, Stefan Descheemaeker; and newly appointed CFO, Ruben Baldew. Welcome, gentlemen, and it's really great to be back here in Boston with you. Stefan and Ruben have some prepared remarks to start us off. And then with time permitting, we've got a little Q&A at the end. So Stefan, over to you.

Thank you very much. Andrew. And by the way, over the years, I think the way you pronounce my name is becoming fantastic. Well done. So good afternoon to all of us. By definition, as some of you may know the story, but I think it's worth reminding what the story is all about. So it's a story of, you see -- there we are -- it's really a story of a pure play. We are frozen food leader. We are the European leader. We are #2 together with Unilever. When you're taking into account frozen food only, we are by far the #1. We like the story. We like the fact that we are focused. Focus is a word that you're going to hear a lot of times today. So yes, the fact is when you think about what we've been doing, we know this category better than anyone. We have heritage dating back 1930, actually 1924 when Clarence Birdseye invented the category actually. And well when our people -- when other people are starting to move to diversification and growth, actually, what we decided single focused way, we like this category that this category has a lot to offer. And we believe -- thank you very much. Yes. And what we want to do is we need to consolidate further this category. We've been able to know in the last few years to go to Eastern Europe at attractive multiples, and we're going to keep it that way. So that we're not going to deviate. We like this one. We like focus, and again, I think that's what we're doing best. We could have the choice to become some sort of food conglomerate. We have decided not to go that way and to really move to what the things we know best. Now if we think about what we do, we're bringing to the equation, the first thing we're bringing is market share, brand advantage. All brands, where you know one in the U.S., which is Birdseye, which is the brand #1 in the U.K. I can tell you the other brands like Iglo in Germany or Findus in Italy or France or in the Nordics or in Spain, well, they are the #1 brand in their countries. Even brand that you probably never have heard of, like Ledo or Frikom in Serbia, they are by far the #1. They're super brands, I would put it that way. So that's the big thing for us. So we have exceptionally strong market share. And even beyond this, what we're trying to do is also to focus behind the subcategories that really matter. And you see that, for example, what we call the must-win battles, key categories in different countries, where the average market share is 45%. So we like it, we like -- we know that with market share comes market -- gross margin and all the rest of it. At the same time, what we also have is, let's say, on top of the quantities, the quality of the brands. All brands in terms of awareness in terms of brand equity in terms of preference, they're the #1 between [indiscernible] of the key countries, they're all #1. So it's really a remarkable advantage and we want to keep it that way and to reinvest obviously behind these brands. The second one is people advantage. Forget about the guy on the top. But beside that, I think what we've been doing is we really are single-mindedly focused a lot of my time behind selecting the best and brightest people, but not only individually, but also collectively. And so what I've seen is right now, what we have is really, I can say after 9 years of experience as a CEO, I really believe that the combination of collective strength and individual strength I have the best team I ever had within Nomad. We have our new CFO, Ruben Baldew, he is with me today and Ruben joined us from Accell Group where he worked with KKR to make the company private. Before that, spent 17 years of his life within 11 different countries, different jobs and all the things, all obviously very much close to finance or financial operations, but beyond this. And well, the only thing I can say is Ruben has been with us for 10 weeks now. You told me this today, time flies. And well, he's bringing a lot of new ideas. He is a great team player. And well, he is very hands-on, which is really a piece that is very important for us. We like to have people that not only have brain but also have obviously something that makes a difference, and he does. The rest of my team, again, same thing, a lot of change, as you can see, but it's really a combination of new hires when there was a short -- shortfall of skills of mindset and sometimes also people that have really gone up through the ranks and size of the organization. We just invite you to see 2 names; Steve Challouma, he's been a veteran of Iglo and Birdseye and Steven Libermann, August '24, you may say, oh my God, he's just started. Well, he has a lot of experience with Findus over the last 20 years. So a lot of experience, a lot of combination of new minds, but also obviously, existing skills and well that's the kind of things we're trying to do. The rest of the team, let's say the top 80 over the last 2 years, 3 years, we have, let's say, changed around 2 dozens of people, again, same mindset, what can we bring? It's a never-ending story. And I think it's really working. So that's a big advantage. That's the second part of the advantage besides the brand is the quality of the people. The third people is the category. And that might sound well, from the American standards, well, are you sure frozen food is a great category. And I would just invite you to think the way it's working in the U.S. and the way it's working in the Europe. U.S. is mostly about ready meals in pizza. And as you can see, 2/3 of our business is bought protein and vegetables, 2/3. So it's a big difference. It's fish, poultry, it's vegetable, so definitely good food. And on top of that, if you're adding one thing is basically 93% of our business is generated from product being healthy in the governance -- the UK government's nutrient profile model as they are not high in fat, sugar and salt. So the combination of that 93% and this 2/3, well, I think it's a reasonably good proxy for good food. So on top of that, on top of having healthy food and secular trends, we also know that frozen food is convenient. It saves consumer time, that's one thing. Second, it's also important in terms of its value for money. It's surprisingly enough compared to all the chilled experience in that EUR 2 to EUR 3 less per meal. So that's a big difference. And it's obviously a big difference in terms of, well, the inflation has been a big hit for all of us for consumers. And so being able to serve good food at the right price is absolutely fundamental. And on top of that, you have sustainability. We have an extremely strong, naturally a very strong sustainability plan. We're coming obviously waste is a big thing, not only for us, not only for the consumers but also for the retailers. When you think about the way the real margin after waste compared to chilled or to fresh is much better. And on top of that, for them, it's also a great way to face, let's say, the sustainability profile of the company vis-a-vis NGO and vis-a-vis the governments. So that's why, by the way, what we've seen is they're starting to invest in the frozen food -- in the frozen aisle. And we've seen more and more of this in these examples of retailers starting to invest for cost reasons every time they're refurbishing one of their stores. But also on top of that, obviously, it's improving the consumer experience. What you see on the left is the kind of things that some retailers are considering right now, the Morrisons, which is one of the biggest retailers in the U.K. And they're considering, they're piloting actually right now. series of stores where they're going to increase the temperature from minus 18 to minus 15, which is really something we initiated 1.5 years ago, where we tried different temperature between minus 15 to 18, which was always the golden standard in frozen food. And we said, "Okay, fine. Should it be the golden standard? Or should it be 9 -- minus 9, minus 12, minus 15?" We come up to a conclusion with our products that minus 15 is great. And with minus 15, you're saving 10% of energy and you're saving 10% of carbon. So it's a great thing. And that's why we believe that retailers have a good reason to invest behind the category. On top of that, it's also a question of perception. We believe that it's -- frozen food is only about planning. Actually, it's not. It's something which is -- which works well in terms of impulse, it's expandable as such. And when you compare with other non-prepaid meal categories doing well, that's exactly what the slide is showing here. With all this, well, what we've seen is, again, when you compare food in Europe vis-a-vis frozen foods, well, over the last 10 years, frozen food is outpacing food. And it's not finished, we can see that in 2024, we still have the same situation. We also believe that it's there to stay and even further for a variety of reasons. One is, I think the retail, as we said, is starting to realize that there is value for them for a variety of reasons with frozen food. A lot of secular trends we were talking about and also some of the catch-up between U.S., as you can see on the left and the other countries, U.K., but also obviously some of the countries like Bosnia and Serbia. So a lot of -- all the countries where we present. So we see a lot of potential for all these reasons. So that's a bit the background. Now how about our plans. Well, we're starting with the left-hand side, which is for those who know us, it's been the bread and butter for organization, which is the must-win battles. So as we said, we're focusing not only -- not on 100% of our business, but definitely on the best and brightest, let's say, categories where we have the highest market share, the highest gross margin and the highest growth potential. That's the left-hand side of the business. And just to give you an example, '24/'25 of these must-win battles today represent more than 50% of our business in terms of sales and obviously more in terms of margin. What is new for us is what we've added since then, which is a growth platform, which is the kind of things like, well, for example, we're doing extremely well in the U.K. with poultry, and we have nothing in Germany. And we believe that we have the brand, we have the equity to get there, and we have product as well. And so that's exactly what we're doing right now which is all these categories, growth platforms, our platform are categories where -- which are accretive from the gross margin standpoint, and we're going to invest A&P behind it. So the combination of both plus, obviously, the savings at the supply chain level means that we can have a self-financing, let's say, model, where we're going to obviously invest behind the business. Business is going to go to net sales and on and on and on with obviously the right margin. So with that, it's also something new for us, which is a 360 approach all our products, all our categories, all our SKUs, which is basically a new commercial flywheel. I gave you already some examples in terms of must-win battles, in terms of partnering with the retailers. So what I will do now is elaborate a bit behind our innovation, which is part of this plan, obviously. So we spent quite some time over the last 2 years to really develop something which would be more consumer driven. I don't think we were consumer-driven enough in terms of innovation. We've taken advantage of the last 2 years where basically innovation was on the DOMS run with the retailers because price was the only thing. So we developed the model. We've come up with 5 different pillars. 3 are focused on the existing core, 2 are focused on the future core. And we're really dealing with that in a split model, so we're growing faster, and we're really starting to see the first results right now as we speak, actually, during H2 and even further in Q3 and even further in Q4. So what it does is, and it's only the beginning. So between '23 and '24, we're accelerating the model. As I said, it's accelerating really right now, Q3, Q4, we think we're going to be close to 5% at the end of the year, and we believe that there is more to come with the model. What we like on top of that is the risk profile of innovation model. Because when you think about example, like poultry in Italy, well, it's an innovation in this country for us, definitely, but it's based on an existing success in the U.K. And so the risk profile for us is much lower than something we're starting from scratch. So we like it. We like the combination. We like the portfolio. We can do better. But the combination is really working well for us. On top of that, we also -- last year, we increased A&P by 14%, and it's really started, let's say, at the end of Q3, Q4, and we keep it that way. We think we're going to be around 4% this year. And definitely, we want to invest more in -- sorry -- and definitely, we want to invest more in '25 and beyond. That in terms of investment, but at the same time, what we also have seen is that we're just spending smarter. So our market research team has built many new capabilities in recent years, one of which is around media mix modeling. And so we have, obviously, like many people, don't get me wrong, we're moving away from TV-only to digital. The difference, though, is when -- well, over the last 2 years, we moved from 80% to 60%. This is very different from 1 country to 1 to another country. because that's Europe. If you think you're going to invest, let's say, 50% or 60% in digital in Bosnia, I think you're wrong. So in these countries, it's still something like 80%, 70% in TV. Well, in the Nordics, for example, in Scandinavia, well, it might be something like 60% already in digital. So we have this approach, which is we hate average, especially in all our countries. And so we're really trying to have the right data to make the right decision in the right country. At the same time, what we see is, well, we see the improvement in media ROI. So in all the big countries like Germany, like U.K., or like Italy. Well, when I started this conversation with you, as I made -- I came with the example of poultry business, this is a good example. It's an example coming from success in the U.K. So over the last 5 years our business has roughly doubled in the U.K. from EUR 170 million to EUR 300 million with the right margin, right products to the right brand, obviously. With that, we think, okay, we have country #2, which is Italy, country #3 is Germany. And we think we have what it takes with the right adaptation. So we're taking the U.K. products, the English products, and we're adapting them to local taste, Italian taste and German taste. Obviously, we're not going to do that in all the countries, but at least, these are the 3 big countries. And now we're starting. We just started early this year with Italy, as you can see, it's a border where the market is not very big at this stage. But over the last year 12 weeks, we've increased our market set by 500 basis points. And it's going to be really about increasing market share, but also developing the market, building the market. It's very much, let's say, a chilled market at this stage. And we believe that we have what it takes. We've seen this in many situations in Italy, where in frozen fish, for example, it has developed, and we've been able to develop the category over the years. In Germany, where we're just starting now, it's a different model. It's a very big market, as you can see, close to EUR 800 million, but it's very much in the hands of private label. So what we want to do and what we're going to do is we are coming with product data is just better, taste better more healthy at an affordable price. So it's a different model. We -- the ambition is to take market share away from market available. And again, with the right assets, the right products and definitely with product superiority at an affordable price. The other example is fish and potato. So we're using fish to grow potatoes. Well, it's called Fish & Chips basically. It's simple. So it's really about -- we have an example. We did it in France. We started -- we took the product 4 years ago from the U.K., and it has become a really -- I mean, it's been a blockbuster in the U.K. In France, it's a great product. And now we're adding, obviously, the chips. So this year, for example, in U.K., where fish product or fish assortment is very big. We didn't have any meaningful, let's say, potato chips. We're building them both together and obviously, on the same brand and definitely bundling them together it's a great model. So again, a lower level of innovation in terms of risk but definitely very efficient. So we have a lot of examples like this. We have examples in Eastern Europe, where people in this country were very much focused on natural veg, vegetables, and the natural fish, which is fine, but obviously, low margin. So we're coming with coated fish. We're coming with prepared vegetables. We're losing part of these at rest, but definitely, we grow, we're developing a new category at a much higher level. We're doing the same in terms of snacking in Nordics, taking the example of France, for example. So we're doing this, and we're really taking full advantage of the richness of the countries from one country to another. And that will be my final slide before giving it all back to Ruben -- it's working. So we said that we were going to increase volume. We lost volume. We moved from minus 13 to minus 8 to minus 2 to plus 1.6 in quarter 2 ahead of time. Within the, let's say, the plus 1.6, must-win battles are doing better, so which is great in terms of margin, and we're going to continue that way. And with that, I will give the word to Ruben.

Thank you very much, Stefan. Can everybody hear me? I think so. It's great to be here for the first time. And Andrew, thanks for pronouncing my name already well the first time, so no learning curve there. If you go and I can click to the next slide. So you've heard by Stefan, where do we play? What are our must-win battle, how are we going to drive growth? And that we already see the recovery now from a minus 2% to plus 2% in volume growth. If you look at our 2024 guidance, total revenue guidance is between 3% and 4%. And within that, we know that compared to H2 where H1 was last year around 8%. H2 will have a softer comparative with around 2%. And in that H2 growth, the growth will be more skewed into quarter 4, which is more linked to the timing and phasing of some of our launches and some of our promotions. Because as Stefan said, we will drive the growth through our more profitable must-win battles. The EBITDA growth will be higher between 4% and 6% growth. And this, in combination with the fact that we're doing share buybacks will lead to an adjusted EPS of EUR 1.75 to EUR 1.80 and in dollars, $1.94 to $2, which is around 9% to 12% growth. And we expect to continue our strong free cash flow conversion between 90% and 95%. That '24 target is in line with our long-term target of 3% to 4%. And you've seen the chart, which Stefan showed about the category growth. So frozen food in Europe over the last 10 years have grown almost 3%, 2.9%. If you couple that with the fact that within that category, 2/3 of our portfolio is in fish, vegetables and poultry actually by holding share in these categories, we should be -- already be able to drive the 3% to 4%. Couple that then with what Stefan just said, our brands, our flywheel, how we are going to drive the growth platforms like with poultry and fish and fetch. This is why we now have 3% to 4% revenue growth also for the long term. And again, we will continue to drive profit through our more profitable must-win battles. As you've seen in quarter 2, we drove efficiencies through efficiencies -- we drove savings through efficiencies in our factories, in our logistic warehouses. So EBITDA, 5% to 7%. And by leveraging also the rest of the P&L, EPS will be 7% to 9%. And cash flow as this year will be -- will continue to be 90% to 95%. Now I just said the 3% to 4%, if you look at that from a category growth, our portfolio position and how we play in there, we feel comfortable with the 3% to 4%. But we also feel comfortable if you look at the historical numbers. Well, we, Stefan, because I just joined, but Nomad has already been delivering this. It's 6%, it's actually between 6% and 7% has been the historical growth year-on-year of our revenue. And actually, within that, roughly half that was organic growth. So again, we emphasize the fact that the guidance we already have been delivering on that. Adjusted EBITDA, 7% and adjusted EPS, you see a bit in '23 with higher interest costs, but you see the trend of 10%. It's not only the track record of delivering the P&L, the growth in EBITDA and EPS, but also how that has translated into cash. So between 2017 and 2023, we have delivered EUR 1.8 billion of free cash flow. There were -- if you look at the years '21, '22, given the crisis with the high inflation, there was a need to have more buffer in terms of working capital. But you see the other years, especially last year as we have been hovering between the kind of EUR 250 million and EUR 350 million. So around EUR 300 million has been in normal years, the underlying free cash flow. If you look at the targets we just displayed, Actually, that would translate for the next 3 years into EUR 1 billion of free cash flow, which is 1/3 of our market cap at the current exchange rate. Now if you look at that free cash flow historically, how have we deployed that between 2018 and 2021, we've done M&A, accretive M&A. If we look at the businesses acquired like Goodfella's Pizza, and Aunt Bessie’s, Findus in Switzerland, but also more recently, the business in Eastern Europe with both a frozen food business, Savory business as well as an ice cream business. In aggregate, those businesses, those acquisitions have overdelivered on our internal expectations. In recent years, we've shifted from an M&A to cash delivery directly to shareholders either in terms of share buyback or in terms of a cash dividend. And you see what we've done in the recent years with the dividend also having a 3% yield. Now summing it all up, you've heard Stefan talking about where we are positioned, the category we play in, and healthy category and healthy portfolio, how we will continue to drive growth with our growth platforms. If you then see how that translates into revenue growth but also profitable growth with the EPS and then the free cash flow conversion. I hope you agree with us that we think there's an exciting journey ahead of us in terms of long-term value creation. And with that, I hand over to Andrew.

Perfect. Great. Thank you, Stefan. And thank you, Stefan, and thank you, Ruben. We've got about 10 minutes left for some Q&A. Maybe starting off, Stefan. GLP-1s have been topical. Plenty of debate and what it may mean for the food industry. Can you share your view on this and the potential implications for your portfolio, which is you talk about is more focused on sort of nutrition and protein as well.

Well, let me first focus on Ozempic or GLP-1. Obviously, it's still very new. We had a lot of different predictions by the way, starting with the CEO of Walmart, if my memory is right. We haven't seen any real meaningful impact for us. But in all fairness, it's still very new in the U.S., and it's even more new in -- its more recent in our countries. Still the only thing I end up seeing is something from Morgan Stanley that says, well, people are going to the intake, the food intake is going to be materially lower with 3 exceptions. One is it's coming from people using Ozempic. One is plant protein. Second is poultry and fish. And third is vegetable. Well, let me remind you that 2/3 of our business is between vegetable, let's say, poultry and fish. So we see this with more as a positive than a negative. But I think, it would be great to have even, let me stand back for a second. I think Ozempic is only one manifestation of something which is becoming bigger and bigger for me, which is the debate around food, the quality of food good, food versus bad food. And it's a very serious debate. It's about obesity, it's about health. It's big in this country. It's getting bigger in our countries as well in Europe. And so -- well, the first thing is I don't think that I haven't seen anybody becoming obese with vegetables, well, tell me. And I think between Ozempic, good food, bad food, well, I think we have a great job to perform. That's why I like this category so much that I like the way we are positioned. And I think this debate is going to take place. It's going to be about taxation at some stage as well. It's going to be about Ozempic, it's going to be about people taking consideration of their health. And well, we have between 2/3 and also or low level of fat, sugar and salt, we definitely believe that we are extremely well positioned. And I love it.

I know you've been upgrading your ERP system and moving to SAP HANA. I believe the changeover is happening in one of your major U.K. plants this quarter. Can you update us on how that's progressing?

Well, it's overall is moving well. As you know, I mean, the ERP implementation is always an interesting endeavor. But we've prepared ourselves the right way. As we expected, what we did is we've loaded, the retailer so that we have to make sure that they're going to have the right level of inventories before starting because basically what you're doing, you unplug a factory for a few weeks. And obviously, that's why you need to be -- to make sure that people are going to be well equipped. We're moving well. At the same time, we also have decided for us to make sure that there won't be any problem bumps in the road with the consumers to reschedule some of the, let's say, the promotions between Q3 and Q4. And that's -- I think that was the right thing to do for the consumer sales.

Ruben, the presentation was very much focused on how you intend to drive revenue growth. While you mentioned it briefly, there was a little on productivity. I guess as the new CFO, can you talk about what you have seen since you joined in regards to the cost savings pipeline and what we should expect going forward?

Yes. So as I said, I think this company has made great progress, both in terms of organic growth as well in terms of M&A accretive M&A. You've seen the accretions that are still on the screen. So very much in buy and build. I think what we've done very well is perfect. We're really doing optimization with kind of 5s Kaizen programs. But also, we have to be clear that if you look at the pricing that had to be taken, and we've -- you see that in our annual report. Volumes have come down in some of our factories with the M&A. We had some more factories in our total network. So we do think that on total, there's a potential for high-end logistics, high-end factories to look at further savings. And that for us, links with our flywheel because we -- as you have seen in quarter 2, we've had savings in our factories and logistics, and we will reinvest that. We can reinvest and we've done a big part of that in A&P behind our brands. But if we see opportunities for some surgical investments on the shop where we will do that. And with that, we will continue to drive growth and drive more efficiencies in our factories and at the flywheel. So we do see opportunities there.

Great. Stefan, no real mention of the Eastern European business that you acquired a few years ago. Can you talk briefly about how that business has done since you acquired it? And performing more recently?

Well, I can tell you, we didn't want to hide anything because we're very pleased with what's happening there. So we are ahead of the plan. That's very clear. So we generated an ice cream business. So that's why I don't want to demonize good food versus bad food. It's doing extremely well. And on top of that, what we expected, which is was to move from basically natural fish, natural veg to something which is more sophisticated with the higher margin is doing well. The team are doing extremely well. So it's really a great acquisition. And hopefully, it's the first one in the Eastern Europe and the others will come.

Great. Much more emphasis on innovation as a driver of growth from you of late. Can you discuss what changes you've made, whether it be people, process, what have you to build this pipeline?

Well, people wise, I came to the conclusion that we are probably a bit too much product driven as opposed to consumer-driven. So it's been a bit of -- and then that's the first piece. So we've changed some people. I think it's more marketing-driven first. Definitely, it's more also outside in than it used to be. And as we said, we also become very pragmatic, and we've been able to link this innovation with these growth platforms so as to make sure that between launching something new, but also something which is well known for us, is going to work. And then also the point of coming with 2 strong pillars for the future, 3 pillars for us. I can see in real terms, it's working well. And little by little, this innovation mindset is starting to really take that traction within the company.

Great. Great to hear about the success driving revenue in your Eastern European Adriatic cluster. Can you talk about profitability there? In emerging markets, typically margin dilutive for most companies. Is that true for you as well?

The answer is no, by the country. So it's really accretive. It's accretive, less on the frozen food side, but definitely at the ice cream side, especially in the impulse side. Well, it's kind of nice margin. Well, you need to understand that also, we have a very interesting DSD model. We have 120,000 freezers across the region. And well, that helps.

Thoughts on capital allocation. It's been a few years now since you did a deal. Is this a renewed priority for you going forward? Obviously, it's been an anomalous a couple of years. And the focus, I think, rightfully so, is on returning more of that cash to shareholders, particularly with where the stock was. And but thoughts on M&A going forward, opportunity, how the pipeline looks maybe more recently as opposed to the last couple of years.

Well, I will start and then please Ruben please complement that. Yes, the pipeline is still full, by the way. And I think there is a reason it's full because some of these guys still think that they can extract something like 12x EBITDA. And we're trading at 8x. So when you're trading at 10x and we're buying something at 10x, you know that, well, that's at least what we've seen, and we've been able to extract 2 points of multiple, 12x versus 8x, the best acquisition is all stocks.

So that's it. And I think in parallel, what we continuing to work on is explaining why we play in strong categories with strong secular trends, then deliver. And once we have a higher multiple, then you can look at M&A again. But until that, we stay focused on what we're doing.

Perfect. And there are some, but again, I don't think we want to be passionate about deals for the sake of these.

Yes. Good. All right. Well, first of all, thank you for a lot of new content in the slides today, actually. So that was really interesting to take a look at. And thanks for your help on that, Jason. Please join us in the breakout for questions, and we really appreciate you being here, Stefan and Ruben.

Thank you very much.

Thank you, Andrew.