M&A Announcement

Mar 29, 2021

Slides

Greetings, and welcome to the Nomad Foods acquisition of Fortinova's Frozen Foods Business Group. At this time, all participants are in a listen only As a reminder, this conference is being recorded. It is now my pleasure to hand today's call over to management. Thank you. You may begin. Thank you for joining us on the call today. We are excited to announce our agreement to acquire the frozen food business group from the Fortinova Group this morning. With me on the call today are Chief Executive Officer, Stefan Desschmaker and Chief Financial Officer, Sami Zekow. We'll be joined by our Co Founders, Noam Gottesman and Martin Franklin for Q and A following our prepared remarks. Before we begin, please note that the comments during today's call and the accompanying presentation contain forward looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are considered forward looking statements. These statements are based on management's current expectations and beliefs as well as a number of assumptions concerning future events. We do not undertake to update any forward looking information provided on this call except as required by applicable securities laws. Such forward looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward looking statements. Some of these risks and uncertainties are identified and discussed in the company's filings with the SEC. We'll also refer to certain forward looking non IFRS financial measures. Please review the disclaimers relating to these non IFRS financial measures, which are included in the accompanying presentation for this call. One final note is that unless otherwise stated, we will be referring to the Frozen Food Business Group, also known as FFBG, as Fortunova throughout this call. With that, I'll hand the call over to Stephane. Good morning, good afternoon, and thank you for joining us on short notice. We're thrilled to announce that we have entered into an agreement with the Fokkenova Group to acquire the frozen food business group, which includes an iconic portfolio of brands such as Medo and Fricka. These brands have incredible consumer awareness with unparalleled number one share in several countries. They stand for high quality food that is convenient and nutritious. And as you've come to learn, that in many ways, the birds are in favor of the back end. This acquisition expands our geographic footprint into 8 new markets in Central and Eastern Europe, where we are targeting our presence. Croatia, Serbia, Bosnia and Herzegovina, Hungary, Slovenia and many more. And as you'll hear, the financial impact of this transaction is quite meaningful given its size, our synergy plans and the attractive underlying growth of these brands. With that, let's jump right into the details of the transaction. To repeat, we are acquiring the frozen food assets of Fortinova Group. As you may know, Fortinova is a Croatia based of government with operations, which includes retail, agriculture, beverage, spreads and frozen food. The perimeter of this transaction is specifically around the frozen food business, including both frozen savory and ice cream. The purchase price of EUR615,000,000 represents a valuation of the 10x EBITDA when including approximately €15,000,000 of annual run rate synergies. This is an exciting transaction for Novart, both strategically and financially. Strategically, it meets 3 important criteria. 1st, it expands our footprint into Central and Eastern Europe, where we do not currently have a presence. These are developing countries where the opportunity for growth is approximately two times of our existing Western European markets. We are entering these markets with number 1 brands, which are institutions in their respective countries. For example, Nelo is one of Croatia's most loved brands with consumer loyalty on par with brands such as Coca Cola, Milk Car and Vanilla. And second, it introduces us to ice cream, an exciting new product adjacency to our core clothing group portfolio. It is a new category for NoMad and one where we expect to learn a lot. And finally, given the strength of our VLAD management team and its strong operational footprint, this acquisition also creates a platform for us to expand further with the expansive Central and Eastern Europe region. That was a strategic rationale. Let's now turn to the financial impact of this transaction. Firstly, this is an impactful and sizable transaction for us. We expect it to generate nearly €300,000,000 of revenues and over €50,000,000 of adjusted EBITDA in 2021 on an annualized basis. That creates a combined annualized revenue base of €3,000,000,000 and adjusted EPS base of over $2 per share in U. S. Dollars. The attractive financial profile of this business will enhance our overall organic revenue and adjusted EBITDA growth profiles. We're expecting to realize approximately 15,000,000 euros of annual run rate synergies by 2024 and see a path to growing the adjusted EBITDA base of this business by approximately 50%. We expect this transaction to be high single digit accretive to adjusted EPS in the 1st full year post close. Sami will discuss financing and capital structure in more detail, but the headlines are that we plan to finance this deal to cash and borrowings while maintaining a reasonable leverage profile. And finally, we expect the deal to close during the Q3 of this year. I'd like to provide you with some more details of this business. We covered many of these points already, but to recap, these are unparalleled market leading brands in countries like Croatia and Serbia, where the outlook for growth is nearly 2 times that of Western Europe. NATO and FREECOM operates a similar global local model to our brands. For example, Nadro is known as a local brand in Croatia, although it also operates in other countries. The same goes for Precom, which is the core brand in Serbia. The business has an even balance between frozen savory and ice cream, which each represent roughly 50% of sales. Similar to Nova, the savory frozen portfolio here have strong representation within fish and vegetables. Nelo and FREECOM, both have strong market share, especially in the larger markets in Croatia and Serbia. And as a result, private label share is relatively low. Fortenova has a unique go to market in this region and co distributes its savory and ice cream categories. Here you see a snapshot of the different types of products that this portfolio offers. A wide range of high quality frozen food staples with many similarities to our existing portfolio on the silvery side. ForteNova has an incredibleized portfolio, ranging across multiple needspace, price points and channels. One important area of exposure is Croatian tourism, which has effectively been closed for business over the past year. We look forward to the post pandemic recovery here and learning more about this highly profitable and dynamic category. Looking at the map, we can see that Fomeroa's geographic footprint is meaningful due relative to our existing business. With nearly EUR 300,000,000 in revenue, this business will represent 10% of our combined revenues. Importantly, it provides us access to over 13,000,000 new consumers, which is comparable to the average number of consumers in the UK, Italy and Germany. And finally, on people. ForteNova has 3,000 employees, a fantastic management team and a culture that we think will fit perfectly within Nova Foods' organization. We've developed a global local model over the years that realizes the benefit of Pan European scale and capabilities, while adhering to each market's unique local characteristics and traditions. For example, while we sell the biggest brands in France, Italy, Sweden and other countries, it is clear that food and consumer taste are local. Our portfolio marketing and go to market are adopted as such, and we intend to do just that with this acquisition. I'd like to contextualize the size and impact that this acquisition will have on the combined business. UK, Italy and Germany, as you know, are our 3 largest markets. However, the protein of our frozen food business becomes our 4th largest business when viewed as a combined region. It will be around 9% of our revenues, so it's quite meaningful to know our total revenue base. On the right, we also show pro form a category mix, where fish and vegetables will continue to represent the large majority of our business. We have developed a repeatable M and A playbook and have exciting plans to leverage the combined scale and expertise of Novas Groups and Fortinova. Our plans are very much in line with global local model that I just outlined. As the EU became the full leader in a pure play, we have scale, multi geography expertise and strong discipline when it comes to expense and working capital management. We expect this to result in approximately $15,000,000 of run rate synergies by 2024. At the same time, we also believe we will learn and benefit from Copel Nova in many ways. These are potential reversing leads that we have not yet quantified. For example, they are an exceptional ice cream company. This is a category that is new to us and one we've started to enter. Our business plan will be to optimize the local portfolio within the existing distribution. As we learn more, we will evaluate other ways of leveraging the operational footprint and innovation leadership in ice cream. As I stated upfront, the acquisition of this business creates a strategic platform for growth in Central and Eastern Europe. We intend to do this both organically and inorganically. And finally, Portanova has a unique and well established move to market where we believe we have an opportunity to learn. With that, I will hand it over to Sami to discuss the financial overview of this transaction in greater detail. Sami? Thank you, Stefan, and thank you all for joining us on the call today. This is an exciting day for Nomad Foods as the acquisition of ForteNova expands our portfolio into a new and dynamic European geography with an incredible branded portfolio of local jewels. In terms of deal highlights, we are paying approximately €650,000,000 to acquire this business, which equates to 110x EBITDA including synergies. You heard Stephane outline the sound strategic rationale for this deal. We expect it to be equally impactful from a financial perspective for the following reasons. First, we expect Fortenova to generate mid single digit organic revenue growth, two times that of our existing business with an opportunity to grow adjusted EBITDA by 50%. 2nd, with synergies, we have a clear line of sight to over 20% EBITDA margin within 3 years of growth. With nearly €300,000,000 of revenue expected this year, This business will represent approximately 10% of our combined annualized revenue base in 2021. On the same basis, this equates to adjusted EPS of over US2 dollars We expect this deal to be high single digit accretive to adjusted EPS in the 1st full year of post close. And we expect the deal to close in the Q3 of this year and plan to reflect this business in our 2021 guidance at that time. In terms of capital structure, this transaction is expected to take our pro form a leverage up from 2.8 to 3.8. However, with the cash that we generate, we expect to deliver towards the 3x by the end of 2022. Overall, we continue to maintain a moderate leverage profile and remain committed to a strong credit rating. You've seen this slide many times before. This is our stated M and A criteria, which we've remained very disciplined on. This transaction checks all of the boxes that you see here, taking us into new categories, countries and channels and has a clear path to growth, generate strong cash flow and has a very compelling strategic and financial rationale. Finally, with the valuation under 10x EBITDA with Synergy, we believe we paid a reasonable valuation for these rare assets. We have developed a strong track record for acquiring and integrating complementary frozen food acquisitions in Skoomaad's formation in 2016. In fact, with combined annual revenues approaching EUR 3,000,000,000 this year, we have nearly doubled the revenue base of this business relative to where we first started at Nomad Foods in 2016 when we made our 1st anchor acquisition, the Igloo Group. This milestone has come through a combination of sustained organic revenue growth and the series of strategic acquisitions you see here on this slide. We have delivered superior financial results over the past 5 years with consistent performance year in and year out. Based on our current 2021 guidance, we expect to deliver a 5 year revenue growth CAGR of 6%, with balance contribution from organic growth and acquisitions. This translates to an EPS CAGR of 13%. We remain committed to growing EPS at a double digit rate, and the acquisition of Portnova puts us in a great position to achieve the low term financial targets that we outlined back in November. You see here that on a combined and annualized basis, we are a company with nearly $3,500,000,000 revenue and over $2 adjusted EPS this year. And with that, I'll hand it back to Stephane for closing remarks. Thanks, David. We're delighted to be able to announce the position of POSE in our Frozen II Business Group. It is not every day that market leading brands like Ledo and FreeComm come to market. The Fozinova Group recognizes the strategic value and long term vision of the category that we offer as owners of these brands, and we certainly plan to further develop this business from a very strong foundation. While this is our 2nd acquisition in 6 months, you should not assume that we are done. Our M and A pipeline is active, and we will continue to pursue unique opportunities as they arise. That could mean entry into new countries, but also complementary categories in existing markets. And at the same time, we continue to drive strong organic growth in our existing business through our core portfolio, greenfielding and other white space opportunities. We continue to believe we are in the early stages of value creation and look forward to delivering the strong results that we've come to expect as shareholders in our company. And with that, we are happy to take your questions. Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Rob Dickerson with Jefferies. Please proceed with your questions. All right, great. Thanks so much and congratulations. I guess just the first question, my questions are more modeling based than strategic because I think the strategy makes sense. I guess just for 2021, you said EPS would be $2 or sorry, at least $2 per share, but that seems much higher than the high single digit accretion in year 1. Is there anything kind of upfront that's weighted in time to close in the year end that gives you kind of an unequally weighted bump this year relative to the go forward? First question. Well, actually, as you said, we expect it to close in Q3. We mentioned that the EPS is effectively at $2 is effectively a pro form a. And it is in line with the high single digit equation. Okay. No, I appreciate that, Timmy. I know you're my math strong. I was just thinking, I thought guidance was $150,000,000 to $155,000,000 for the year, like euro terms. Well, whatever, I'll circle back. No problem. So I guess, second question is just based on the growth target of mid single digit organic for the business. I guess first, if you could just provide some color as to why you expect that business to be growing as quickly as it is very simplistically? And then secondly, just on the EBITDA margin expectation and dollar growth potential, Maybe just explain a little bit more why you think you can get some of these synergies out of the business? Maybe it's just performing inefficiently as is. And that's all I have. Thanks. Okay. Thanks, Rob. Well, the answer is quite simple to your first question. It's a faster growing category in these countries. So the consumption is lower than in the Western Europe and obviously in the U. S. And we see that there is definitely there is an acceleration. So a lot of catch up and obviously to be combined with our model, with our Flywheel model where we are going to be fully focused behind these brands. And so we announced with it that we can make it grow even faster. So that's that. And I think the big thing is, again, and it seems simple, but it's not. We're really so focused. We are pure play. We're a unique company from that standpoint in frozen food. And so it is the only thing we're going to be doing. And we did it with we're doing it in Western Europe with great brands. Again, it's a big brands again are great brands. That's very important. It's very much the same as Igloo or Versailles, and then we're going to apply, obviously, the thing being obviously local global, we're going to apply the same model. So we know that we're going to grow faster than what we do in right now in Western Europe. So that's that. And at the same time, back to synergies, we're working very hard on the synergies. You know our model. Model is a bit different from other companies. We're investing 1st. That's quite important. We're investing for growth. And then you could see that the combination of the synergies will be a combination of cost but also obviously of top line. And what we haven't quantified yet, which is more to come, is what we can learn from talking about. The model is very similar, but there are some also some interesting differences that probably we could apply back to Western Europe. And then if I may, just a really quick follow-up. Just in terms of the ice cream side of the business, which is material, Stefan, I've heard you say a number of times before, the 2 categories you'd love to be in would be frozen pizza and ice cream. Ice cream is here. For the time being, at least it seems as if it's about kind of making the business more efficient, capitalizing on the closing wins where you exist already with the business not expanding quickly into Western Europe with ice cream. That could come later, but we shouldn't be expecting that over the next couple of years. Is that fair? I think it's I think, Rob, it's fair. I mean, it's the same thing. The first interest, we're going to apply we're going to learn from ice cream. I think it's really a great category, makes a lot of sense, same brand. And we're going to learn a lot. And at some stage, there are some opportunities abroad. We will obviously we will use these opportunities. But first thing first. So it's the same thing as with Felas is a great example. With Celas, we really focus so much on the U. K. And Ireland. Now we are the largest, by the way, it's the highest market share ever over the last 7 years at least, so it's a big difference. And that's exactly the kind of things we want to do. And then we said at some stage, we are working with these for us, especially with our network. Let's go for it. All right. Great. Thanks so much, guys. Thank you. Our next question comes from the line of Faizi Ali with Deutsche Bank. Please proceed with your question. Yes. Hi, good morning. Good morning. I was wondering if you could share a little bit more about the gross margins on the business, because the EBITDA margins do look pretty high. So I'm wondering if it's lower SG and A versus gross margins? More or less, actually, the gross margin and the EBITDA margin are in line with the existing moment business, but they are higher when including the synergies. And we definitely have an opportunity for gross margin to move up as we develop our growth plan and our algorithm and realize the synergies. Okay, great. And then could you share a little bit more about the seasonality in the business? So I know you said that ice cream is obviously a 2Q, 3Q focused business. Is there any way to quantify maybe how the seasonality is in terms of both top line and profitability? Let's do that, well, at this stage, I wouldn't go too much in the details of what it is exactly, but it's very clear that when you see or let's say, the normal stable is frozen business, it very much be towards Q1 and Q4. So when you integrate this into the global nomads, I think it will rebalance a bit on the seasonality in the 4 quarters, which is interesting from that standpoint. Again, obviously, time will tell. But at this stage, that's what you should remember. It's going to rebalance a bit the importance of the different quarters at the low balance level. Okay, great. And then just last one. This business was part of a bigger company. So are there any costs required upfront to either stand up the business or any costs required to achieve synergies that might hit cash flow? It's included in our business plan overall. As you know, it is part of the acquisition. As you know, I mean, when we take our business, I mean, our integration cost and our model for M and A is always to invest in the business that we acquired to really see profitable growth. And we have sometimes to make some investments. That's where factoring to our business plans. Okay, fantastic. Thank you so much. Thank you. Our next questions come from the line of Bill Chappell with Trevis Securities. Please proceed with your questions. Hi, this is actually Grant on for Bill. Thanks for taking the question. I guess first one, just on the recent business performance of the group, just hoping to get some more context around that. What has it been growing at maybe pre COVID? Is it in line with that mid single digit organic growth? And how do you see that or how have you seen that kind of change over the past few years? Well, let's say, before COVID, to your point, Bill, it was a very nice business, growing nicely, very much in line with the market, which is great. It shows something in terms of strength of the brand strength. Then obviously came COVID. And then unsurprisingly, you have obviously the retail side moving up, doing nicely. It's very much what we have experienced, by the way, with our business in Western Europe. And at the same time, unsurprisingly, for example, there is a bit of food service and also exposure to Croatia tourism, especially with the ice cream. And you can imagine that, for example, in 2020, when the, let's say, the tourist market was literally closed, obviously, that had an impact. More to come, obviously, this year, I think it's going to be a slow it's going to come little by little bit better during the summer. But then beyond this, quite frankly, I'm not an expert, but nobody knows exactly what's going to happen. I think what we see in the long term is these brands are moving very nicely, and we have a lot of tailwinds ahead of us. Got it. And then actually one on the competitive dynamics of that Eastern, Central and Eastern European market. It sounds like with the lower private label share and a strong brand positioning, it may be a little less competitive than Western Europe. Is that fair or are there other strong branded competitors in the market as well? Well, let's say, these markets are competitive by nature. So yes, private level is lower. It's lower than in Western Europe. The Western Europe, remember, is more in the region of 40 plus 40% plus. Here, we're more in the region of 20 plus. So that's obviously and then you have these fantastic brands. At the same time, we're going to have an interesting, let's say, 2 phenomenons. 1 is we definitely believe that, let's say, the consumption is going to grow, and it's going to grow also on top of, let's say, the expansion of the mortgage rate. And at the same time, mortgage rate will also come with probably with a bit more private label. But again, this is something that is totally fine with us. As you know, it's something that's part of a business model in Western Europe. And we know how to deal with private label the right way. So from that standpoint, it's not going to be different. The difference is probably intrinsic growth to Sanisto is higher. Got it. And then last one for me, just on ice cream. What are some of the learnings that you're trying to get out of this business maybe before it seems like you would expand it further into more Central European countries or potentially add an acquisition for Western Europe? What are you looking to learn about the business? And what kind of thought process or decision making criteria you're looking at for organic expansion of ice cream versus acquisition platform to expand the ice cream business? Well, we obviously we need to understand how it works at the New York Times level, obviously, at the foodservice level together with the other categories. At the same time, it's a brand new category, Ben. But at the same time, it's interesting. We have a lot of our people that have a good experience in ice cream, and they like it. So I think we're going to learn a lot from, let's say, from the banking standpoint, but also based on the experience of our people. So from there, we will see how much how big is the importance of distribution versus the power of the brand and that kind of things. But again, nothing new from that standpoint. So it's that we also need to understand, obviously, the combination and how synergistic they are with the favorite product, which we believe is important. And again, how we can learn from this to apply to other countries. But it's a great opportunity for us. That's the only thing I can say. It's absolutely fantastic. That's great. Thank you. I'll pass it along. Thank you. Our next question comes from the line of John Tomlentang with CJS Securities. Please proceed with your question. Hi, it's Charlie Strauzer for John. Good morning. Just picking up on some of the other comments or any questions. Can you at this point pursue more acquisitions? Or do you feel like you have to adjust this more for a bit before you control to kind of get the leverage range down as well? And it seems like FFBG would be a great platform for more tuck ins in Eastern Europe to kind of expand on that a little bit more? Let me answer first financially. I mean, are we going to end up after this acquisition, with a leverage of 3.8 times with a great free cash flow. As you know, it's a good money in the cash machine and will be lower than 3 by the end of next year. So it's so we believe that there is no reason for us to stop. I would have said probably something like 3 years ago, let's digest a bit because beside the financial side, we were not really ready with our business model. But in the meantime, I think we have learned a lot, and I think I really feel comfortable to be able from the management standpoint on top of the financial standpoint to do other things. Then obviously, you need to be ready. And as we know, as M and A, you need to be very proactive, but at the same time, you need to be ready when it comes. And I know that at some stage, there are some impatience when it will come. We need to be ready when these good opportunities do arise. And that's exactly what we what happened with the SPOKENOVA and these brands will likely go in the end free time. Martin, do you want to follow-up to that one? Look, I would just hi, Charlie. I would certainly add that these types of properties don't come around all the time. Stefan has touched on this, and I'd like to emphasize it. I think that if another region that fits perfectly into our portfolio comes along, I don't think the timing is a factor, and we have more than adequate resources to and from a management and financial standpoint to absorb another acquisition. These are great opportunities and they had literally decades of runway with brands that consumers literally have grown up with since childhood. So the intangible value of that is an opportunity, which obviously we wouldn't want to miss should another region become available. Excellent. Thanks. Thank you. Our next question comes from the line of Andrew Olson with UBS. Please proceed with your question. Hi, good morning guys. Sandy, maybe just one for you. You mentioned that you were with some impressive targets to extend the revenue base 50% and then have line of sight for 25% EBITDA margins within the first within by year 3, I believe. So feel free to correct me on those. But, could you just give some of your what planning went into those targets? How much came from cost synergies versus revenue synergies? And then I guess how much is it going to come from expanding the current footprint and then bringing some of those brands to Western Europe or conversely bringing some of your Birds Eye, What are the opportunities to bring some of your brands into this new region? Sure, Jordan. And I'm going to give you the perspective. Just remind us, coming on the metric there, the organic growth of the business, the top line is mid single digit. We have seen the effect of EBITDA would be in the high single digit percentage. And they are basically the perspective they are twice the net average, I would say, overall. The metric that you need to keep in mind is that what we declared is effective that we are planning to grow our EBITDA by EBITDA base to 50% of the planning horizon we have mentioned. And the growth is really at a different it's going to be balanced because of the cost and financial synergies. Stefan has been leading to all of the opportunities in India. And honestly, there are a lot as well. I mean, even But we have not yet fortified some of the cross selling proposals. What's effectively the cost of the driver in the rest of the European region or in Western Europe and vice versa as we said. But if you think about our algorithm and our retail book, cost structure and expense management and our end, all of that has only been influenced in the playbook that has the 100 and that supports the acquisition to compete very well. Thank you. Our next questions come from the line of Jacob Navaj with Credit Suisse. Please proceed with your questions. Hey, thanks guys. This is Jacob Rob here. Just a quick one here, I'm not sure if I missed it, but can you tell us what the revenue was, EBITDA was prior to the pandemic? Any color there? We have actually we just mentioned that we have to 75, I would say, in this year from a revenue standpoint. And I can get you to the specific number. I mean, before the business has changed, I mean, the business was going pre COVID. And we're not going to the right now. We'll give you the specific revenue in the quarter. Got you. Okay. And then I guess and then on the synergy side, I guess, can you dig a little deeper of what specifically, I guess, where you see synergy creation most acutely? Is it perhaps are you is it sharing innovation across platforms? Is it perhaps trying to expand the site based offerings, maybe in Eastern Europe? I guess any color there would be helpful there. Thanks. Absolutely, no problem. I think on that one just to get in touch, yes, that was actually before, I mean, within our playbook, we have a number of, let's say, strategies that we developed and that are proven to be very working very well. Procurement, for instance, we buy globally our ingredients. And frankly having that leverage and benefiting the protein of our business, I mean, with the KFCB plus. From an operational experiment, as we have mentioned, we have developed very aggressive and easy program in manufacturing and logistics. And we have best partners across the factory space. On expense and working capital management. The business has done very well, but I think we do have a process that has been moving to extract values in the quarter. And on the commercial side, when you look at the portfolio that Fortenova has and the power of our portfolio and our know how, we can really drive a fair amount of, let's say, top and bottom line synergies driven by leveraging our toolkit, our marketing efficiency, our NRM, our machine battle framework. So there's clearly a number of areas we have mentioned that are currently going to be huge contributor to the value creation of the business. Thank you. There are no further questions at this time. We do appreciate your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.