Nomad Foods Limited

Hello and welcome to the Nomad Foods second quarter 2021 earnings call. I'm Tipoosh Barry, head of investor relations, and I am joined on the call by Stefan Descheemaeker, our CEO, and Sami Zaykowt, our CFO. On our call today, we will review our financial results for the quarter and conclude with a question and answer session. For those planning to ask a question, we ask that you do so using the Zoom raise hand feature. Before beginning, 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 with the FCC, and this slide in our investor presentation, which includes cautionary language. We will also discuss the 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 the dependencies at the end of the slide presentation available on our website. Please note that certain financial information within this presentation represents adjusted figures for 2020 and 2021. 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 these 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. Earlier today, we reported our second quarter 2021 results, which marked the highest second quarter adjusted EPS in our company's history, despite the anniversary of our most difficult comparison of the year. The power and resilience of our value creation model was evident during the quarter as contributions from M&A, share repurchases, and margin expansion more than offset an expected organic revenue decline. Based on our year-to-date performance and our plans for the second half, we remain confident in achieving our 2021 full-year guidance, which calls for another year of organic revenue growth and double-digit adjusted EPS growth. Further, with the pending acquisition of Portanovax Frozen Business, we expect a 2021 adjusted EPS base of over $2 per share on a combined and annualized basis. This will create a higher new baseline from which we expect to grow in the coming years. With that, let's jump to the details of Q2, beginning with the highlights on slide 3. Total revenues were down slightly as an expected decline in organic revenue was offset by contribution from deposition of Finland's future lands and favorable forex translation. On a two-year basis compared to 2019, Total revenues grew at a cager of 5% and all Gragnick revenues grew at a cager of 4%. Adjusted gross margins expanded 50 basis points or 90 basis points on a like-for-like basis when excluding the effect of Finland Switzerland whose initial gross margins are below those of our base business. We are pleased with these results as we continue to navigate A dynamic inflationary backdrop. Adjusted EBITDA grew to €123 million, representing 4% growth versus last year, and an 11% CAGR versus 2019. And finally, adjusted EPS was €0.40 per share, representing 18% growth versus the second quarter of 2020, and a 2-year CAGR of 22%. Shifting now to the details of the quarter, we achieved strong performance despite the easing of restrictions across Europe and the anniversary of peak COVID-related demand a year ago. Roles in the frozen food category remained elevated on a two-year basis, but did normalize versus the first quarter when most of Europe was under lockdown. Again, this backdrop we experienced sequentially improving market share trends during the second quarter, with market share in May and June both increasing versus the prior year period. Our market share improvement has been enabled by better supply and service levels which after dipping to the low 90% range earlier this year have returned to the high 90% since May. We are encouraged to see a positive market share inflection and expect this momentum to build through the rest of the year. Confidence in our growth expectations for 2021 is supported by strong underlying fundamentals within our core portfolio. Improved capacity is leading to more normal promotion activity, and in turn, particularly strong market share performance in our core categories such as fish fingers, coated fish, peas, spinach, and green cuisine. Green cuisine continues to be a key driver of both Absolute growth and share gains as we build distribution, grow penetration, and drive trial across our European footprints. Our chicken-less range has performed exceptionally well since being introduced late last year and early signals of our recent fish-less launch in Germany are very encouraging. Further, with the Tokyo 2020 Olympic Games underway, We are thrilled for Green Cuisine to be the official plant-based sponsor of Team GB in the UK as we democratize the meat-free category. One of our incredible athletes, Max Whitlock, has already won a gold medal at the Tokyo Games. Congratulations, Max. We have several 360-degree activations underway and are excited to bring them to life with the help of Max and our other sponsors at Lease. In two short years, Green Cuisine has become one of the leading meat-free brands within Europe and now has nearly 14% share of the frozen meat-free category across Western Europe. Consumers love our products and we continue to believe we have every right to win in this exciting white space growth opportunity. Our second quarter performance was also helped by strength in food service. which grew over 40% versus the prior year period. While this business is still down double digits versus pre-COVID levels, it is recovering nicely and given the strong race of growth is providing a meaningful contribution to the overall performance of the business. We expect this to be a recurring theme for at least the next three quarters. I'd like to shift now to the topic of inflation. Since presenting at Cagney five months ago, we stated that we expect to manage inflation in the lowest single-digit percentage range this year, despite rising commodity costs. Between the actions taken by our procurement team, the length of our cover positions, favorable forex tailwinds, and the nature of our COGS basket, we've seen limited inflationary pressure on our P&L for most of this year, and I have not yet had the need for significant price increases. As a result, our growth margin guidance for the year remains unchanged and we are pleased to be in a position to reiterate our 2021 earnings guidance. I'd like to applaud the efforts of our organization for their exceptional work. With that said, similar to many other food companies in the market, we are experiencing an uptick in raw material inflation, noticeably, in oil, packaging, freight, and logistics. As we have in the past, we will deploy our entire toolkit of levers, including productivity and price, to protect our margins and ensure that we can continue to deliver against our steady growth algorithm for years to come. Lastly, we prepared for the acquisition of Fortenova with the refinancing of a large portion of our debt. As a result of this transaction, we were able to, one, significantly reduce our like-for-like interest rates, two, extend our maturities, and three, generate 400 million euros of incremental borrowing capacity. Taking all of these factors into consideration, we expect the net increase of our annual interest expense to be marginal, despite taking on an incremental 400 million euros in debt. We are eager to close on the Fortenova transaction at the end of Q3 and look forward to integrating the business and brands into the Nomad4 portfolio. As a reminder, this is a transaction that we expect to be strategically and financially impactful for years to come. From a strategic perspective, Fortenova will expand our geographic reach into eight Central and Eastern European countries many with leading market share positions. It will also introduce us to ice cream, a new and high margin category, which will create a nice seasonal hedge, the frozen savory business during the summer months. The business also has significant exposure to out-of-home consumption and international tourism, creating a cyclical tailwind as the world returns to life after COVID-19. Financially, we expect Fortenova to be high single-digit accretive to adjusted EPS in its first full year prior to synergies. This transaction is expected to increase our adjusted EPS to over $2 in 2021 on a combined and annualized basis. We expect this to set a new baseline for growth in 2022 and beyond as we build on momentum in our base business, realize Fortenova synergies, and allocate excess capital in an accurate manner. In summary, we are pleased with our second quarter results and remain on pace to achieve our guidance for the year. We have an active commercial agenda over the coming months, which we expect to result in market share gains, growth in our international business and the recovery in food service. We will continue to mitigate inflation by driving productivity and raising prices were justified. We are building green cuisine into one of the largest and fastest growing plant protein brands in Europe, attracting new consumers into our portfolio and driving innovation within the frozen food aisle. And finally, we expect that the pending acquisition of Fortenova will serve as a new catalyst for growth in 2022 and beyond. With that, I will turn the call over to Sami to review 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 9, I will provide more detail on our key second quarter operating metrics, beginning with revenues, which declined 1% to €596 million. Organic revenues declined 4.5%, as we anniversary peak COVID-related demand during the prior year period. This was offset by the acquisition of Indus Switzerland and favorable currency translation, which combined to benefit revenue growth by 4 percentage points. On a two-year compounded basis, second quarter revenue grew 5% and organic revenue grew 4%. This is the prior unexpected decline in our branded retail business, was offset by growth in our non-branded business, with food service growth of over 40% and private label declining modestly. We achieved 50 basis points of gross margin expansion during the quarter, or 90 basis points when excluding the dilutive effect of the Finder Switzerland acquisition, whose gross margins have a lower starting point. This is a solid outcome in the context of a heightened inflationary backdrop and significantly increased promotional activity versus the prior year period. Gross margin expansion was driven by a combination of productivity and transactional effects. We are pleased to be in a position to reiterate our gross margin guidance for the year and, as Stefan mentioned, are well equipped to navigate a dynamic inflationary backdrop. Moving down to the rest of the P&L, adjusted operating expenses declined 3% year-over-year, reflecting growth in NP and a decline in indirect costs. Adjusted EBITDA increased 4% to €133 million and adjusted EPS increased 18% to €0.40 for the quarter. Both metrics, built on last year's record performance, and were positive during the quarter despite an anticipated decline in organic revenues. Further, adjusted EPS also benefited from a 10% reduction in our weighted average share count versus the year-over-period, reflecting the significant level of share repurchase activity conducted over the past 12 months. Turning to cash flow on slide 10, we generated 103 million euros of adjusted free cash flow to the first six months of the year, equating to 66% cash conversion. Cash flow and conversion were below the prior year period due to the effect of COVID, which was a significant cash flow tailwind in 2020. In the first half of 2021, we rebuilt our inventory position, which was depleted in the year-ago period while undertaking a series of projects to support our long-term growth ambitions. This resulted in €55 million of working capital outflow and an uptick in capex. Looking forward, we expect adjusted free cash flow conversion to remain at a similar level in Q3 given the seasonality of the business and improve significantly by year-end. While 100% productivity will be difficult to achieve in 2021 given our working capital and capex need this year, we remain committed to this objective long-term. As Stefan mentioned, we refinanced at senior secured notes a Euro term loan in Q2, resulting in a lower interest rate, extended maturities and incremental borrowings. This was a very successful transaction with the 750 million note issuance representing the best pricing among similarly rated European bonds in the past five years. Following the acquisition of Fortenova, are performed and leveraged within the high threes and deliberated to the twos range by the end of 2022. With that, let's turn to slide 11 to review our 2021 guidance, which is based on foreign exchange rates as of August 2nd, 2021. We are reiterating our 2021 full year guidance based on our year-to-date performance and our plans for the second half of the year. As seen on this slide, our guidance continues to call for adjusted EPS of 1.50 to 1.55 euro per share, representing growth between 11 and 15%. Based on current FX rates, guidance equates to a range between 1.79 and 1.85 in US dollar. Guidance is based on a continued assumption of organic revenue growth in a range of 1-2% and based on contributions from Finland, Switzerland and translational effects, total revenue growth in a range of 3-5%. This assumes a continued normalization of the category growth and does not take into consideration the possibility of another series of lockdowns across Europe as a result of the Delta variant. We have a very active calendar planned for the back half of the year, which we expect to result in a continued market share gains and enabled by an improved capacity situation. As a result, we expect our retail business to grow in the back half, despite assumptions that the frozen category will decline modestly versus the prior year. In addition, we expect a contribution from our non-branded and international businesses neither of which is tracked within the Nielsen data available to the investment community. Finally, a quick word on the pending Fortenova acquisition. We recently completed debt refinancing which as Stefan mentioned reduced our interest rates, extended maturities and provided 400 million euros of incremental borrowings. The net effect is a marginal increase in our interest expense which we expect to absorb in our existing guidance. While we will update guidance on Fortenova upon closing, it is important to note that the seasonality of this business is highly concentrated in the summer quarters, mainly Q2 and Q3. The business is tracking in line with the figures that we provided at the time of signing and we continue to expect Fortenova to be high single-digit accretive to adjusted EPS in 2022 before taking synergies into account. However, given the seasonality consideration that I just mentioned, we do not expect a material change to our 2021 guidance upon closing of the transaction this fall. Had we owned Fortenova at the start of this year, our 2021 adjusted EPS guidance would have been north of 2 US dollars per share. And as Stefan mentioned, we expect this will set a new baseline for growth in the coming years and contribute to the 2025 target introduced at last year's Investor Day. Before concluding, I would like to announce that our Board of Directors has approved a new buyback authorization of up to 500 million dollars. Our capital allocation strategy has not changed and our near-term priority is to close the Fortenova acquisition this fall. Beyond Fortenova, we remain committed to M&A and have an active pipeline that we are working on. With that said, we continue to see value in our shares and this authorization provides us added flexibility to further enhance shareholder value while maintaining a reasonable leverage profile. That concludes our remarks. I will now turn the session over to Q&A. Thank you, operator, back to you.