Nomad Foods Limited Ordinary Shares

Q2 2022 Earnings Conference Call

8/10/2022

spk15: Good day and welcome to the Nomad Foods second quarter 2022 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, please press star then one. Please note that this event is being recorded. I would now like to turn the conference over to Anthony Bucala, head of investor relations. Please go ahead.
spk12: Hello, and welcome to the Nomad Foods second quarter 2022 earnings call. I am Anthony Bucallo, head of investor relations, and I am joined on the call by Stéphane de Schiermaker, our CEO, and Sami Zikoud, 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 our 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, share-based payment, and related expenses, as well as non-cash FX gains or losses. Unless otherwise noted, all comments from here on will refer to those adjusted numbers. With that, I will hand you over to Stephan.
spk05: Thank you, Tony. Good afternoon, everyone, and thank you for joining us on the call today. We're pleased to review our results for the quarter. We performed well in Q2, despite difficult macro conditions across Europe. We began the year already addressing an inflationary environment, and we adapted quickly to meet additional challenges brought on by the Ukraine war, both inflationary and otherwise. We're encouraged by the resilience of our brands, our people, our consumers, and our customers. Our revenues grew 17% while our organic sales strength improved sequentially from Q1. Our value share was stable while we passed price increase to mitigate cost inflation. Our supply chain provided excellent service to our customers with fill rates improving materially in the half year. Year to date, service levels have improved 160 basis points. We will continue making crucial supply chain improvements while integrating and introducing new products to further drive organic growth in our newly acquired Adriatic business. We are now through the most challenging period of the year on input cost, and we have covered nearly all of our raw material costs for 2022. Additionally, we have worked effectively with our retail partners to set our pricing at levels that address input cost increases and achieve gross margins, which will allow us to appropriately support our brands. As a result, we expect our business performance to improve materially as the year goes on. As all of you know, Nomad has been navigating an extraordinary environment that includes high consumer uncertainty, inflation, as well as the outbreak of the war in Ukraine. The normal cadence of our business would be to have price discussions annually with the retail partners, executing the increases in Q1. But given the rapid change in input costs, our pricing actions have become far more dynamic, given the realities of that dramatic cost inflation. As we pass price increases this year, we expect pricing to fully offset volume declines, leading to low single-digit organic sales growth for the year, which we see as a relatively good outcome and a testament to the strength of our brands. We believe further price increases will be necessary to recoup cost inflation and maintain our margins. This should allow us to exit the year with the gross margins and cash flow appropriate to maintain the proper investment in our business. With that, I'd like to recap our second quarter key financial metrics beginning with reported revenues of €697 million, which increased by 17%, driven primarily by the first-year inclusion of our newly acquired Adriatic business. Organic revenue declined by 3.2%, a sequential improvement from Q1, but still reflecting the lingering impact of COVID lockdown comparisons and category weakness across Europe. We delivered an adjusted gross margin of 28.2%, 260 basis points lower year-on-year, reflecting soft organic sales and a higher raw material cost. Adjusted EBITDA of 127 million euros represents a 3% increase compared to last year, as higher input costs offset other positive factors. And finally, adjusted EPS was 40 euro cents per share flat year-on-year. Turning to slide four, our 17% revenue growth benefited from strong ice cream sales in the Adriatic region, while we realized 2.5% net pricing for the company in the quarter. In July, we saw a recovery in organic sales trends as our pricing was delivered to the market and we lacked more normalized results. Q2 represented the most unfavorable mismatch of price and cost for this year, and it's weighted on our margins, but we are now turning this favorably. As we discussed in Q1, there is always a time lag between COGS increases, which are linear, and our price increases to the retailer, which are staggered. We are now better matching our pricing to total inflation, and we are maintaining our dialogue with retailers about further price initiatives, which will recover our gross margin towards long-term average levels. Additionally, we have good visibility on cost as we are more than 95% covered for the rest of the year, up from 85% in Q1. On energy, we are covered for this year and well covered for 2023. In H1, we landed our pricing in the market. In a dynamic pricing environment, our overall value share was stable while we gained 60 basis points in our must-win battles. Our Muslim battles are in the categories and markets where we define our success, and we are pleased with this performance. When looking at the challenging consumer environment, high inflation as well as the consequence of the Ukraine war across Europe, we're taking a more conservative posture. As a result, we are amending our adjusted EPS guidance range for 2022, to €165 to €171 from our previous €171 to €175. This represents high single-digit growth. Longer-term, our business strategy is on track, and we are confident we are still on plan to deliver our 2025 adjusted EBS guidance of €2.30. Turning to slide five, Nomad is a company that is always learning and evolving to new challenges. We've done this as an organization many times. As we discussed at the top of our remarks, the war in Ukraine exacerbated the already rising inflation in Europe and disrupted global supply chains, especially in agriculture and energy. We are adapting quickly, and in Q2, we accelerated our fish diversification strategy, grew green cuisine, and moved quickly to fully integrate our rapidly growing Adriatic unit. First, we are aggressively de-risking our fish supply. We had plans to address this issue before the war, but we have picked up the space in Q2 as the volatile global macro environment is threatening fish supplies. We are securing new sources of farmed fish as well as adding geographic sources and species to augment our current supply. We remain committed to sustainability and we are staying within MSC and ASC guardrails in these plants. Second, Green Cuisine has a strong half-year with mid-single-digit organic growth despite negative headwinds in the category. Green Cuisine has grown market share nearly 300 basis points in the trading 52 weeks. In Q2, Green Cuisine won multiple trade awards in the UK and one in Italy. We recently launched an advertising campaign in the UK which is being really received by consumers and retailers. Finally, Q2 sales growth in our newly acquired Adriatic business was well ahead of plan, with strong volumes in Croatia and Bosnia and Herzegovina. In May, ice cream sales had a good early start to the season and benefited from historically high temperatures. Food service was strong as COVID restrictions were lifted and traffic returned to restaurants, bars, and hotels on the coast. Our integration is ahead of schedule, and we are excited about the future of this new acquisition. And with that, I will turn the remarks over to Samy. Samy? Thank you, Stéphane, and thank you all for your participation on the call today.
spk06: Turning to slide six, I will provide more detail on our key second quarter operating highlights. We reported revenues of €697 million in the second quarter a growth of 17% year-on-year, driven primarily by the acquisition of our Adriatic business. As a reminder, that transaction was finalized in September 2021 and will become fully integrated into our organic numbers in Q4. Second quarter revenues also had a small benefit from favorable effects. These revenue components were offset by a 3.2% decline in organic revenues, mostly due to lockdown comparison and a generally weak performance across the category. Gross margins were 28.2% during the second quarter, reflecting a 260 basis points decline versus last year. The inclusion of the Adriatic, whose gross margins are seasonally higher at this time of the year, helped offset gross margin pressure. Moving to the rest of the P&L. Second quarter COGS increased 21.4%, an increase of 88 million euros versus last year. Our adjusted gross profit grew 7.2% to 197 million euros. Adjusted operating expense of 92 million euros was up 19% year over year. This rise in operating expense was due exclusively to the inclusion of the Adriatic Division in our numbers. As a percentage of sales, operating expense was 13.2% this quarter versus 12.9% last year, an increase of 30 basis points. Our EBITDA and EPS performances were impacted negatively by the rapid rise in input costs. Second quarter adjusted EBITDA of 127 million euros was up 3% versus last year, and our adjusted EPS of 40 euro cents was flat. Turning to cash flow on slide seven, we generated 36 million euro of adjusted free cash flow in the half year, equating to 25% adjusted free cash flow conversion. This is below last year, mostly due to a buildup of raw material inventories, as well as the inclusion of a seasonal working capital outflow of the Adriatic business, which was not in the base period. Change in working capital was 125 million euros use of cash, up sharply from last year as we built raw material inventories in anticipation of possible shortages. We believe this was prudent, considering the disruption risk in the raw material markets. The inclusion of the Adriatic also impacted this result. CapEx of €34 million was flat versus a year ago. As we mentioned in Q1, we do expect higher CapEx for the year as we support strategic investment decisions and incorporate the Adriatic into our broader spending plan. Change in cash tax decreased by €6 million to €25 million, while cash interest was stable at €38 million. We expect to deliver improving free cash flows through this year. but with delivery weighted heavily towards Q4. However, the combination of stepped-up capex, higher raw material inventories, and the first-year implementation of the EU's unfair trading practice directive, we leave us short of our typical 90% to 100% long-term conversion target. With that, let's turn to our final slide, slide eight, to review our 2022 guidance which we are adjusting from CAGNI and our Q1 earnings report in May. Our guidance on sales and EPS is based on our best projections of cost inflation and other factors in the second half of 2022. As Stefan mentioned in his remarks, we plan to recover cost inflation through pricing in the back half of the year, and thus we expect an improving growth margin profile over the course of the second half. To be clear, we expect a sequentially better financial performance in the back half of the year, based on improving margins as our pricing takes hold. We expect organic revenue growth in the low single-digit range for 2022. This will be driven by price increases in half too. Low single-digit growth is consistent with what we guided in May. We expect a significant spread between price and volume, but we expect price to fully offset volume declines. We expect the Adriatic Division contribution to drive reported revenue guidance of high single digits for the full year. For capital allocation, it is our top priority this year to use our cash to support operations. We will still see share buyback as central to driving shareholder value. However, in Q2, we did not repurchase shares after moderate repurchases in Q1. our $500 million share buyback program remains in place until August 2024. For the balance of 2022, we are taking a cautious stance in consideration of the volatile consumer outlook and other factors such as the impact of the Ukraine war across Europe. As a result, we are amending our adjusted EPS guidance to a range of 1.65 to 1.71 euro per share, from the previous 1.71 to 1.75 euro. We believe that we remain on track to reach our 2025 adjusted EPS target of 2.30 euro. That concludes our remarks.
spk02: I will now turn the session over to Q&A. Thank you. Operator, back to you.
spk15: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press $2. And at this time, we'll pause momentarily to assemble our roster. And our first question today will come from Andrew Lazar with Barclays. Please go ahead.
spk03: Great. Thank you so much. So Nomad's running organic sales down about 4% in the first half, and this implies obviously more than 4% growth in the back half. I appreciate more pricing is to come, and as you said, comps are easier. But I guess mid-single-digit organic seems maybe somewhat of a tough task in light of the macro environment in Europe. So maybe can you discuss a little bit of the bridge on how you get there? Is it mostly pricing kicking in with an expectation that volume elasticity does not worsen from here? And then pricing, as you mentioned, didn't accelerate much in 2Q, but sounds like more is going to become visible in the P&L. What's your expectation for the benefit of pricing for the full year?
spk02: Thanks so much. Good morning, Andrew. Thanks for the question.
spk05: Let me handle the question and let me dissect a bit the numbers to your point. I think H1 was really representative of the end of the COVID comparison. And in terms of price, however, we successfully negotiated our price increases. It really comes at the end of the quarter. When I see, for example, July, July excluding the Adriatic's in terms of sales is around plus 7%, which is really representative, you know, COVID is behind us. And indeed, you know, the price increase that we have negotiated during the first half are really starting to kick in. So when then I'm moving forward to the full year, what we see is we're expecting a pricing in the region of mid-teens. Elasticity is in line in terms of market share. And obviously, we need to decline, but the volumes will decline as a result. And obviously, with that, you know, we think we're going to – you know we're going to be there. So that's a combination. It's really about end of COVID, market share, and more importantly, it's pricing. Sami, any other add-ons?
spk06: No, I think it's effectively there will be an acceleration of a Q2 and Q4 for sure, yeah.
spk03: Great. And just to make sure I heard it right, you said July sort of on an organic basis was up seven, I think. And then on a full year basis, I think on a full year basis, you said you'd expect mid-teens pricing. Did I hear that right?
spk02: Correct. Great. Thank you.
spk15: And our next question will come from Jason English with Goldman Sachs. Please go ahead.
spk04: Hey, guys. Two quick questions. First, follow up on that pricing. It sounds like you have most of it already negotiated and locked in, but I think I did hear you say in prepared remarks that you believe you're going to need further price increases to cover the cost pressure. So can you clarify?
spk06: Yeah, hi, Justin. Yes, absolutely. We have gone through, let's say, the first two waves that we had discussed, I mean, previously and successfully. And as we alluded to earlier, what we had said is effectively that we would consider a third wave towards the end of the year of pricing, which is primarily an advancement of the Q1 pricing into this year, Q1 of next year. And that's key now in the plan for sure, yes.
spk04: Thank you. That makes a lot of sense. I appreciate the clarification. And the acquisition, the Adriatic region, the M&A contribution continues to exceed our own expectation every quarter. It looks like the business is doing quite well. If it were including your base, what would your organic sales growth look like through the first half of the year?
spk05: Well, it's a very good question. Indeed, it's working extremely well, to your point, ahead of expectations. And market share-wise as well, by the way, they also have increased their pricing. So all is green in the Adriatic. So when you compare, let's say, the minus 3.2% that we have excluding the Adriatic for the existing business in terms of sales, We would do a pro forma of Q2 for the Adriatics, and we would include it, obviously, in the business. We would be just short of plus 1% for the full business.
spk02: So that's what it is.
spk05: It's a sizable difference. Yeah, for sure.
spk04: Do you think that's durable, or is this just unique because the warm weather, boosting ice cream, or is this really kind of reflective of what this business can contribute to you?
spk05: Well, obviously, weather is playing a role. Don't get me wrong. God knows, Jason, what's going to happen next year in terms of heat. Nobody knows this. The only thing we know is also we're gaining market share, and we also know that, Well, we could sell even more. So it's also a learning for us, you know, in quarter four, okay, can we also even produce ahead of time? So we're learning all these things. So difficult to know. Let's not forget that the heat wave is playing a role, negative role for the rest of the business, much less pronounced, to be fair, but it's a bigger business. So, yes, all in, we're very, very pleased with what we see with the business, with We're learning ice cream, and we love ice cream, Jason.
spk06: Maybe, Jason, what I would just add, I mean, to Stéphane's point is the fact that, effectively, this year we have seen as well an acceleration of the business driven by the fact that the tourism has caught up as well, which, effectively, has pushed the impulse category probably even further. So there is a bit of an advancement of, effectively, what we had anticipated in the out here into this year. But let's say from a health standpoint, this is a very healthy business with good growth potential, definitely.
spk04: Great to hear. Thank you all. I'll pass it on.
spk15: And our next question will come from Rob Moscow with Credit Suite. Please go ahead.
spk13: Hi, thanks. Your guidance assumes mid-teens pricing for the year, which means a rapid ramp in the back half. But I think it also means a 15% decline in volume for the year with an equally rapid decline by the end of the year. And you said that you've loaded up on a lot of raw materials to prepare for shortages. So what's the impact of a decline in volume like this on your operating leverage and also on your balance sheet?
spk06: Yeah, I think, Rob, I think the net of all of that is still effectively going to give a low single-digit growth for sure. There is pricing, there is mix, and there is volume as well. So when you combine the totality of that, we are not getting to a mid-teen volume decline. We are getting to probably a high single-digit volume decline. And those costs are being factored into our operating, let's say, costs overall. We've been planning for that as we effectively entered into this year with the significant pricing, I mean, from that standpoint. And that's reflected in our gross margin projection.
spk13: So that implies a pretty significant mixed benefit. What's driving the mixed benefit?
spk06: Well, we clearly are having most of the categories that have higher margin, the countries that have higher margin that are clearly executing pricing and driving those categories with higher margin that are pushing, that are going faster than the rest. And the fact that, for instance, we're starting with the UK, very much all of the pricing wave is a significant contributor as well to this acceleration, which explains, effectively, the fact that there is a mixed factor on the category side and on the country side as well.
spk15: Okay. Thank you. And our next question will come from Steve Powers with Deutsche Bank. Please go ahead.
spk14: Yes. Hey, good morning. Can you hear me okay?
spk13: Yeah. Yes.
spk14: Okay, great, great. Just on that last, just to clarify, is mixed expected to be positive on the year, or is it expected to be negative on the year, such that you have mid-teens pricing, negative high single-digit volume, and sort of a bit of negative mix to get you back to low single digits for the year? I'm a little confused if it's positive or negative mix you're expecting on the year.
spk06: No, actually, it's effectively the pricing range on average is about, let's say, the meetings that we have just talked. The volume is going to be in the range of about, as I said, high single digit, I would say, on that one. And there is effectively a balance of things from a mixed standpoint, and there is as well, let's say, an increased support, I mean, driven by the promotion that we need to put in place in order to drive the business over, which effectively equates to the low single digit growth for the base business.
spk14: Understood. Promotion. Okay. Thank you. Is there an ability for you, given your visibility and some of your hedge positions into 23, is it too early to talk about an early expectation of inflation for 23 at this point? Any color you can offer us as to what 23 looks like from a cost inflation standpoint?
spk06: I think it's too early, I would say, at this stage. There's a lot of moving parts. As you have seen, some of the commodities are going down now for some of the items, even though, effectively, those represent a tiny portion of our portfolio. There is, effectively, a downward trend on those. On the others, effectively, there is a stabilization at the peak point, and we are, effectively, as well, continuing extending some of the hedging activities we had in areas like energy in order to cover for the next year. So I think expect more as we provide guidance for 2023. Understood. Okay.
spk14: And then I also, if I could, I wanted to ask about operating expenses. They came in higher than I think we and ConsenSys was expecting this year. I understand a lot of that is probably Fort Inova and that rolling through ahead of schedule. From your perspective, were the operating expenses in line with your expectations? To the extent they came in ahead, is it really only for Nova, or are there other inflationary aspects impacting that line of the P&L as well that we should be thinking about?
spk06: No, there is clearly, I think this is the area, as we have talked in the past, I mean, on COGS and on operating expense, where we clearly have a pretty good visibility on. And there is, except for Tenova, there hasn't been any kind of noticeable item that would effectively be of importance for you guys.
spk12: Okay.
spk02: Very good. Thank you very much.
spk15: And our next question will come from John Baumgarder with Mizuho. Please go ahead.
spk11: Good morning. Thanks for the question. Stephanie, I'd like to ask about the positioning for your frozen categories here at retail. From a pricing perspective, the price gaps relative to shelf-stable and fresh, they seem to have widened even compared to the credit crisis 15 years ago. And I'm curious, A, how do you think about consumers trading down to frozen in this environment where the price gaps would seem to be pretty favorable for relative value, and then B, What are you seeing from retailers? I mean, do you expect them to manage the frozen category differently over the next six to nine months? Are they increasing visibility for your categories? Are they supporting non-price promotion for these categories? Just how do you think about frozen versus fresh and ambient in this environment?
spk05: Thank you. Well, overall, to your point, John, I think, you know, this is a category that is doing well in recession time. And at this stage, you know, we're seeing the same. In terms of fresh versus the others, I think it's still very difficult to reach, you know, John, because at the same time, we see that some people are increasing price later. So let's see a bit, you know, where things are standing. But what we see at this stage, we haven't seen any significant difference with the other categories. But I think the big piece to remember is, A, you know, we're getting out of COVID and additional new consumers are coming. B, You can see some people coming from, let's say, out of home to restaurants and moving down back to the retailers. And obviously, again, this category is doing well. I think what we need, what we will also do together with the retailers is to explain how great this category is, not only in terms of affordability, but also in terms of waste, for example. And this is great in terms of cost of living. You know, this is a category that's where you can keep it. You know, it doesn't lose anything. And so these are the kind of things we're going to do much further in the future. But are we confident with the long-term future of this category, especially in recession time? Absolutely.
spk11: Okay. Thanks for that. And then, Sammy, question for you on the guide for 2022. You've lowered EPS but maintained net sales in that high single-digit range. Can you discuss maybe where in the P&L you're taking a more conservative stance, tied back to the macro comments? Is it more gross margin? Is it more OPEX? You may have to reinvest back more. Just any clarity on the incremental change to the outlook. Thank you.
spk06: Yeah, it's not on the OPEX, I mean, to be very clear. And on the COGS, we have increased visibility overall. The reality is that we are really simply reflecting a cautious view on the fact that the economic environment is becoming quite uncertain there. So there are pressure on effectively the top line that would require probably further strengthening of the business in order to make sure that the pricing is going through over the full year.
spk02: Okay. Thank you very much.
spk15: And our next question will come from Cody Ross with UBS. Please go ahead.
spk10: Good morning. Thank you for taking the questions. I just want to follow up on the last question there. It sounds like you're taking a more cautious stance on top line view, but you didn't deliver your organic sales outlook. Can you just comment further there of what you're driving?
spk06: Well, the margin, as you see, the margin change that you see from one guidance to the other is effectively within the range of what is low, let's say, when we talk about high single-digit revenue growth, which remains the case, I mean, at this stage, is effectively continuing to be the case. The only element there, as I said, is to a marginal impact overall. What we see is effectively we see some constraints, some elements that potentially could affect our top-line progress overall for the year, but that would still leave us in the range of high single-digit overall. That's not going to change. from that perspective, but effectively there would be some movement there. This is what effectively is creating the level of uncertainty that is impacting our EPS guidance. Simply put, it takes probably more effort to execute three price increases than what we had anticipated.
spk10: Gotcha. So it sounds like still in the range, just at the lower end of the range now. Understood.
spk05: We are determined to have the price rise. But let's say to get there, it might be a bit more difficult. But definitely for us, it's a priority number one.
spk06: And Cody, the one thing I would add on this one is that we clearly have a plan to get to the higher end of the range. Simply there are uncertainties which we felt important to reflect. But the 171, if we're leaving it within the guidance range, is clearly within reach as well. So this is the range we're talking about.
spk10: Understood. That's helpful. Thank you very much for that. And then just last question from me. You didn't repurchase any shares in the quarter, which is in line with your prior guidance as you work to secure inventory. Can you talk about your potential to increase share repurchases going forward, especially given where the stock is trading at? Thank you.
spk06: At the very stage, you're right. I mean, all the points you just made are absolutely correct. What we clearly state is we will continue to support the operations, which is clearly your number one objective there. We, in an environment of supply constraints, I mean, this is really critical for us to make sure that we have the product we need at the right price, you know, for us to clearly serve our consumers. From a share repurchase standpoint, this is effectively something that we have in the radar screen, as you know, in terms of returning, let's say, the appropriate level of return to our shareholders. And it's taken into consideration within the grand scheme of other options that we have. So, at this stage, clearly, this is one possibility, but for the time being, the focus remains supporting the operations.
spk02: And our next question will come from John Tanwatang with CJS Security.
spk15: Please go ahead.
spk01: Thank you. Good morning. This is Dan Moore for John. A lot of the questions have been covered. Maybe just any updates on the strategic alternatives process, one, and two, any additional detail you can share in terms of securing alternative supply for fish. You mentioned that in your prepared remarks. Any specificity there would be great. Thank you.
spk05: So let me cover, I think you're talking about fish most of the time. That's a key question, I understand. So from that standpoint, it's, you know, we've taken a lot of steps. We've made a lot of improvements where, you know, the risks have definitely gone down since last time. So we've increased purchase from outside of Russia. We've gone to other species. And also, very importantly, you know, we also have come to, We're starting to reduce our reliance by going with farm fish, obviously of the high quality. But we're starting with this piece, and we've made a lot of progress. We've made all the testing sessions. The consumers are very pleased with the outcome. And we're going to start very soon, you know, the industrial production. So these are, you know, exactly the kind of things we said we would do, and we're doing it. And on top of that, you know, the last piece is we also said that the fishless part, which is part of green cuisine, is really on fire. So this combination makes it that definitely we are reducing our reliance on that part of the fish.
spk06: And on your first question, which was the 13D, I think there's no more additional comments. I mean, to provide them the one that you're aware of at this stage.
spk02: Understood. Thank you.
spk15: And our next question will come from J.M. Shekian with Citi. Please go ahead.
spk09: Hi. Thanks for taking the question. I also wanted to ask on the frozen category, what impact you're seeing, if any, from private label just amidst the price hikes? And as you move forward, do you expect to see additional pressure from the private labels?
spk05: Thanks. So overall, as you have seen, we have maintained our market share. So that's given the environment, it's not something easy, but we've been able to do this really, really, really well. And in terms of Muslim battles, you probably know what our Muslim battles are. That's really the categories where we want to win and also in the countries where we want to win. So in this, we've increased market share in the course of the last quarter and especially in H1. No, obviously, with what we have, we want to go and increase the market share in the future. I think we have the right brands, we have the right programs, and we're doing well vis-à-vis private labor. Let's never forget that all these guys are going through the same kind of purchase, you know, and cost of goods increase like us. The only difference is, which is obviously we are moving ahead, you know, we are the price leaders, and And we are, most of the time, we are ahead of the curve in terms of pricing. And the only thing we don't know, by definition, if and when these guys are going to increase price. But they will, obviously. They should at some stage. But again, I'm not in their shoes. So overall, the brand equity is stronger than ever. And we're very pleased with what we're doing. But the priority number one, as we said, is to make sure that we're going to have the right gross margin. And we're going to be in a position to start, you know, 2023 exactly at the level we wanted to be able to reinforce our brands.
spk02: Great. Thank you. Appreciate the call. I'll pass on.
spk15: And our next question will come from Brian Giffney with Newberg Berman. Please go ahead.
spk08: Oh, great. Thanks a lot for the call. Just a couple of questions on cash flows, if you don't mind. Can you just sort of break down the cash flows relating to exceptional items for about $29 million year-to-date? I know historically they've been running over $15 million for the last sort of effectively the last four quarters. Can you just give us an idea when you'll get them sort of below $15 million or maybe some sort of colour for the full year would be great? And also working capital, there's quite a large outflow year-to-date. I know that's inventories and receivables. Any sort of guidance on where you see working capital for the year-end and ultimately what what the drivers are for that large outflow. And then maybe just one final question then, just in terms of the fish sourced from Russia, can you actually quantify what percentage is sourced from Russia, either maybe at the end of FY21 and where you are today? Great, thank you.
spk06: Yeah, I would suggest that, let's say on the offline item, we took this one, I mean, offline, I think in the follow-up session, I think it makes more sense, I mean, to talk this. On the working capital, clearly there has been effectively a significant rise in the working capital driven by the investment we have made in inventory. I mean, particularly in raw material and packing material in order to secure the supply. There has been effectively as well the inclusion of that is driving, let's say, a part of the substantial, I mean, rise in working capital. And that we expect over time in the year we're taking a very aggressive look at our cash flow. in order to make sure that we deliver a cash performance that is consistent with the plan that we had in place by revisiting our capex, our inventory approach to make sure that, frankly, we clearly have what we need in order to safeguard the year, enter the year with the right level of inventory. But on the other side, if we can go on the journey of, let's say, taking it down as we move forward on that. So we clearly expect substantial improvements in the fourth quarter in particular. and returning, taking into account all the investment we have to make, I mean, in the Q3 in working capital.
spk05: So, as far as the Russian fish is concerned, you understand that for commercial reasons we are, if it's significant, but for commercial reasons we are not disclosing the percentage of the amount. But as I said, for all the reasons I mentioned, you know, like going to other species which are not Russian what's more southern hemisphere, which is more going to Pangasius, which is also about, you know, plant protein. We see that it's starting to go down, and it will go down and down, you know, over the next quarters and years. Still, you know, I think we believe that in the future we will still work with Russian suppliers, but we have now, you know, we will be in a position to move, to switch then faster and easier from one category to another.
spk08: Okay, now that's great. Can you just put in context the level of cost inflation you're seeing for fish? Because obviously you're changing suppliers and there's obviously general cost inflation anyway. So just what level of inflation you're seeing? Thank you.
spk06: We see broad-based inflation in virtually all of our ingredients, I would say, on that one. And it's in the double-digit range, as we have talked, I would say, overall, depending on the species, depending on the category, that's effective broad-based inflation that we see overall.
spk08: Thank you.
spk15: And again, if you'd like to ask a question, please press star then 1. Our next question will come from Addy Oria with HPS. Please go ahead.
spk00: Hi. Good morning. Thank you for taking my questions. Can you hear me okay?
spk15: Yeah.
spk00: Yes. Awesome. Thank you. Just to finally round off on the fish point and a couple of people asked, I appreciate you might not be able to disclose the exact percentage. and appreciate, obviously, the fishless side is doing well and you're moving to other species. Just, I mean, it clearly represents a material part of the fish sourcing. I'm just curious, was there no sanctions impact on the Russia side? And then maybe could you speak to fish sourcing in China? Has that been okay? And maybe directionally, maybe if you say in the next year or so, do you see kind of what kind of, it says US, Russia, and China, what will be the majority kind of region providing your fish and Maybe you could talk directly towards those regions and what you've seen.
spk05: Let me start with the first part of the question, which is the sanctions. From the European standpoint, EU, no sanctions vis-à-vis whitefish, which makes, by the way, a lot of sense because they've checked what the impact would be for the consumers. They've come to the conclusion that for the consumers, it would be much more negative than for anybody else. That's one piece. As you may know, some tariffs, 35% have been levied in the UK. But we've taken some strategic decisions. And for us, this is just negligible. So it doesn't impact really all fish in the UK. Let's not forget we have several factories and obviously several ways to source the fish. So that's one thing. As I said, looking forward, We believe that we're going to reduce our reliance on the Russian fish. The Chinese processing, well, it's been a bit during end of Q1, early Q2. You may remember with the Shanghai lockdown, it was a bit chaotic. But we know it's back on track. And I would say if I, again, I could see, looking forward, it's going to be really a combination of wild fish between the U.S., Russia, or Chinese Russia, but also, let's say, the farm fish, mostly coming from Vietnam at the right level, will be very important for us. And we are in the process to secure long-term supply at the right level with the right quality. Very much the way this company did something like 20 years ago with MSC. marine stewardship council. We're doing the same now with the ASC, which is the equivalent for farm fish, and we're going to set the standards, and the standards will be high because that's exactly what we are, which is obviously good value and great value and great quality.
spk08: Okay.
spk00: Thank you very much. Moving to the cost base, What percentage of sales does energy represent? And again, helpful, like you said, double-digit increase on fish prices. It would be interesting to know what kind of range of increase have you seen on your energy costs? Obviously, it's material given your cold chain requirements.
spk06: Yeah, we don't disclose the share of energy in a total cost. What we can tell you is that it is of importance, I mean, of course. but because of all of the, effectively, I mean, the cooking and the whole chain that is associated with that. What we've done on energy is we have taken a hedging approach, I mean, to that, that we started since the beginning of the year that has enabled us to level up the cost this year and be well hedged, if you want, throughout, let's say, the middle three-fourths of the next year. So we've been managing it quite, let's say, well overall in order to mitigate the impact this and next year.
spk00: Okay, thank you. And have you considered kind of the availability of energy? Obviously, for example, in Germany and France and some European countries, if you weren't, for example, if you weren't able to get gas, would that have any material impact?
spk05: It's a very good question. As you can imagine, to your point, there is price and there is also availability. So we see, and that's one of the reasons, by the way, over the last two months, you know, consumer outlook has also obviously significantly worsened, but that's something else. In terms of availability, what we're checking is obviously the ability for us to move from gas to other energy. And we're working very hard on this piece, but we've made a lot of progress in terms of ability to switch from one to another.
spk00: Okay, that's really helpful. Thank you. And then finally from me, I just read in the materials that Fortinova revenue of about $2.98 million in 2019 and then $2.61 in 2020. And then EBITDA declined in that same period from $59 to $50. Could you please give some color on that? Why did it decline? And obviously you've mentioned it's growing very well organically in the most recent period. So why did that happen between 19 and 20?
spk06: Yeah, there was a clear impact, I mean, driven by COVID over there. I mean, because this is an area where tourism is of importance. And as you know, I mean, it's directly proportionate to tourism. As we see clearly COVID now, let's say, in the back, I mean, in the base period, and we see tourism going back and combined with a very hot summer, we see a combination of, let's say, the moon and the stars are aligned and the business is doing very well this year compared to the prior year.
spk05: Well, and if you don't mind, there is another thing, which is something we could see from the start, is the former owner, was no longer considering, you know, that part of the business as strategic. So it was very much, you know, based on retail. And we've seen that several times. We've seen, you know, we've purchased, you know, a series of frozen food business that were no longer considered as strategic for the previous owner. And then we've seen a difference when it's really the focus for the whole organization. And so we're starting to see already on top of, obviously, as we said, you know, the end of COVID, There is also the heat. We're making progress in market share. So this is the kind of things where when you are fully focused behind one category, what it does.
spk00: Okay, understood. And sorry, do you think, for example, then for 2022, that 2019 pre-COVID levels is a decent number to go by? And then they'll carry on growing from there or? Is there a different kind of, just on a kind of revenue level, different ballpark we should look towards?
spk06: No, I think the business will continue. I mean, this year is on a roll and growing really well, double-digit growth, and it clearly will end of the year within the range of double-digit growth as well. I mean, Ovolin will be a key contributor to the rest of the business, as we have alluded to that. As we said, I think, earlier in one of the earlier questions, there is a bit of a forward impact of the fact that the acceleration of tourism that we had planned to be spread over the outer years is concentrated more this year, exacerbated by a summer. So we probably have a bit of an exceptional acceleration of growth this year on Forte Nova, but it will continue to grow in the outer years.
spk00: Okay. And finally from me, sorry, would it be reasonable to assume then, do you make any change to your, I think you guided towards 2.9 billion revenue as your expectation for the year in the Q1 call, is that directionally still where you expect to come out? Or would you make any changes to that?
spk06: We've maintained the guidance. I mean, on the side that we said, effectively, high single-digit revenue, I mean, fully included. So I think that's unchanged in terms of the guidance that we gave on sales.
spk15: Okay.
spk02: I'll jump back into Q. Thank you very much.
spk15: And this will conclude our question and answer session. I'd like to turn the conference back over to Stephane de Sheermaker for any closing remarks.
spk05: Thank you, Operator. So we are adapting quickly to a dynamic and challenging marketplace. Our world has been changed by the back-to-back crisis of COVID and the Ukraine war, and I'm very pleased with the determination of our people and how well we have adjusted. We have strong plans in place for the back half,
spk02: And we are well prepared for 2023. Thank you very much. The conference is now concluded.
spk15: Thank you for attending today's presentation. You may now disconnect your lines at this time.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-