Nomad Foods Limited (NOMD) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. Welcome back for our fireside chat with Nomad Foods. With us today are CEO, Stefan Descheemaeker; and CFO, Ruben Baldew. Stefan is going to start off with some comments, hand it over to Ruben, and then, we'll sit down for some questions as well. Over to you, Stefan, and thanks to you both for being here.

Thank you very much, Andrew. So let me start right off the bat with -- I think for those who don't know us, I think, that's what we are. We are the leader in a very good category, which is frozen food in Europe. So we have, let's say, a leading position, great brands. You know some of them, obviously -- like, obviously, Birds Eye, but iglo or Findus are very, very important as well. Then you have probably some brands that you don't know like Ledo, Frikom, which are great brands in countries like Serbia and Croatia. Then we have additional brands like pizza in Goodfella's, which is in the U.K. So that's our position. I will go fast behind it, brand awareness, preference, brand equity. I think we're ticking all the boxes. So that's our position. And again, let me highlight it, it's in a very healthy category. This is a slide that I loved a lot for 9 years because for 9 years, we've been able to increase sales, EBITDA, EPS every year. So 9 years, but not 10 years. I -- well, as you can imagine, it's frustrating. At the same time, I think we need to go beyond the frustration to understand what it really means. So let me first start with the first 9 years. It doesn't mean that the first 9 years have been easy. They have not been easy. I think we have to start with a totally strategic change back in 2015. Then we went to Brexit, all the distraction that came up with. Then we had COVID, which definitely challenged our supply chain. Then you had obviously a wall of inflation back in 2022 with the Ukraine War. We priced a lot and all these things. And then also, we had question marks around our supply chain, especially in fish at that time. So we went through all these things. And I think every time, whether it was macro-driven or self-inflicted, which can happen as well, I think we came up with the learnings and then what we can do to be stronger. And so that's why we came, for example, with the must-win battles, which is how to make sure that we're not going to be distracted by way too many subcategories where we have no right to win. But definitely, per country, where we think we have this 20%, 30%, 40%, 50% market share, where we can make the difference. That's one of the things. Second, for example, we've learned through Brexit that we can diversify, obviously, our supply chain. Then, in terms of the Ukraine War, well, we've been able to price. But beyond pricing also, we have developed a new muscle, which is the revenue growth management, which now allow us to be much more granular. And then in terms of supply chain, again, in terms of protein and fish finger and fish, we've been able to move not only from wild fish, but to farm fish as well. So a lot of things we've been able to do during this year and all during these 9 years, which have been 9 years of growth. This being said, I cannot be satisfied with this year. Yes, we are stabilizing our volume market share. Yes, we've been able to take the right decision in terms of what we should price and what we should not price in terms of COGS. And yes, weather played a big role between the unprecedented heat wave, and Ruben is going to talk about it. And we thought that frozen food would be insulated from that, and it was not. Coming back on that later. And also paradoxically, a poor summer in the Adriatic region compared to 2024. And at the same time, very poor harvest. But I think that would be wrong and probably not helpful to attribute our disappointing performance this year with the weather only. And I think it would be the wrong learning for the future. So I think what we've been good at over the last 9 years is every time to take the learnings and then to become stronger. So the learnings from us are very simple, 2 big learnings. One is weather, okay, fine, heat wave was big. We think we can come up for next year with a better assortment, more adapted to heat wave because we have something that can work very well with barbecue or definitely also with, for example, let's say, chicken, marinated chicken and all these things. That's something that exists in our assortment that we probably haven't emphasized well enough at this stage because we didn't see it coming with such a magnitude. At the same time, as I said, we've not been very good. We've been a bit slow this year at accelerating the renovation of some of our key categories like fish fingers, which is EUR 400 million, or pizza. And this next year, definitely it's something that we're going to do much faster. For example, fish finger, the idea was to come up with something like Q3. We're accelerating in the big countries like U.K., Germany, Italy to Q1, which is a big difference. And that's the kind of things we're learning. I think making sure that we are paranoid enough to think, okay, what's happening in the market at the same time. So that's -- these are the key learnings for us. So, again, disappointing year, not 10 years, but 9 years plus this year, but again, a lot of learnings for us for the future, starting in 2026. And with that, we think we're going to be stronger and stronger at the end of the day, as I said, and I started with that with the category that is doing well. That's the performance of the category over the last 10 years, and it's been -- compared to food, it's going to be -- it has been good. And I think our view is how can we be even stronger as a leader in a very healthy category. Because why is it strong and why is it healthy? Well, for obvious reasons. First, frozen food is convenient. At the same time, it's value for money. Sustainability, however, I doubt that consumers do attribute so much value at this stage. But more importantly, and that's very much in line with our superiority program, it's very good food, it's very tasty food. All our renovations, which is around 10% per annum, are going the same way, which is how can we make sure we're coming up with something which is tasty, which is really appreciated by the consumers. And the renovation of fish fingers, for example, goes very much in that direction. Another reason we think this category has a great future is when you compare with the U.S., penetration is still very low. U.K. is halfway as always. But you see a lot of countries where basically it's 60% or even 50% of what the consumption is in the U.S. And as we see -- as we've seen, we have a lot of strong fundamentals going that way. So not going to even Bosnia, but even Italy or something like that, we can see that there is a long runway of potential growth with this category, which is quite different from some of the regions. At the same time, and again, I think it's something that's on top of tasty, nutrition is becoming increasingly important, health is becoming increasingly important. Well, 2/3 of our revenues are coming from basically fish, protein and vegetables, as simple as that. At the same time, and I hate this acronym of non-HFSS, which is not high in fat, salt and sugar. Well, something like close to 90% of our food is -- belongs to that category. So we have -- the only difference is probably pizza and ice cream, and that's it. The rest is really healthy, very, very healthy food. And I think -- in these times, I think it's becoming increasingly important. So a lot of potential tailwinds for us in the category as category leader. So let me then quickly go through the new Masterbrand advertising campaign, which is something which we're doing right now, which is on air in the U.K. What it does is basically, it's very versatile. It's something that we can use in many other countries with many different categories. We're advertising. We're emphasizing different products depending on obviously, the country. But the idea is obviously how to maximize, obviously, our media money so that we can go faster, but also at a decent price. [Presentation]

While in other countries, you're changing Birds Eye by Findus or by iglo, you're changing some of the projects by spinach or something, and it's there. And it's available. It's available right now in the U.K. It's going to be in the tubes, by the way. It's going to be digital. So there are many different ways to use this. And we think it's a very efficient way to obviously use our media money. Next one is innovation. Well, I talked a lot about renovation. Renovation is part of what we're doing right now. Basically, it's around 10% of the portfolio is renovated each year. So very much in line with how can we make sure that we're going to have superiority vis-a-vis private label mostly, sometimes brands. But first and foremost, let's face it, private label is the -- let's say, the competition, is competition. So that's one thing, so renovation. But on top of that, innovation is really starting to ramp up. We're starting in 2023 with 4.2%, even lower in '22, quite frankly. And then moving to '24 to something like 5%, we're going to be close to 6% this year and even further. I think on top of the numbers, what's important as well is we also have -- a huge part of that is coming from what we call lift and launch. In other words, when we have a great category like U.K., in chicken, well, we know that we can develop this chicken in other countries like Italy or Germany. And that's obviously a recipe for lower failure because innovation always comes with a certain proportion of failure. And by doing this, we know that we have a proven success in our country. By adapting, obviously, the recipe here and there, we know that we're going to increase the success rate. That's exactly what we do. It's probably less spectacular, but at the same time, I think it's much more effective. It doesn't mean that we cannot come up with some really new innovation, very much in line with what the consumers, especially young generation is expecting. So these new projects in terms of ready meals, chicken-based, 30 grams, 35 grams of proteins, the right ingredients, much better than any competition. We're launching it right now in the U.K. It's a new category for us. We're reasonably small in ready meals in the U.K., but we're quite big in countries like Netherlands or Belgium, and that's going to be part of the must-win battles. So more to come, but it's really something that we're really proud of. So it's starting basically in September. And then we'll -- obviously, we'll keep you informed of what we are. The next one is something which is already existing in the U.K., it's Chicken Shop. Basically, it's some sort of fakeaway of basically takeaways and what's existing in the chicken category. We're already very big in the U.K. It's something like EUR 200 million of sales. So it's one of the big categories, but that is making a big difference in terms of subcategories in the U.K. As I said, it's replicating what QSR is doing, but obviously at a fraction of the price, which obviously is something that was really appreciated. And as I said, chicken, we started from the U.K., and then, we saw some countries like Italy, which is our #2 country with great margin, by the way. And we have seen that frozen chicken was very small. And quite frankly, it's quite sleepy. And we've taken this category by -- let's say, very quickly. And in 2 years, we've been able to move something like 7% market share or even less -- we doubled the market share. So we're really taking the market, let's say, the category, which is really what our role is as category leader and brand builders. So we're doing this. We're using obviously the products coming from the U.K. We're adapting them. And then obviously, we're creating the category, which is what the trade is like, obviously, because it comes with higher margin. We're doing the same in Germany, slightly different because the category is there, but it's very much in the hands of private label. Then we're coming with something which is obviously in terms of quality, it's definitely superior. So a lot of things are happening in chicken. Definitely, we believe that chicken is -- I wouldn't say the protein, but it definitely is a protein of the future, and we're well positioned to get it. Then you know something we haven't talked a lot in the past, which is food service. Food service for us is around 8% of our business. It's doing well. It's mostly in countries like the Nordics. A bit, obviously, also in the Adriatic, Serbia, Croatia, we have a great route to market and a bit of Spain and Portugal as well. And so we have developed over time a great relationship, especially in Norway with McDonald's. And we've come up with a product which is basically a plant protein nugget. And believe me, I've been through a lot of tasting session in terms of plant protein. I think plant protein, the issue of a lot of time was basically the product is not as good as the "real stuff." This one is great. This one is really great. I'm trying not to be biased. I don't think I am. I think it's a great product. Starting now in the Nordics. We'll see obviously how it's working with McDonald's. And we also believe that if it's successful with McDonald's in these countries, it will spread to other countries. And at some stage, we may use it, obviously, for own as a retail brand further and further again. So that's the kind of things we're doing. We also believe that foodservice should grow faster in the future. We have some great plans in some countries, like in Southern Europe and in Adriatic, as we said, where we have fantastic route to market that is unparalleled and something that is unique and that I think we should leverage further. So a lot of things are happening at this stage despite obviously this difficult year, but definitely, it's something that we are building for the future, for '26 and beyond, so that basically this year is going to be a year of learning and then learning to get stronger. But with that, I will give the word to Ruben that obviously is going to go into more details behind what we mentioned this morning, and obviously, more numbers to come.

More numbers. Thank you, Stefan. Let me go into a bit of the market share numbers. As Stefan said, we've been leaning into investing behind our brands, growth platforms, rolling those out across Europe, and the strategy so far is working. If you take a step back, this company took pricing ahead of the market in '22-'23, and that led to pressure on our market shares. And you see the impact of that and the aftermath of that also in '24, especially in the first of '24. But that pricing did enable us to maintain our gross margin and to allow us to do those investments. And you see the recovery of both value and volume share in H2 '24. And after the decrease in quarter 1 '25, you see that we, in quarter 2, have stabilized value share and are growing volume share. And that is growing volume share in a category which is growing. Our category has been growing, if you look at the last 10 years, in a positive way. It grew last year. It grew up until P4, so the first 4 months of the year. And then we saw a decline of the growth numbers in the category and decline in P5, in P6 and in P7. We think that it's transitory that's linked to the unusual hot weather and dry weather we've seen, especially in Northwestern Europe. And you see some of the evidence of that back in P8, we see the category back in growth. Also, I want to be clear that, that P8 number is only for a selected number of regions because we don't have all the market data yet. So that's mainly our Northwestern European business where we see the category recovering. If we look at our ice cream business for which we don't have market data yet, we do see that in July and August, our own numbers, our own sellout has been slow. And a big part of that is also due to the unrest we've seen on the streets in Serbia with lower sellout in out-of-home. So that gives you a bit of context of where we are today. We're also reiterating the guidance which we shared with our last earnings. Let's now pivot a little bit more towards the future and forward-looking. Today, we have announced a new set of medium-term targets, and they're centered around 2 elements. The first element is around our EBITDA, where in the next 3 years, we target to have 1% to 3% EBITDA CAGR over that whole period. Now that number can vary year-over-year. For example, next year, we're going to have our bonus rebuild. So that could be then on the low end of the range or even slightly below the range. But over the full period, we'll have 1% to 3% CAGR of EBITDA. And clearly, every year, we will target to have positive EBITDA accretion. Now the second target, and it links to that, it's a combination of EBITDA growth will go in combination with better quality of earnings, us focusing very much on exceptional items, bringing those exceptional items down. And that also in combination with continued strong working capital and CapEx will lead to 15% more free cash flow in the next 3 years compared to '23 to 2025. Now, how are we going to do that? Today, we announced that we will step up our productivity program with around 25%. So a EUR 200 million program for the next 3 years, mainly in supply chain, but also in overheads, and I'll come to speak about that. We're going to use those savings to reinvest in our brands in product quality, in renovation and innovation, in communication, but also in shop floor activities. And by that, we should be able to have competitive positions in our healthy category and have growth. Now, if we go a bit more into those supply chain savings, so as said, we're accelerating those. Over the last 3 years, we've done EUR 145 million to EUR 150 million. In the next 3 years, we're going to do EUR 180 million, and you see the buildup and the big increases in procurement. And on the next slide, you see the breakdown of the procurement drivers. So we're going to double our procurement savings. And you see the biggest increase there is strategic purchasing. So we clearly already had a centralized procurement organization. But in the next 3 years, we're going to work further on supply reduction, supply rationalization and having more leverage there. You also see that in the past, we had 4 drivers. Now, our total savings project -- program is much more broad-based. So we're also looking at savings, for example, in the customs area. Second bit is a continuation of the logistics savings. We have been putting savings forward in logistics already. We will continue to do that. One of the elements will be the reduction of the numbers of depots, which we were going to have, 22%, which, by the way, will also help from a cash perspective. The third, last, pillar in supply chain is our factories' conversion cost. So on the right, you see the utilization. Our utilization on average is 66%. Some factories are almost at 90%. Some factories are at 25%. And we're going to do 3 things. Firstly, if you look on the left, at this moment, there is around 20%, 22% of our volume done by co-packers. Some of that co-packed volume, we're going to bring in-house in our own factories and that will give us leverage and cost per unit benefits. The second bit is mainly for the big factories we're going to do cost optimization to make sure we have the right capacity and cost level for the right volume. And on the right side of the graph of the table, you will see that we will look at network studies. And you've seen, for example, in quarter 2 that we announced the closure of a smaller factory in the Nordic region. So that's the supply chain piece. Next to that, we will also look at overheads. On the left, you see our overhead evolution. So our overhead up until '24 has gone up 8% every year. But if you take out M&A, it has gone up 5% every year. Now clearly, there was inflation. Clearly, we have been investing in capabilities like revenue growth management and cyber. But in '25, you see that's the year where we actually bring in the absolute amount down, thanks to EUR 20 million of savings, and those savings are actually centered around 2 things. One is the simplification of the organization. And secondly, it's a rigid approach on all the discretionary spend and having a zero-based budgeting approach. And we will continue to drive that also in the next 3 years. So on the low end, we expect to have around EUR 20 million of savings. On the high end, EUR 35 million saving. And you see it's more front-faced as well. Now, all those savings, we're going to reinvest, as said, behind product quality, renovation, innovation, but also behind our brands and our communication. And you see that our A&P has gone up in the recent years. We're now around 4% of net sales. But also on the A&P level, we're going to look for efficiency. So in quarter 2 this year, we started with indirect procurement to look at all the nonworking spend in media and to see how we can become more efficient there. Stefan shared the Masterbrand campaign, which will give us leverage, which allow us to roll out growth platforms and leverage our brands. We're also going to work to make our spend work harder in terms of a centralized media buying with one central partner, and we continue to work on marketing mix modeling. Now this focus on ROI, this focus on efficiencies, not only from a P&L perspective, it's also from a cash perspective and a quality of earnings perspective. So on the left side, you see the exceptional items we've been booking in the last 3 years, which has been around EUR 70 million on average every year. Going forward, we will halve that by around EUR 35 million. And a big driver of that is a rigid approach and governance on our exceptional items. And clearly, a big driver there is by lowering the spend on our ERP transformation, where we've said before, we will go slower, smaller and simpler, focusing on process and data first and then systems to follow. And we think that is a big driver to lower the exceptional items here. So if you were to sum it all up, we will drive 15% more free cash flow in the next 3 years. One of the driver is the 1% to 3% CAGR over the next 3 years, driven by the step-up in productivity program, which we will reinvest in our brands and the products, and therefore, leveraging the healthy category we're in. We will continue to have a disciplined approach around CapEx and working capital by benchmarking, forecast optimization. And I just spoke about halving our exceptional items, have an ROI focus and a slower and smaller transformation program. And with that, I would like to thank you for your attention and hand it over to questions.

Perfect. All right. You both are so far away.

Yes, you can sit here. Yes.

Perfect. All right. Good. We got a couple of minutes for some questions here. Maybe to start off, less than 2 years ago, you established long-term targets, calling for 3% to 4% revenue growth, 5% to 7% EBITDA growth and 7% to 9% EPS growth. You're now walking away from the revenue and EPS growth and meaningfully lowering your EBITDA growth targets. I guess, what's changed to cause this?

Well, it's a great question. I think what we've seen is we were a bit too tight definitely during a very volatile environment. I think -- since 2022, I think the market has differed and probably you have heard that from many different food and beverage companies. So I think the cornerstone of our guidance is centered around 2 things. One is we're coming with a bigger savings program, and at the same time, lower EBITDA guidance. And you may say it's paradoxical, and we don't think so. We just think that it's creating the space for us to be able, when needed, to reinvest more in the business. I think we've been through a lot of price increases. We're still in a very volatile environment in terms of COGS. And at the same time, we think -- some here and there, we might need also some more advertising intervention and all these things. And that's between these 2 elements, more savings, lower EBITDA guidance. We think we're going to do the right -- we're going to make the right decisions for the business in the long term. And that obviously, at the same time, as we said, in a great category. So what we think is going to help also our top line at some stage. And even if it's only coming to the guidance, back to our point, I think we're doing the right things for obviously the long-term topline development of this company. At the same time, we're also coming with free cash flow, an increase -- I mean, to Grant's point, there has been a substantial increase in terms of free cash flow, which should help also the investors to understand what we're doing. But the cornerstone is really how can we create the space in a very -- in still a volatile environment in a very healthy category so that we're doing the right -- we're taking the right decisions for the business, whether it's sometimes not to take the whole price, sometimes it's more advertising or sometimes it's already going back to the P&L.

Great. Should we view your prior 3% to 4% long-term organic sales growth target as no longer achievable?

No, it doesn't mean that. I think it just means that at this stage, we think it's -- well, first point, we're not being very pleased with missing our targets. And so I think what we want to do is also to create, obviously, the right level, so the right expectation so that people are less anxious from that standpoint. But at the same time, we know that is volatile. Sometimes it might go up faster, sometimes it might be a bit lower. And that's why we want to create obviously the -- let's say, the space to get to obviously the right business model. Our objective in the long term is -- well, not long term, but like midterm is to make sure that for each and every category, in each and every country, we have the right, let's say, model in terms of value, so superiority and also price level vis-a-vis private label. And so the combination of these 2 elements, also with the right investment in terms of A&P, is what we want to go for. And I think with that, we will have, I wouldn't say, never the perfect business because perfection doesn't exist, but it's definitely something that it's going to be the right decision for the long term.

EUR 200 million of cost savings equates to about 35% to 40% of your EBITDA. You're targeting only 1% to 3% EBITDA growth over the next 3 years. So I guess the question is, are these savings real? And if so, where are they going?