Nomad Foods Limited

Good day and welcome to the Nomad Foods first quarter 2020 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the call over to Tapash Bari, head of investor relations. Please go ahead.

Thank you for joining us to review our first quarter 2020 earnings results. With me on the call today, our chief executive officer, Stefan Descheemaeker, and Chief Financial Officer Sami Zaykoud. Before we begin, I would like to draw your attention to the disclaimer on slide two of our presentation. This conference call may make forward-looking statements that are based on our view of the company's prospects at this time, including consideration related to the impacts of COVID-19. 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 may 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 represents adjusted figures for 2019 and 2020. All adjusted figures have been adjusted for exceptional items, acquisition related, share based payment and related expenses as well as non-cash foreign exchange gains or losses. All comments from here on will refer to those adjusted numbers. And with that, I will hand the call over to Stefan.

Thank you, Tapush, and thank you all for joining us on the call today. On behalf of our entire organization, I would like to extend our thoughts to those affected by COVID-19 and hope that you and your families are staying safe. At Nomad Foods, we have been working hard to ensure the continuous supply of frozen food to consumers across Europe during this time of need. From day one, we have done this with the health and safety of our employees as our top priority. I'm extremely proud of the collective effort our entire organization has made to act quickly and decisively. I speak for all of us when I say that we are humbled to help our communities navigate this crisis. Turning now to first quarter results, which came in well ahead of expectations due to an unprecedented level of consumer demand beginning in early March. Highlights from the first quarter were as follows. Organic revenue growth of 7.7% driven by a 6.3% increase in volume and mix and a 1.4% increase in price. Gross margin of 29.1% which was in line with our expectations. Adjusted EBITDA 120 million euro and adjusted EPS of 33 euro cents per share. Based on our first quarter results and our expectation that sales growth will remain elevated for at least the next several weeks, we now expect to exceed our full year guidance. Sami will walk you through the details of our guidance in his remarks. I'm sure many of you are looking to better understand how we're managing the business throughout this crisis and what we are doing to ensure that we will emerge in an even stronger position. I will address these points in three sections. First, I will cover the near term, outlining how we have adapted our business to service an elevated level of demand throughout the home confinement period. Second is the medium term and how we plan to navigate through these next few months as restrictions gradually ease. And third, the long term, specifically what we are doing to ensure that our business is on an even stronger foundation once we ultimately return to some sense of normality, whenever that may be. Let's begin with the near term on slide four. Given the unprecedented nature of the current environment, we thought it would be helpful to provide you with the weekly view of the sellout progression across our branded retail business, which represents 90% of our sales. The remaining 10% of our sales are comprised of private labor and food service, which each represent roughly 5% of the total sales. It's important to know that the data on this slide represent branded retail sellout growth, which may not align perfectly with organic revenue growth for a variety of reasons. But this should give you an indicative direction of view. You will notice that we had an okay January, and so sales beginning to accelerate in February, which was our original plan. and clearly the surge which followed in March as stay-at-home orders and school closing went into effect. Since the growth peak in mid-March, it was likely driven by pantry loading, we have experienced a continued elevated level of demand throughout April, which we believe reflects growth of in-home consumption. You will notice a dip in week 16, which was depressed due to Easter phasing. When triangulating this sellout data with our five weeks of actual Q2 sales results, it is clear that performance continues to trend ahead of plan. And while we expect this may continue for at least the next few weeks, it is very difficult to project the future trajectory with accuracy. Turning to slide five, I'd like to provide some more color on the new term. As you recall, our original expectation for Q1 was that organic revenue growth would be roughly flat versus last year. We were firmly on pace to deliver against these plans as of late February. However, the pace of demand increased meaningfully throughout the month of March, with organic revenue growth for the month growing roughly 20 percentage points ahead of our plan. In terms of insights, it's clear that early on the growth spike was a result of consumers stocking up. However, as time has passed and people have remained relatively confined to their homes, our research is showing that people are opening their freezers and consuming our products. Another insight is that we are seeing an influx of new consumers into the category. This is largely driven by the significant shift to at-home consumption, natural role that our leading and trusted brands play in serving family meals. And finally, our brands have observed a disproportionate uptick in market share. This has been evident fairly broadly at both country and category level across our business. During the month of March, Our market share was up one percentage point, an notable improvement versus being roughly flat over the preceding 52-week period. We believe the increase in market share has primarily been driven by the fact consumers tend to buy brands they trust in moments of uncertainty. This is particularly the case for new consumers entering the category. In all, this progression is a validation of the power and awareness that all brands have in their local markets. This brings me to our supply chain, which has done an incredible job in not only keeping up with demand, but doing it in a way that has protected the health and safety of our factory employees. We took a number of decisive actions at the onset of this crisis, to ensure that we can deliver against all goals. In Italy, we were one of the first companies to use thermographic cameras at factory entrances. In January, as we noticed delays in Chinese production of Pollock, our procurement team quickly increased our cover position from other countries to ensure adequate raw material stocks. These examples plus many more have allowed us to maintain a high service level throughout the crisis. Despite our best efforts to keep up with demand, the reality is that there is a significant amount of pressure on our supply chain. As such, we have reduced near-term marketing and promotion plans with the goal of reactivating these programs in the back half of the year. There has been a lot of coverage lately around how COVID-19 may impact agricultural supplies, even farmer dependence on migrant workers and potential labor shortages. This is a risk that we have been monitoring for some time and one that we do not expect to impact our business for two important reasons. First, our main crops, peas, spinach, and potatoes, are picked using machinery and are not labor intensive like certain other fruits and vegetable crops. Second, we have strong relationships with our farmers, many of which have spanned multiple generations. These farmers tend to have secure labor forces and as a result are not as dependent on immigrant labor. To recap the new term, we have observed strong demand since March with elevated growth remaining into April. Our factories are all operational and are working at full capacity to maximize throughput. Let's now shift to how we're preparing for the medium-term outlook over the next several months as restrictions ease and out-of-home consumption begins to normalize. As you can imagine, there are a lot of unknowns as the progression will be dictated by global and local health authorities. Certain European countries have recently announced plans to gradually reopen schools and restaurants. With that said, it's probably fair to say that this next phase will likely be prolonged. We will navigate through these next few months with a strong set of plans that include merchandising, innovation, promotions, and traditional support to help sustain demand. Another consideration is the macroeconomic backdrop that we expect to see once restrictions begin to ease. Given the number of puts and takes, we are preparing for a range of scenarios, including the probability of a recession. As we've seen throughout this crisis, frozen food is a resilient category with a stronger consumer value proposition. History shows that during periods of economic uncertainty, consumers trade down into frozen while also being more price conscious. Taking these factors into consideration, we expect that our business will prove resilient in a recessionary environment as it has throughout the COVID-19 crisis. Finally, the long-term implications. While our current focus is on managing through this crisis with solid day-to-day execution, we are also planning and acting to ensure that our business exits this period with a healthier foundation than when it entered. There will be some permanent changes that we will lead into. These include the step change in e-commerce, where our category and our brands have structurally higher market share. Another is the fact that freezer capacity has increased at the consumer level. We also recognize there has been an influx of new shoppers into the frozen food category, with many of them trying frozen food for the first time in years. While some of the eating occasions are likely to return to out of home as schools, work, and restaurants gradually reopen, we do believe There is an opportunity to convert new frozen food eating habits into permanent repeat consumption. We know that frozen food has a lot to offer, not only in crisis time, but for everyday life. And we're confident that as consumers eat more frozen foods, that they will recognize the many benefits, whether they be nutrition, convenience, quality improvements, or innovative meat-free solutions. Speaking of meat-free, I'd like to provide you with an update on Green Cuisine, our new meat-free sub-brand that we are launching across Europe. At Cagney, back in February, we announced our intention to develop this into at least a 100 million euro business by 2022. As we sit here two months later, I'm pleased to say that we remain on track to deliver on-air and long-term targets despite some timing shifts. resulting from the COVID-19 crisis. Our original plan was to have distribution of green cuisine across at least eight markets by mid-year. This is still the plan, albeit with some modifications given the general deprivatization on innovation as retailers and suppliers focus on the highest volume skews. Year to date, we have launched green cuisine in Germany, France, Netherlands, Italy and Spain. Belgium and Austria will soon follow. One adjustment that we have had to make around green cuisine is the timing of media, which was originally scheduled to go live this spring, which will now take place during the second half of the year. The performance of green cuisine in the UK, where we first launched a year ago, continues to be very strong and encouraging. Sales are tracking ahead of plan, and our market share continues to grow. Further, we are driving solid incrementality to the category through the recruitment of new consumers. In all, green cuisine remains a key strategic priority of ours, and while our plans have shifted a bit this year, we are exceeding our need-term sales expectations and remain on pace to deliver our 2022 targets. In summary, we report a strong first quarter and no expect upside to our original guidance. Our business has demonstrated extreme resilience throughout the COVID-19 crisis. This is being driven by solid execution and the fact that our portfolio is highly concentrated in frozen foods sold in Western Europe. Further, our exposure to food service is only 5% of our revenues. We're gaining new consumers and are seeing growth in market share, and our supply chain is working hard to keep up with strong demand. Finally, our strong balance sheet and liquidity profile create a unique opportunity to repurchase shares during the first quarter amidst the valuation dislocation in our share price. We're pleased to be in a position to deploy cash to shareholders in a value-enhancing manner. Our company is well positioned to not only navigate the current crisis, but emerge in a structurally stronger place. With that, I will hand the call over to Sami to discuss the financials and guidance in more detail. Sami?

Thank you, Stefan, and thank you all for your participation on the call today. Turning to slide 7, I will provide more detail on our key first quarter operating metrics, beginning with revenues, which increased 10.5% to €683 million, driven by 7.7% organic revenue growth. Revenue growth also benefited 3.2% from a trading day benefit, including an extra day due to the leap year. For any change, translation was a 40 basis point offset to revenue growth during the first quarter. In all, organic revenue growth exceeded our expectation in almost every country due to the aforementioned factors related to COVID-19. First quarter gross margin was 29.1%, down 180 basis points versus last year, and in line with our expectations. The year-on-year decline was driven by the timing on inflation relative to price increases. Moving down to the rest of the P&L, adjusted operating expenses increased 14% year-over-year, reflating phasing shifts which we had planned for. Within operating expenses, ANP and indirects both increased double digits. Adjusted EBITDA was 120 million euro, representing a 2% decline versus the prior year. This was better than our prior expectation, which called for adjusted EBITDA to decline double digits. Upside was primarily driven by increased sales. Adjusted EPS was 33 euro cents for the quarter. In Q1, we repurchased 4.7 million shares, which had a limited effect on the first quarter weighted average share count as the program commenced late in the quarter. Turning to cash flow on slide eight, we generated 74 million euros of adjusted free cash flow in the quarter as compared to 93 million euros in the same period a year ago. Factors contributing to adjusted free cash flow performance include adjusted EBITDA of 120 million euros, a 2% year-on-year decrease, a working capital inflow of 1 million, CapEx of 10 million representing 1.5% of sales, cash taxes of 19 million, and cash interest and order of 18 million due primarily to year-over-year impact of interest swaps. We converted 110% of our adjusted EBITDA into adjusted free cash flow. During the first quarter, we announced a 300 million share repurchase program which we consider to be unique and accretive use of capital due to the dislocation in our share price. Since that announcement on March the 13th, we have deployed 91 million US dollars capital towards buybacks, acquiring approximately 3% of our shares outstanding at the weighted average price of $16.78. Looking forward, our approach to capital allocation remains consistent and unchanged. We continue to prioritize excess cash for potential acquisition, while retaining flexibility to mobilize the share repurchases where unique opportunities, like the one we saw in March, present themselves. Finally, our balance sheet remains strong, with leverage in the mid-twos, 828 million euros in cash and short-term investments, and total liquidity of nearly 1 billion euros when factoring other undrawn lines of credit. With that, let's turn to slide 9 to review our 2020 guidance, which is based on foreign exchange rates as of May the 5th, 2020. For the full year 2020, we are raising our guidance and now expect to achieve adjusted EBITDA of approximately 450 to 460 million euros and adjusted EPS of 1.24 to 1.27 euros. Full-year guidance now assumes organic revenue growth at a mid-single-digit percentage rate. Given the wide range of potential outcomes for the remaining of 2020, we have made the following assumption in formulating our guidance. First, the guidance assumes an elevated level of organic sales growth in Q2, where we already have five weeks of strong organic revenue growth behind us. Due to the inherent challenges in accurately modeling the future commercial impact from COVID-19, our guidance currently assumes organic revenue growth in the low single digits range in the back half of the year. In terms of quarterly phasing, given strong sales performance in H1, coupled with the delay of marketing and promotion to the second half of the year, we now expect adjusted EBITDA to be more balanced between the first half and the second half of the year, versus our prior guidance, which was Q4 weighted. Finally, guidance now assumes a weighted average share count of 200 million for the year, down from our prior expectation of 204 million. This reflects the share repurchase activity conducted since mid-March and does not take the possibility of future potential share repurchases into consideration. That concludes our remarks. I will now turn the session over to Q&A. Thank you. Operator, back to you.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star and two. We will pause for a moment as callers join the queue. Our first question comes from Andrew Lazar with Barclays. Please go ahead.

Great, thank you. Good morning, everybody.

Morning, Andrew. Morning.

First off, I guess, you know, obviously Nomad chose to provide specific full year guidance above, you know, initial expectations. And I guess the question is, what gives you the, I guess, the confidence to be able to do this when really the vast majority of peers have, you know, either withdrawn guidance for the full year or perhaps only reaffirmed, you know, full year guidance in a more vague sense? That would be my first question.

Thanks, Andrew. It's a very good question. As you know, forecasting with accuracy, and especially right now with this COVID-19, it's a difficult exercise. At the same time, our portfolio is really uniquely positioned vis-à-vis, you know, when we compare with many of our public company peers. So, it's simple. The simplicity is one category, which is frozen. is one channel, which is retail, which is equal to at-home consumption. It's one geography, which is Europe. And it's leadership with all our brands. And at the same time, we have, as we said, very few exposure in terms of food service. It's 5%. So with that, again, it's difficult to predict exactly all the trajectory will play out throughout the rest of the year. This is why we've taken a position of low single-digit organic revenue growth in H2 as a baseline, as Sami mentioned. So that's why, but again, to your point, it's unusual, which is great. Thank you for that. Please, keep going.

Thank you for that. The second one would be, It's going to be fascinating to track how, for the industry, many of these new users, of which you're clearly getting a lot of given the stay-at-home restrictions, ultimately convert into, let's say, ongoing repeat purchasers and such. You talked about some of the numbers around the magnitude of the incremental volume and how many of those are new users to the brand, if you will. And I'm curious, how does this compare maybe to the Thank you for joining us. around maybe what some portion of consumers have suggested they might do in terms of repeating when things normalize. That's a tougher one, I realize.

That one is a bit tougher, but again, I think it's really extraordinary times. Back to the baseline, the penetration historically has been roughly flat. To your point, what we see now is absolutely new consumers coming, by the way, from Different backgrounds. Great.

Thank you very much.

Our next question comes from Steve Stracula with UBS. Please go ahead.

Hi. Good morning. Just to actually piggyback off of Andrew's question. do you or the broader team have any numerical data to just reference what new household penetration is right now maybe for some of these key products relative to maybe how it was just a few months prior and how does that change that we've seen just recently compared to maybe what we've seen in like the past recession I know 0809 is probably the data maybe it's not the cleanest today but any type of historical context might be might be useful and I think you also said something about consumers having additional freezer capacity relative to the past we've read a few articles on that but any elaboration would be helpful thank you

Anastasia, I think we may have lost Stefan.

Okay, please be patient.

Sammy, are you still there?

Yeah, I'm here. I'm here.

Sure. Yeah. Why don't we try to reconnect Stefan?

Yeah.

Hello? Can you hear me?

Yes, Stefan.

Sorry, okay, excellent. Thank you very much. So, Steven, the question about the new household and obviously the new consumers, too early to say. At the same time, anecdotally, I can tell you what we've seen in terms of qualitative, if people are very impressed by the new frozen. So people were expecting something which was all about convenience and all about price and affordability. And they've seen something which is nutrition, taste, nutrients, sustainability. So that's absolutely fantastic. And it's obviously something that we very much focused on at this stage. So that's one thing. The freezer capacity in all fairness, Steve, it's too early to say. We know that those freezers are not going away, but we don't know exactly by how many new freezers. So the point for us has always been to get more consumers to open the freezers door more frequently. And that's exactly what we're expecting to see, especially with the new way of consuming. So that's where we are. Too early to stay in terms of real quantitative, but it's going to come very, very soon. And I can imagine that our inside department is really fully busy with this. But what we've seen so far, qualitatively, very, very, very good. And at the same time, what we also see is these people will not leave anytime soon because what we also see is that these The deconfinement will take time, and the more this time, obviously, the more these people will obviously use our products. We also have seen that these people want to cook more from home, and that's also absolutely very good for us.

Great. And then I have a quick follow-up before I pass it along. Stefan, I know Wayne has been in charge of the Sweden business more recently. He did phenomenal work with repairing the UK business a few years back. Can you help us understand strategically what's maybe now going into place right now to stabilize or fix the Sweden business? And the same commentary for Aunt Bessie, as you'd mentioned at Cagney, that a few of your initiatives were to get back on shelf starting in around the April timeframe. And I'm just wondering if The busyness that you're seeing right now with COVID related demand, does that shift the time window for Amp Thessy's getting some of that new distribution back until the summer? Thank you and I'll pass it along.

So let me start with Amp Thessy. It's quite simple. You remember, Steve, we had an issue in 2019. Actually, we lost distribution with one of the top four guys in the UK. And we're very pleased to see that for Mushroom Battle, which is the key piece, which is Rose Dinner, We're back on track with this top guy. Actually, I think it started back on March 11. Obviously, it's a bit too early to see the results, but it's there. So, that's very good news. And we also know that we're going to increase our distribution with another two. So, again, 2019 was a bit more difficult on Bessie's, but for what really matters, which is almost in battle, which is a key piece of the organization, We're very pleased with, again, what we said, and it's happening actually. More difficult to read across all these things with COVID-19, but that's a reality. So that's very good. In terms of Sweden, the first thing that Wayne has done is to put in place a new management team. I think it's a very strong one with a very, very good team. The second piece is really about repairing the relationship with the trade. and, as you know, Wayne is very, very strong. It's really, I mean, he's fantastic, you know, at doing these things. It takes time. It really takes, you know, the time to create a joint business plan together with these guys. And that's exactly what he is doing. Adding more presence, you know, obviously no screen presence, video presence with these guys, which is probably something we didn't have enough in the past. And he's just applying the mushroom battle framework that's proven so successful with the U.K., Italy, Germany, and lately with Spain. Spain last, you know, remember in 2018 was difficult, lack of focus, new team as well. We started in 2019 and we've seen the results. So we know it's going to take time. It's only representing at this stage 2.5% of EBITDA, but definitely for us, we think it's an important country and we hope that we're going to see improved performance later this year. and obviously a good momentum in 2021. So that's the idea for Sweden. And to your point, I'm very confident that Wayne is going to do a great job.

Great. Thank you.

Our next question comes from Rob Dickerson with Jefferies. Please go ahead.

Great. Thank you so much. Hopefully everyone at Nomad is doing well and staying safe. So I guess, you know, just a quick question on green. You too, by the way, Rob. Yeah, no, I'm doing my best. We're okay.

My family's okay.

Thanks for saying. In terms of green cuisine, you know, I know you had mentioned, you know, shift in media timing. It sounds like obviously AMP is shifting a little bit more to the back half of the year overall, but specific to green cuisine. you know I guess you know on the media timing piece uh is the strategy there basically you know we have it it sounds like in most countries right sounds like the innovation's there I think you you call it up maybe Belgium and one other market where it still needs to enter um the trial I would assume is you know is much more elevated than it probably traditionally would have been um which is a you know obviously should be you know a great driver of repeat potentially so you know I guess the question is do you shift that media spend later to try to flip the switch once you have trial to increase the possibility and the probability of sustained consumption of the new brand or was it basically you know hey we just don't need to you know spend the media now so let's wait till later and the brand seems to be doing okay so I'm just kind of broadly trying to understand you know has there been any shift in the way you're thinking about green cuisine as it phases through the year and then and then the potential you know carryover effects of that shift as we kind of emerge from the pandemic effect. And I also ask because a company like Beyond Meat this week, they actually really didn't see revenues grow that much because they have food service exposure. The margins are a little bit better. The stock's up almost 90% in a month.

So to start with, Rob, we're not changing our short-term expectations, so we're very pleased with what we're seeing. To Sami's point, there was a bit, which was expected, it's normal, by the way, a bit of deprivatization during this crazy march from the retailers, and so in some countries like Belgium, for example, we've moved, you know, The back to the shelves, or let's say starting with on the shelf from week 18 to week 23. That's an example. But again, you're not going to advertise at that time. So it's just a shift. It is just a shift in terms of timing, in terms of A&P. But what we see is definitely more than ever, meat-free and back to what the CEO of Beyond Meat said, it's on trend. It's going to only accelerate with what we're seeing right now. And that's exactly what we're experiencing with Green Cuisine. So in this year, you know, to your point, we have UK, Ireland, Germany, France, Netherlands, Italy, Spain, Belgium is coming, Austria is coming, and I definitely believe other countries will also be coming in the course of this year. So it's, you know, it's definitely a fantastic product, great trend. We are only positive.

Stefan, if I may just add as a complement to the question. The reality is you really want to advertise when you have the right level of distribution as well. I mean, it's very important for us. And in a context like the one we are going, if you want the distribution, is geared towards effectively meeting the needs of the consumers for the retail expectation. And so we are trying to balance, if you want, when will we have the appropriate level of distribution to really accelerate growth, and this is when the support is going to kick off. So I think what's really important for us is we've seen Green Cuisine outperforming versus our expectation, and we are clearly, I mean, in good shape for the year.

Okay, super. And then just very quickly and simplistically on the cost side, We saw gross margin pressure a little bit in Q1 that was expected. I know there was some cost inflation that came through probably on the fish side. I think you had mentioned before some pepperoni. There's currency. As we think through the year into Q2 and the back half, is the expectation still for that gross margin cadence to improve quarter to quarter? That's all. Thanks.

Yeah, we expect inflation actually to moderate. And I would say for the rest of the year, yes, actually, the gross margin will be down less in Q2. And we are looking for gross margin to improve into the second half of the year overall.

Okay, super. Thanks so much.

Thanks, Juan.

Our next question comes from John Bumgardner with Wells Fargo. Please go ahead.

Good morning. Thanks for the question. Hi, John. How are you doing? I wanted to come back to the comments about the broader environment here. What is your understanding about your competitors, both branded and private label suppliers, and their ability to respond to the demand spike? Your shares were up solidly across the board here in Q1. Is it your sense that those market shares can be sustained either through supply chain advantages or marketplace execution? How do you think about the relative positioning there?

I think it's a combination of two elements, Don. One is in the short term, we acted very early and decisively on supply chain. From the procurement standpoint, for example, we could see that there would be some some issues in terms of fish for example and we've been able very early on to come with alternatives that's one thing and second in terms of again the factories the obsession was obviously to keep all our 13 factories open and that's what we've been able to do through a combination of obviously of many initiatives all centered around the health and safety of our people and so they've responded fantastically well and so we're very, very, very pleased with that. At the same time, that's the offer on the demand side. It's very clear that the consumers are moving to brands they trust in times of crisis and that was the beginning of really my introduction. All our brands are A brands. They're leading brands and it's very reassuring obviously in crisis time to come back to these brands. So the third piece is As you remember, you know, our portfolio is quite simple. It's 40% is fish, 20% is veg. And so, you know, these two categories, again, are very reassuring and doing extremely well doing this category. So that's that. Again, helping us is obviously, so it's 90% brand and everything is about, you know, retail. When you go back to new consumers, I'm not talking about the existing ones, the first thing they want to do is, okay, let's try with the brands we know. And the Bird's Eye, Eagle, Fenders, you know, are great brands, and that's their starting point. It's our job, obviously, now to make sure that they're going to see, you know, what has improved over the last X years, which is in terms of nutrition, in terms of sustainability, in terms of innovation, and we have so much to offer. So that's at this stage, you know, that's what we've seen. And our job is obviously to keep most of these consumers. That's going to be the big job. That's our focus for the coming weeks and months.

And if I could just build on that, when you think about the promotional environment as well, I think given, especially in frozen fish, because your promoted price points tend to be, I guess, fairly deeper than both brands and private label, even under normalized conditions. and you mentioned the portfolio of A Brand. So, I mean, do you think there's an opportunity to use this market dislocation to maybe migrate the depth of your deals higher on a more permanent basis coming out of this in conjunction with the net revenue management? Or do you think there's a need to, you know, continue promoting the way you do for competitive reasons and you're trying to retain some of these new consumers, you know, coming into the portfolio?

Tommy, do you want to take that?

Yeah, I think we're clearly considering promotion as a key vector, I mean, to drive the business, I would say, of all this part of our NRM framework, and that's part, frankly, of our, let's say, strategy, and in terms of growth, we're measuring it, we're measuring our promotion as part of the total price proposition, price quality proposition to the consumer relative to competition. So we don't intend at this stage to frankly make a fundamental change to that. I think what we want to do is to make sure that frankly we're coping with the current reality, which is repromoting when it's needed and making sure that we have a relative price index to competition and to the proposition that is practical enough for the consumer.

Thank you.

Our next question comes from Faiza Alwi with Deutsche Bank. Please go ahead. Yes, hi, thank you.

So I wanted to pick up on this private label point also. And, you know, I was wondering if you had some data as we went through sort of this crisis starting from, you know, the original stocking up phenomenon and then more recently. Have you sort of seen consumers continue to gravitate towards brands or have you seen, you know, as recessionary pressures build, have you seen consumers sort of go more towards private labels?

So to your point, short term what we've seen is people gravitating towards brands and, you know, preferably A brands like us. And that's why, you know, we're gaining share. Long-term, to your point, or longer-term, I would put it that way, we know that the likelihood of recession is very high, and it's going to have two impacts. One is the fact that people are going to stay more at home. So, yes, they will go back to work, but at the same time, for recession reasons and other reasons, by the way, people will stay more at home and will have dinner at home. So that's the good news for us because, again, in terms of category, we know that frozen food is doing extremely well during recession times. At the same time, to your point, private label is always something that we focused on. So there will be a price question, and that's our job, obviously, to make sure that we're offering the right price and value equation. So that's that. But nothing new from that standpoint. It's going to come at some stage. and probably what's going to happen on top is there might be some skew rationalization which then probably will impact B and C brands and probably will lead to very interesting conversation with the retailers because as long as we're coming with the right A brands and right innovation, we believe that it's going to be more of a plus for us than anything else.

Okay, okay, makes sense.

I just also wanted to ask about, you know, costs and cost inflation specifically around fish. So, you know, we've been hearing about, you know, meatpacking plants where there has been, you know, virus spread and there's been sort of supply constraints. Can you just talk a little bit about the fish supply chain and if you see any risks there as we go out to the balance of the earth?

I'll take that. I mean, we have had no impact on our supply chain, I would say, from fish. And the chicken and beef issues in the U.S. appear to be U.S.-specific. We haven't seen anything happening of that sort in Europe. And we entered, I would say, 2020 with a second year of inflation. but we saw actually inflation moderating back in February. We are at the scale as well to be fairly active in the market and make sure that we are taking advantage of our position to get some of our inventory at a very effective cost actually.

Thank you. Our next question comes from Brian Holland with DA Davidson. Please go ahead.

Thanks. Good morning. Can you tell me what consumption was in the quarter? I guess my context here is obviously very strong Q1 on the shipment side, but I would have assumed some of that initial consumption would have drawn down on your trade retail inventory. I'm just wondering as we go into Q2, as we're still seeing consumption very strong, if I'm right and consumption was faster than shipments in Q1, Does that reverse in Q2 or do we have more room there?

Okay, let me take that one. Hi, Brian. So just a little, you know, some math here, Brian. So remember that the 20% for Q1, which is the sellout the way you have seen it, but obviously it gives you just, you know, part of the explanation. What you have to take off is we mentioned and Steve mentioned Nordics and on Bessie's and it represents something like a 5%, let's say, a Hertz. Then food service, it's only 5% of our business, but we've been declining by 15% Q1, which is quite moderate, and it represents another 1%. You remember also that we had a shipment question between Q4, Q1, in terms of phasing, which is another 1%. We have 2% of leap year, so we're left with 11% to be compared with the 7.7. And quite frankly, the delta then is really sell-out leading sell-in, which is the answer to your question. There is a bit of interesting upside ahead of us.

Okay, that's helpful detail. Thank you. And then to the extent that you have any insight on this, what is the state of the consumer pantry right now at home? Obviously, we have a demand surge, but unlike in a typical pantry load situation that might be driven by a storm, what have you, where folks are buying excess of how long they're actually going to be home or the impact of the storm, something like this. you know folks don't have options other than to eat at home so they are working through what they're buying and I guess one of the thoughts here was when we come out of this people would still have a lot of inventory but as you're pointing out here this is a demand surge they're consuming the product as consumer mobility improves just wondering what your sense is as to how much inventory is working out of the home to the extent that we might have a normal second half as opposed to You know, a lag here with people drawing down on that inventory. Thank you.

So when you see the numbers, again, we had an extraordinary spike in the middle of March. But then since then, you know, obviously, you know, people have come back to a new normal. And so we're still in the region of 20% plus. So that's that. At the same time, freezers in Europe are smaller than the U.S. We also have, by the way, fewer storms. So the pantry loading is much less of a phenomenon in Europe than it is in the U.S. So what we know is, by definition, again, Brian, people are consuming frozen more because in Europe, 25% of food is, in normal time, or at least three COVID-19 times was eaten away from home, 50% work, 25% schools, and the rest is restaurant. And so that's not happening. And so that by definition, people are eating more at home, which is exactly what our market is. So yes, the reason for retailer to build up given the selling versus sellout comment, as you said to your point, And the key question for us in the coming weeks and months is how this back, let's say, the confinement process is going to play out between school, work, and restaurant. What we see is schools, it's starting to be confined, but it's going to be limited until September, very limited. I can see that you know my wife is director of a school I can tell you it's going to be probably something like 10-20 percent. Restaurants again are going to respect social distancing so again it's going to be very limited and work I don't know about you but what we can see even with Nomad is we're going to be very very very cautious and at the same time long term what we see is People, oh my God, you know, it's working, this working from home. So it doesn't mean that it should replace fully, you know, the office, but definitely it's going to be more important, which means more consumption at home, which means then more consumption of frozen food. So that's a bit where we see. So we see that the midterm is going to be hard to monitor this staggered, you know, movement to a new normal. When is it going to be a new normal? We don't know. By vaccine time, probably. Then beyond this new normal, there will be new patterns coming in, which we believe are going to play out in our favor. Does it answer your question, Brian?

Yeah, that's excellent color. Appreciate it. That's a lot, Thomas.

Our next question comes from John Tanwanting with CGS Securities. Please go ahead.

Good morning, gentlemen. Thank you for taking my questions and congrats on navigating through just an extraordinary unprecedented crisis. My first question, and maybe you've addressed this already, but do you still view your shares as attractive compared to M&A at this point? And then maybe as a follow-up, discuss the status of the acquisition pipeline and your ability to diligence and pursue deals in this environment.

Well, the fact is we're not going to comment as such on M&A. I'll let, you know, Sami comment on the repurchase, which is, I think, the right thing to do. And at the same time, you know, it's fantastic. We have the balance sheet the way it is right now, which is great. So I'll let you comment maybe a bit more on the share repurchase, maybe, Sami?

Absolutely, Stefan. Thank you. Yeah, I think, you know, as you had mentioned, I would say for us, I would say the share repurchase has been opportunistic. We've been buying back in total up to now 5.4 million shares. at an average of a 16.78 price. And since we actually announced the program on March the 13th, as Stefan would say, my only comment, frankly, is just to reiterate the fact that we have a very strong balance sheet, as you have seen, and we have cash on hand, and we can mobilize, I mean, up to about a billion. So I think we feel clearly that we are ready to, frankly, jump on the right opportunity at the right time. And for the time being, this has been the area of sharing purchase.

Okay, great. Thank you. And then I was just wondering if you could comment on your relative position in your supply chains and the strength there versus, I guess, food in general. Maybe one getting at, are you going to benefit from, you know, the impacts in the global supply chains to meat and harvest and fish and all of that, you know, that are being caused by the pandemic? Are you in a position to say that your supply is secure for the rest of the year for your demand expectations? And maybe does that give you an advantage, you know, when, when, You know, packing plants are closing down or harvest are not getting enough labor and, you know, issues such as that.

Yeah, I'll take that. I mean, Stefan, feel free to intervene. I think the point that we highlighted was that we've been acting very early overall to secure our factories and our people. I mean, making sure that we have the right safety structure, I mean, in the plant to allow our people to come and continue to work in order for us to produce and deliver to our customers and consumers. and we backed it as well on the whole supply chain. So we did have already a very good cover, but we even strengthened it, I would say, overall and can say that we have a very good cover overall today, I mean, on our raw material. The reality on the issue that we see in the US effectively is that the protein issues in the US do not seem to be occurring in Europe. And on the harvest, I would say that the biggest issue are with lettuce, fruits, which are very much labor intensive and that there's not an area where we have exposure. I mean, our own processes from a harvest standpoint are pretty well automated and we're fairly well protected from that standpoint and have all of the material we need to ensure the supply for now and for the rest of the year.

Got it. Thank you. And then finally, just maybe to build on a prior question about inventories coming out of the pandemic, maybe from a more psychological perspective, do you think it's possible that consumers just they veer away from frozen foods after having come out of isolation for so long and maybe back towards fresh or chilled or something that they haven't had in a while, maybe even going out to the extent that it's possible? I'm wondering if you've been able to Think about those possibilities and how much it could impact you if that's something that might be in the cards.

You always have to think about a range of possibilities, but we definitely think that what we have heard of us is more opportunities than anything else. We always know that opening the freezer has always been an obsession of ours, and compared to the fridge, the difference is huge. and what we're going to monitor very soon is obviously if we see that it's changing over time. So that's one thing. The second thing is we've seen a lot of people, we're monitoring these people, our department, our inside department is really monitoring what they think about our product and what's happened is really when you think about it, a lot of people left frozen with this idea that it's about convenience affordability but what they're discovering right now is oh my god you know it's a you know it's it's great taste nutrition is fantastic you know meat free is part of frozen food sustainability with waste all these things that you know are important by the way for the new generations and beyond that's the kind of thing that they didn't know so that was our job uh to to make it to make it know and and whether we like it or not you know what the current situation You know, these people discovered frozen foods and we definitely believe that's going to help. So I see much more opportunities than anything else ahead of us.

The point I would add probably is the fact that what we have seen, what we have observed is in the new, let's say, shopping pattern that we see from consumers, they are coming back to frozen food in a much more regular basis. I mean, historically, they were going and buying some frozen food and then putting them in their fridge, waited, and then, as Stefan was highlighting, effectively what was very important for us is to make sure that they open up the door of the freezer. But what we are seeing right now is effectively that they're using frozen food in a much more regular basis. They're coming back to the store, purchasing again and again. That's extremely encouraging for us. Now, the question is whether that pattern will stay. But given the period of time during which they will adopt their pattern, it's very likely that effectively those changes remain for quite some time. I mean, a habit usually, I mean, change for about a three to four months period. I mean, so I think it's quite encouraging on our side.

One additional point, John, is you probably have seen, and it's not limited to us, that online has literally exploded during this time. And again, it's going to stay. So some people may even say it's been 10 years in three months. So it's big, and it goes to all the categories of people, by the way. And what's also very clear is that Frozen is over-indexing with online. So it's another reason why we believe this combination is going to help us.

Got it. Thank you very much, guys. Good luck out there. Thanks.

Our next question comes from Bill Chappell with SunTrust Robinson Humphrey. Please go ahead.

Hi, this is for Bill. Thanks for taking the question.

Just kind of following up on the last question,

Is there a world where, you know, you mentioned that consumers are talking about an old way of looking at frozen food versus a new way of looking at frozen food. Is there a possibility where retailers maybe need to increase shelf space or maybe provide more support to the category if that takes place? Thank you.

The simple answer is yes. It's actually a very good category for the retailers. It's a good margin for them. We know that they are under-tributed versus the opportunity in the sales that comes with frozen. So that's what's going to happen. It's not going to happen overnight, at least in terms of total fixtures, but definitely you can imagine that they could equip with second replacements in terms of freezers, and we believe we can make it work. It's going to be part of our joint business plan with all these guys, but definitely it's on the agenda. Got it. Thank you.

This concludes the question and answer session. I would like to turn the conference back over to Steve Descheemaeker for any closing remarks.

Thank you very much, operator. So thank you all for participating on our first quarter earnings call. The past two months have been an unprecedented moment of time for many of us. Our entire organization has adapted to a new way of working while working hard to ensure that we can continue to supply our beloved brands, grocery stores across Europe while protecting the safety of our employees. In times like these, we are humbled to be serving our communities with nutritious food. Our business is proving to be very resilient throughout this period of uncertainty and is poised to emerge on an even stronger foundation. Thank you for your time. Stay safe and I look forward to updating you when we next report future earnings in August.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.