Nomad Foods Limited

Good day and welcome to the Nomad Foods second quarter 2020 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the call over to Tepoge Barry, Head of Investor Relations. Please go ahead.

Thank you for joining us to review our second quarter 2020 earnings results. With me on the call today are Chief Executive Officer Stefan Descheemaeker and Chief Financial Officer Sammy Zachaut. 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, expectations, and intentions 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 at 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 does represent adjusted figures for 2019 and for 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. And all comments from here on will refer to those adjusted figures. And with that, I will hand the call over to Stefan.

Thank you, Tapash, and thank you all for joining us on the call today. First and foremost, I hope that you and your families continue to stay healthy and safe throughout these unprecedented times. Earlier today, we reported our second quarter earnings results. marking NOMAD's 14th consecutive quarter of organic revenue growth. In addition, we also announced our intention to commence a tender for up to $500 million of our ordinary shares, representing a significant return of capital to our shareholders. Starting first with our second quarter earning results, We're pleased to report another quarter of exceptional performance, with nearly every financial metric exceeding the expectations that we provided on first quarter earnings call. Second quarter financial highlights were as follows. Organic revenue growth of 12.3%, driven by a 9.9% increase in volume and mix, and a 2.4% increase in price. This performance was in line with the business update that we provided in June. Gross margin of 30.3%, reflecting 50 basis points of expansion. Adjusted EBITDA growth of 21% to €119 million. Adjusted EPS growth of 26% to 34 euro cents per share. Based on our yesterday's performance and our expectation that sales growth in the back half will now remain elevated, we are raising our organic revenue guidance for the year and now expect to be above the high end of our prior range for both adjusted EBITDA and adjusted EPS. Importantly, This new outlook now includes approximately 10 million euros of incremental strategic investments to be deployed over the course of the next six months. Let's turn to the details of the second quarter beginning on slide four. We're very pleased to report second quarter organic revenue growth of 12.3%. Performance was fairly consistent throughout the quarter, with all three months achieving double-digit organic revenue growth. Importantly, we were encouraged to see growth sustain at an elevated level, even as stay-at-home restrictions were relaxed across Europe beginning in early May. Frozen food has proven to be one of the fastest growing and most durable MCG categories throughout Europe these past four months. At Nomad, our business has performed at a very high level, a testament to the agility of organization and the power of a brand. Moreover, our portfolio is concentrated in the sweet spot of the packaged food space, in frozen, branded, and retail. This focus has worked to our advantage, and it is where we continue to direct our attention. While we had original plans for strong growth in 2020, the impact of COVID-19 has undeniably accelerated our top and bottom line results, due in large part to an influx of new consumers discovering our brands and significant repeat behavior since the start of the pandemic. During the second quarter, we recruited an unprecedented number of new consumers into our portfolio, with 12-week household penetration up 4 percentage points to 44% across our three largest markets. Across each of our three largest markets, the UK, Italy, and Germany, millennials demonstrated the strongest spending growth amongst new consumers, a clear indication that our power brands Birdseye, Igloo and Findus are resonating with this important and influential set of shoppers. Our expansion of green cuisine will only further strengthen our appeal amongst millennials, given the high value that they assign on food that is healthy, convenient and sustainable. In terms of repeat purchase, we saw a notable year-on-year uptick amongst users we repurchased two times or more during the quarter. For example, in the UK, our largest market, nearly 40% of Nomad users repurchased into our brand two times or more during the second quarter. We are encouraged to see repurchase rates that are best in class amongst frozen savory ahead of other branded competitors. We responded to sustained and elevated demand by running our product lines at maximum capacity while creating new safety protocols in our factories, all which have remained open and operational throughout this pandemic. Despite these extraordinary efforts, there were still parts of our portfolio where demand outstripped our ability to supply during the second quarter. As you may know, Our largest factories in Bremerhaven, Reichen and Lowestoft were already running at high utilization rates prior to COVID-19. While there was adequate capacity to deliver our regional plants, the unanticipated spike in demand did create some bottlenecks which reduced our factory service levels to as low as 87% in April. We responded by increasing factory output and reducing demand creation activities during the second quarter, namely advertising and in-store promotions, which led to temporary market share declines during the month of May and June. The good news is that these actions have enabled us to not only improve our customer service levels, which are now back to a robust 98%, but also to rebuild our own inventory levels to support our expectation for elevated consumer demand in the second half of 2020. Further, preliminary data in July suggests that our market share is stabilizing and we now have the capacity and promotional support to deliver on our robust plans for the third and fourth quarters. Moving on to gross margins, we achieved 50 basis points of gross margin expansion during the second quarter, a positive development versus our prior expectations, which called for year-on-year decline. This was driven by lower promotions, as I just described, but also fixed cost leverage and favorable channel mix. We're pleased to see the business return to gross margin expansion, one quarter earlier than we had originally planned and remained on pace to achieve gross margin expansion during the second half of the year. As you may know, we have successfully navigated an unprecedented level of raw material inflation in 2019 and 2020 arising from a correction in fish prices and persistent strength of the US dollar, the transactional currency for approximately 20% are for cost of goods. Inflationary pressure is now clearly abating. Earlier this year, before COVID-19, we had already observed a moderating trend in fish prices, a welcome development. Since then, supply-demand dislocations in the out-of-home channel have created some unique opportunities for us. These benefits should accrue in the back half of this year. Another recent trend has been a strengthening of the euro, which is near a two-year high, versus the US dollar. To the extent that this trend sustains, a strong euro would help further contain our cost of goods in 2021, while driving a higher real-time conversion of our euro-denominated results into US dollars. The currency in which our stock trades. Finally, we generated a significant amount of cash in Q2, bringing our first six months adjusted free cash flow generation to 243 million euros. We have made meaningful strides in optimizing our working capital terms over the past year and are pleased to be in the position to both generate this amount of cash but also use it to fund highly accretive actions like the expected tender offer which we announced today. Our business has performed at an exceptional level through the first six months of 2020 with consumer shifts to at-home consumption and frozen food in particular providing strong macro tailwinds. Looking forward, as I mentioned earlier, our business is exceeding our expectations relative to where we thought we would be exiting Q1 and certainly versus our plans at the start of this year. This has created a unique opportunity to both raise our guidance for 2020 and to deploy approximately 10 million euros behind incremental strategic investments to capitalize on our success to date and fuel key growth initiatives to position the business for continued success entering 2021. While this year's guidance would have been even higher without these investments, we're fortunate to have the opportunity to deploy capital to create sustained long-term value for shareholders. Our plan is to allocate these additional resources across Three strategic pillars of growth. One, the targeted retention of new consumers who have entered our brand since the onset of COVID-19. Two, even greater media support behind our core portfolio where we have superior ROIs. And finally, doubling down on green cuisine, our plant protein brand. Green Cuisine continues to perform very well with our revenues and gross margin both exceeding our plans. This is despite a delayed activation program which we shifted our plans from Q2 to Q3 as a result of COVID-19. I'm happy to share that we are now beginning to activate the Green Cuisine brand across our continental European markets with the multi-channel media campaign and traditional trade and promotion support. This is starting in Germany and Austria as we speak and will expand to the other markets throughout the third quarter. In terms of distribution, green cuisine, which was available in only two countries at the start of the year, is now available in 10 European markets and will be in all our markets by early 2021. And finally, we're making excellent progress along our innovation agenda with green cuisine set to expand into the exciting meat-free poultry category in the coming weeks, starting with the UK markets. I'd like to conclude by providing some broader perspective as we celebrate our fifth year anniversary as a public company. We are on an exciting journey and I'm sure that I speak on behalf of our entire organization when I say that we are incredibly proud of the performance that we've been able to generate in a relatively short period of time and we look forward to the opportunities still to come. Our second quarter results mark LOMA's 14th consecutive quarter of organic revenue growth, and based on our updated expectations for this year, we are well on our way to delivering a fourth consecutive year of organic revenue growth in 2020. While we have clearly benefited from unprecedented demand for frozen food, this slide also demonstrates Our long-term track record for growth leading up to this year. From day one, we have managed this business with an owner's mentality, acting in the best interest of long-term sustainable shareholder value creation. As such, we firmly believe between our consistent track record of delivering results, solid financial health, and attractive growth prospects that Nomad Foods is well equipped for continued success throughout and beyond the COVID-19 pandemic. This brings me on to the other piece of news this morning. Earlier today, we also announced our intention to commence a tender offer to purchase up to $500 million of the company's ordinary shares. As you know, we raised equity 18 months ago to prepare ourselves for a slate of interesting acquisition opportunities that we saw ahead of us at the time. We have maintained our discipline by sticking to our acquisition criteria and ultimately passed on a number of deals. In the meantime, our business has evolved in a very positive way. Our revenues, adjusted EBITDA, and cash balance have grown while our leverage has come down. As we sit here today, we see numerous avenues for growth within our European frozen food footprint, both organically and inorganically. And as a result, we believe that further concentrating our strategic focus within these opportunities offers our shareholders the best return on our investment. Organically, we have strong momentum and are making incremental strategic investments to ensure that our business is well positioned entering 2021. Consumer interest in our iconic brands has never been higher. Moreover, expansion into the plant protein space through green cuisine positions the company for the possibility of accelerated organic revenue growth in the years to come. At the same time, we are refining our M&A focus towards European frozen acquisitions, which are primarily mid-sized in nature. This compelling and targeted pipeline will require us to carry significantly less cash on our balance sheet than we have in recent quarters. This brings me to our intention to repurchase up to $500 million of our stock through a modified Dutch auction process. As stated in this morning's announcement, the expected tender offer is intended to serve two objectives. First, we recognize that we are carrying more cash than we need, and as a result, we are returning excess cash to our shareholders and what we believe is the most efficient way of doing so. Second, we believe repurchasing our shares is a compelling and a creative use of our cash while preserving financial flexibility to pursue our M&A pipeline as I just described. Our confidence in the growth prospect of our business and the European frozen food category has never been higher In fact, we have begun planning our first ever investor day to be held virtually later this fall to present the various growth initiatives ahead of us. We look forward to sharing more details on this exciting event in the coming weeks. And with that, I will hand the call over to Sami to discuss the financials and guidance in more detail. Sami?