Nomad Foods Limited

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.

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.

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.