Title

Presentation

Nomad Foods Limited beats earnings expectations. Reported EPS is $0.46, expectations were $0.38.

Operator: Good morning and welcome to the Nomad Foods’ First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Anthony Bucalo, Head of Investor Relations. Please go ahead.

Anthony Bucalo: Hello and welcome to the Nomad Foods’ First Quarter 2023 Earnings Call. I’m Anthony Bucalo, Head of Investor Relations and I’m joined on the call by Stefan Descheemaeker, our CEO; and Samy Zekhout, our CFO. Before we begin, I would like to draw your attention to the disclaimer on slide two of our presentation. This conference call may include forward-looking statements that are based on our view of the company’s prospects, expectations, and intentions at this time. Actual results may differ due to risks and uncertainties, which are discussed in our press release, our filings with the SEC, and this slide in our investor presentation, which includes cautionary language. We will also discuss non-IFRS financial measures during the call today.

These non-IFRS financial measures should not be considered a replacement for and should be read together with IFRS results. Users can find the IFRS to non-IFRS reconciliations within our earnings release and in the appendices at the end of the slide presentation available on our website. Please note that certain financial information within this presentation represent adjusted figures for 2021 and 2022. All adjusted figures have been adjusted for exceptional items, acquisition-related cost, share-based payment, and related expenses as well as non-cash FX gains or losses. Unless otherwise noted, comments from here on will refer to those adjusted numbers. With that, I will hand you over to Stefan.

Stefan Descheemaeker: Thank you, Tony, and thank you for joining us on the call today. Nomad had a solid start to the year as our sales momentum from the second half of last year continued in the first quarter. Additionally, our teams did an excellent job executing the strategies we announced at CAGNY in February. I’m pleased with the performance of the great people across Nomad who delivered excellent results to start the year off right. Last year we faced a difficult environment brought on by post COVID inflation and the outbreak of the Ukraine war. We adapted to confront these challenges last year and put new plans in place this year to make Nomad even more resilient and positioned for growth. Overall, we believe our Q1 results demonstrate that we are on the right path to accomplish our goals.

In Q1, our revenues grew organically 8%, another sequential quarter of improving sales trends. The benefits of our pricing strategy and disciplined supply chain management were visible in improving adjusted gross margin and EBITDA margin, both of which grew 100 basis points year-on-year. We also delivered adjusted EPS of EUR0.46, which grew 7% in the quarter. As we shared at CAGNY in February, we have three central priorities for this year. Our first priority is to strengthen our commercial approach with additional A&P investments for our brands while adding affordability options for stressed consumers. This includes not just innovation, but renovation for many of our best selling products. Our second priority is to leverage the efficient savings from our world class supply chain to help fund growth.

Our final priority is execution of our revenue growth management strategy, designed to recoup costs through pricing and maximize the value of our portfolio. I’m happy to say we are on course for all three. Our new A&P investment is reaching the market now in Q2 and will be fully deployed in the third and fourth quarters. Our supply chain is performing well, delivering excellent service and efficiently managing our procurement process. Finally, our revenue growth management execution is helping drive price and mix further narrowing our cost gaps. Overall, Nomad is in a much better position today than at this time last year. We are highly encouraged by the resilience of our top line and the improvement in our margins. ’23 will have its challenges.

But we are with our improving fundamentals and expected step up in cash flow and strengthening balance sheet, we are highly optimistic about this year and beyond. We are on track to meet our guidance expectations. With that, I’d like to recap our first quarter key financial metrics beginning with revenues. Q1 revenues grew 5.8%, with strong pricing more than offsetting volume declines. Organic sales grew 8%. However, we experienced 2.2 percentage points of negative ForEx impact. Adjusted gross margins grew 100 basis points to 28.9%, driven by our pricing initiatives and supply chain execution. Adjusted EBITDA grew 11% to EUR146 million, with margin improving 100 basis points. And finally adjusted EPS was EUR0.46 per share, up 7% versus last year.

At current US dollar spot rates or Q1 adjusted EPS was $0.51. Our revenue performance was strong in the first quarter as our pricing from the second half of 2022 rolled over into the start of the year. This was the fourth sequential quarter of improving organic sales trends against a challenging consumer environment or mid-teens pricing more than offset a mid-single digit volume decline as our volumes were not impacted by elasticity and price gaps with competition. We have further narrowed the gap between our price and input costs this quarter with a positive margin expansion. Raw material prices are moderating. However, we are not seeing meaningful deflation. This all plan to recoup our input cost inflation from 2022 and 2023 by year-end. This will help fund our plans for stepped up investments in A&P and innovation.

This is crucial for the health of our business. Our world class supply chain continues to show positive results with delivered service to our customers at a multi-year high, with levels above 97%, up 100 basis points from last year. Additionally, we remain disciplined on procurement and we are covered for nearly 80% of materials for the year. We’re giving ourselves more flexibility on coverage than in previous years becoming more analytical and strategic on how we acquire raw materials. We lost about 1% value share this quarter. This loss was a direct impact of both elasticity in the price gaps which have not yet narrowed versus our private label competition. However, our new A&P investment hits the market starting late in Q2 and will be rolling out across the balance of the year.

With greater brand support and innovation, we expect to reverse these losses as the year progresses. Finally, with our strong EPS delivery this quarter, we are raising the lower end of our 2023 adjusted EPS guidance to EUR1.52 from EUR1.50. Our original range of EUR1.50 to EUR1.55 now stands at EUR1.52 to EUR1.55. This represents an adjusted EPS range of $1.67 to $1.71 at current US dollar rate — spot rates and excludes any impact of capital allocation. This quarter, we benefited from the adjustments we made to our business model last year combined with the new plans we have rolled out this year. We plan to return to our historic margins over time and we made progress during the quarter. In Q1, margin benefited from our pricing from the second half of 2022.

Additionally, we showed the benefit, the benefits of supply chain discipline and cost savings programs. As a result, our gross margin expanded organically for the first time since the end of 2020. With a continued focus on price realization and supply chain discipline is good early starts puts us on target to meet our goal of flat adjusted gross margins for 2023. The consumer is at the center of everything we do, and we kicked off our four digit strategy designed to attract and retain consumers during this period of high inflation across Europe. We have adjusted many of our promotions on key items and selective markets to keep consumers in our portfolio. Additionally, our expanded above and below the line communication strategies are carrying the message of frozen food intrinsic values, including lower waist, high nutrition, product versatility and good value.

We are seeing strong initial evidence that our message is taking root. Long-term, we think the strategic gives us the opportunity to reconnect with consumers and strengthen loyalty to our brands. Finally, we’re seeing the full benefits of the farmed fish supply strategy we accelerated after the outbreak of the Ukraine war last year. With our new source of fish, we launched new and innovative products across four of our markets, including the UK, Germany, the Netherlands and France. We have a scheduled expansion into at least another three new markets this year. The initial results have been very encouraging and we are excited by the innovation opportunities the new supply of high quality fish provides us. With that, I will now hand the call over to Samy to review our financial results and guidance in more detail.

Samy?

Samy Zekhout: Thank you, Stefan, and thank you all for your participation on the call today. Turning to slide six, I will provide more detail on our key first quarter operating metrics, beginning with reported revenues, which increased 5.8% to EUR775 million, up 8% organically. First quarter revenues were negatively impacted by 2.2% of unfavourable effects. We saw elasticity in our top line performance as volumes came under pressure due to price increases and the persistent price gap with private label. These volume declines were expected and are in line with expectations as we aim to recover cumulative cost increases from last year and this year. These volume declines impacted our market share, which was off about one point for the quarter.

As we communicated at CAGNY, we expect market share trends to improve sequentially this year, driven by our innovation efforts on affordability as well as stepped up A&P investments. We delivered a strong margin performance this quarter. Adjusted gross margin was 28.9%, 100 basis points increase versus the prior year, reflecting the successful recovery of higher input costs through pricing. We continue to navigate an inflationary environment. In Q1, we saw a benefit in the cost of goods sold from the tail end of cover position from 2022. Looking ahead, while we have strong cover now in place for the rest of 2023, the full effect of inflationary impact on COGS will be realized as the year progresses. As we look out to the rest of the year, we expect to deliver flat gross margins supported by price increases and cost discipline.

Moving down to the rest of the P&L, our adjusted gross profit grew 10% to EUR224 million for the first quarter. Adjusted COGS increased to EUR551 million, an increase of 4.3%, up EUR23 million versus last year. Adjusted operating expense of EUR100 million was up 6% year-over-year. Adjusted EBITDA of EUR146 million was up 11% versus last year. Adjusted EBITDA margin landed at 18.9%, an increase of 100 basis points. Finally, our adjusted EPS of EUR0.46 was up 7% in Q1. This translates into $0.51 in US dollar terms of spot rate. Turning to cash flow on slide seven. Cash generation is crucial to the health of our business and remains a top priority as we consider our capital allocation for this year and beyond. In Q1, we generated EUR25 million of adjusted free cash flow for a conversion ratio of 32% versus 62% in Q1 2022.

Q1 was adversely impacted by the phasing of inventory receivables and payables in certain markets during the quarter. The adverse phasing of receivable and payable is temporary and should reverse in Q2. We remain on target for our 2023 cash flow guidance and our options for accretive capital allocation remain wide open. CapEx of EUR21 million was flat versus last year. We continue to support strategic investments in the business. Changes in cash tax increased EUR1 million to EUR10 million, while cash interest was down EUR2 million to EUR25 million. As part of our refinancing in November 2022, we will be facing higher cash interest payments on a portion of our debt. As a result, we saw a cash benefit in Q1 before realizing the full impact of higher interest charges in Q2.

Last year, our cash generation was negatively impacted by a working capital build to mitigate the possibility of supply shortages in the middle of the year. We are also impacted by the implementation of Unfair Trade Practice Directive or UTPD in the EU. This year with more normalized inventory level and UTPD in the base, we expect cash flow conversion in line with our historical average. With that, let’s turn to slide eight to review our 2023 guidance, which we initiated in our 2022 earnings report in February and are updating today. This guidance is based on foreign exchange rates as of May 3rd, 2023. We are updating the original guidance we delivered in our 2022 year-end earnings report. First, we expect organic revenue growth to be in the mid-single digit range for 2023.

We expect our pricing initiatives to more than offset volume declines. We expect cash flow to be in line with our historical performance with working capital and UTPD in the base. We expect our cash conversion ratio in the range of 90% to 95% in line with historical averages. We are raising the bottom end of our original 2023 guidance. We now expect adjusted EPS in a range of EUR1.52 per share to EUR1.55 per share or $1.67 to $1.71 at current USD spot rates. This replaces our original guidance of EUR1.50 to EUR1.55 and excludes any impact of capital allocation. I will now turn the session over to Q&A. Operator, back to you.

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Jason English with Goldman Sachs. You may now go ahead.

Operator: Our next question will come from John Baumgartner with Mizuho Securities. You may now go ahead.

Operator: Our next question will come from Peter Saleh with BTIG. You may now go ahead.

Operator: Our next question will come from Cody Ross with UBS. You may now go ahead.

Operator: Our next question will come from Steve Powers with Deutsche Bank. You may now go ahead.

Operator: Our next question will come from Rob Dickerson with Jefferies. You may now go ahead.

Operator: [Operator Instructions] Our next question will come from Jon Tanwanteng with CJS Securities. You may now go ahead.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Stefan Descheemaeker for any closing remarks.

Stefan Descheemaeker: Thank you, operator, and thank you for your participation on today’s call. We got off to a solid start for the year and we remain on track to deliver our promises. We believe frozen food remains the best value for consumer across food and we remain pro category leaders. We are focused and committed to delivering our ambitious financial objectives for 2023 and beyond. Thank you all. Operator, back to you.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.