Earnings Call: Q4 2020

Feb 25, 2021

Good day, and welcome to Nomad Foods' 4th Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. Today's conference is being recorded. At this time, I'd like to turn the call over to Toposh Bari, Head of Investor Relations. Please go ahead. Thank you for joining us to review our Q4 2020 earnings results. With me on the call today are Chief Executive Officer, Stefan Deschmaker and Chief Financial Officer, Sami Zekow. Before we begin, I would like to draw your attention to the disclaimer on Slide 2 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-nineteen. 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 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 represents adjusted figures for 2019 2020. All adjusted figures have been adjusted for exceptional items, acquisition related share based payment and related expenses, as well as non cash foreign exchange gains or losses. In all comments from here on, we'll refer to those adjusted numbers. With that, I will hand the call over to Stephane. Thank you, Tafosh, and thank you all for your participation on the call today. I hope you and your loved ones continue to stay safe during these unprecedented times. It has been nearly a full year since our lives changed following the onset of the COVID-nineteen pandemic. At NoMad, our entire organization has risen to the challenge of supplying Europe with our iconic brands, while ensuring the health and safety of our employees. As you may have seen, we reported our Q4 and full year 2020 results this morning. Consistent with our announcement at CAGNY last week, we ended the year on a very strong note with Q4 results ahead of our prior expectations across all key metrics. Here are the headlines for the Q4. Organic revenue growth of 9.5%, driven by an 8.6% increase in volume and mix and a 0.9% increase in price. We achieved 160 basis points of gross margin expansion to 31.5%, marking our strongest quarterly gross margin rate in over 2 years. Adjusted EBITDA of EUR 119,000,000 and adjusted EPS growth of 19 percent to EUR 0.38 per share. Here you see the financial highlights for the full year 2020. For illustrative purposes, we're showing these figures in both euros and U. S. Dollars, the currency in which our stock trades. Overall, an incredible year of performance as we completed our 4th consecutive year of organic revenue, adjusted EBITDA and adjusted EPS growth. Turning now to the highlights of the quarter and the year. As I mentioned, organic revenues grew 9.5% during Q4, ahead of our recently updated guidance of high single digit growth. We were pleased to end the year on a strong note as demand for frozen food began to accelerate in late October. That momentum built throughout the quarter and has carried over into 2021. We continue to see broad based strength across our portfolio with fish fingers, coated fish, poultry and plant protein among the strongest performing subcategories. We've managed the business by focusing on both long and short term priorities throughout 2020. A great example is our strategic decision to allocate €10,000,000 of investments behind Green Cuisine, our core and new consumer retention. Most of these investments was deployed during the Q4, resulting in a 30% increase in A and P spent year on year. Near term, we dedicate a lot of our energy in chasing demand and fulfilling orders to the best of our ability and converting strong profits into free cash. And as you see in our results, I'm pleased to say that we generated EUR 345,000,000 of adjusted free cash flow in 2020, an all time record and nearly EUR 120,000,000 higher versus the prior year. Our strong operational performance in 2020 was complemented by a series of capital allocation actions. We initiated $300,000,000 share buyback program in March 2020 at the onset of COVID-nineteen, and we're quick to repurchase a significant amount of our stock under $17 per share. We followed that up by tendering nearly $500,000,000 of our stock in September. In aggregate, we repurchased over €600,000,000 of our stock, resulting in a significant reduction in our share count as we enter 2020 1. We have also been active on the M and A front. At the time of our tender offer announcement in August, we clearly articulated our focus and priority on the European frozen food acquisitions, where we believe we have a strategic advantage. Since then, we successfully completed the acquisition of Findo Switzerland, which further expands our European geographic footprint. And just last month, we entered into exclusive discussions with the Porte Novak Group to acquire their frozen food portfolio. This is a business with strong brand positioning and a significant operational footprint across the Balkan region. We're making good progress in the 14 of our process and look forward to updating you in the coming weeks. So that was the past, an unprecedented 2020 that many of us will never forget. And for us at NoMad, our 4th consecutive year of sustained robust financial performance. And as you can see here, we plan to continue building on our strong foundation and momentum by growing our top and bottom line again in 2021. As Sami will outline in his remarks, we have a strong set of plans that will underpin our ability to achieve what will be another exciting year for Nomad Foods. Before I conclude, I'd like to remind you why we are as excited as ever in the growth prospect of our company in both the near and long term. Here you see our 3 pillars of growth. First, our core portfolio, which is anchored in frozen fish and vegetables. COVID or not, these are growth categories that are aligned with our more nutritious diet and a more sustainable food system. Demand for these categories have been growing for years. COVID, which introduced millions of new consumers into our portfolio last year, has only accelerated that movement. We have brands at our local jewelers across Europe, and thanks to the support of our R and D and marketing teams, remain as relevant as ever with today's consumers. 2nd is our commitment to breakthrough innovation with Green Cuisine. This is a business that we have taken from €0,000,000 to €30,000,000 in less than 2 years, and we won't stop there. We have plans to grow revenues to over $100,000,000 by the end of next year. As we presented at Cagney last week, Green Cuisine is now in all of our markets and was Europe's fastest growing frozen meat free brand in 2020. We're developing fantastic new products across a variety of meat states and seeing strong response from retailers and consumers. And third, our efforts around M and A as we complemented our core with strategic acquisitions into new geographies, categories and channels. Putting it all together, we have the wide space opportunities to continue to generate top tier performance in the packaged food space in 2021 and beyond. And with that, I will hand it over to Sami to discuss the results in more detail and outline our guidance for the coming year. Sami? Thank you, Stephane, and thank you all for your participation on the call today. Turning to Slide 8, I will provide more detail on our key 4th quarter operating metrics, beginning with revenues, which increased 4.7% to €658,000,000 driven by 9.5 percent organic revenue growth. As expected, this was offset by 3.2% relating to a calendar shift and 1.6% of foreign exchange translation. Organic revenue growth exceeded our prior expectation and was once again driven by our branded retail portfolio, which grew 12% during the 4th quarter. Growth continues to be most pronounced within our core products, namely Fish Fingers and Cottage Fish, where demand is particularly robust. Strong growth in our branded retail business was offset by our non branded channel, which represents approximately 10% of sales. Specifically, we experienced mid single digit growth in private label sales and nearly 30% decline in foodservice due to the impact of restricted movement across Europe. Our gross margins extended 160 basis points to 31.5% during the Q4, reflecting favorable mix, pricing and promotions. Moving down to the rest of the P and L. Adjusted operating expenses increased 15% year over year. This includes a significant increase in A and P, which grew 30% or €10,000,000 versus the prior year. You may recall our decision to allocate part of our incremental profits in 2020 towards strategic investments. Most of this investment was indeed deployed during the Q4. Adjusted EBITDA increased 3% to €119,000,000 and adjusted EPS increased 19 percent to €0.38 for the quarter, reflecting the significant share repurchase activity we have Slide 9. We generated €345,000,000 of adjusted free cash flow in 2020, equating to 131% cash conversion. As Stephane mentioned, we had an exceptional year of cash performance in 2020, which sets a new record for our company. This was driven by higher EBITDA and disciplined working capital management, which more than offset year on year increases in CapEx and taxes. While COVID certainly played a factor last year, specifically regarding inventory, which will need to be rebuilt over the coming months, This performance was also largely driven by cash breakthrough intervention that we have been making since 2019 around structurally improving our working capital efficiency. As we look out to 2021, we expect to deliver another year of strong cash performance in line with our longer term target of 100% conversion. Based on our share price today, this would equate to a free cash flow yield of approximately 7%. With that, let's turn to slide 10 to review our 2021 guidance, which is based on foreign exchange rates as of February 23, 2021. We expect to achieve another year of double digit adjusted EPS growth in 2021 as we look to build on our strong momentum exiting 2020. This guidance is based on the following factors: total revenue and adjusted EBITDA growth of approximately 3% to 5% and organic revenue growth of approximately 1% to 2%. For modeling purposes, we are assuming a weighted average share count of approximately 179,000,000 for the year. In aggregate, we expect 2021 adjusted EPS to be in the range of approximately €1.50 to €1.55 which equates to a U. S. Dollar equivalent of approximately EUR1.83 to EUR1.89 earnings per share. As a reminder, this guidance does not reflect any potential accretion that may result from our excluding discussion to acquire the frozen food portfolio of the Porta Nova Group. These discussions are ongoing and we expect to have an update for you in the coming weeks. On Slide 11, we outlined 2021 guidance related to history. What you can see here is our commitment to delivering sustainable financial performance every year. 2021 will mark our 5th consecutive year of growing organic revenues, adjusted EBITDA and adjusted EPS. And importantly, this performance builds on the strong year that we have achieved in 2020, representing robust growth on both a 1 2 year basis. As we outlined at CAGNY last week, you see here the building blocks supporting our robust plans for 2021. We expect to achieve these goals through a combination of the macro tailwind, operational levers and capital allocations action outlined here on Slide 12. That concludes our remarks. I will now turn the session over to Q and A. Thank you. Operator, back to you. Thank you. We will now be conducting a question and answer Our first question comes from Andrew Olson with UBS. I just wanted to dig more a little bit into the drivers of the top line, the organic sales guidance that you gave at CAGNY and then are reiterating again today. Where do you have the most confidence in that guide and how much does it depend on maintaining some of the COVID gains that you had in 2020? Just trying to think through kind of the underlying growth of the base business versus maintaining some of the lapping effects. Thanks. Okay. Let me take that one, Andrew. Let me stand back a bit first. I think where we're quite different is when you see a bit of our journey, before COVID, we had 3 consecutive years of growth, and it doesn't come by chance. I think we worked a lot on our brands. We worked a lot on our business model and it paid off. And then obviously came COVID, 1 year and obviously we grew nicely, but like many other people. But very importantly as well, we've also reinvested, as you know, another €10,000,000 at the end of the year, which obviously serves us well for the beginning of this year and later. So that's a bit what we have accomplished over the last years. I think where we are quite different is we have just fantastic categories. When you think about fish, which is 40% of our business, nice margin vegetable, which is 20% plant protein up and coming and this in frozen food, which is doing very well now and obviously in beyond, it's obviously a natural tailwind. They're all growing, which is very nice. Then you have COVID, obviously, when we gave opportunity to all these people, new consumers, millions of consumers to try. That's why, by the way, we invested behind retention, which was very important. You remember, that's kind of a program we put together last year. We announced this. You explain why we're doing this, and we see the results. And that's very nice. Then on top of that, obviously, you have Green Cuisine, which has also moved from €30,000,000 to €30,000,000 in less than 2 years. And as you know, we have the plan to increase up to €100,000,000 or beyond the €100,000,000 in the next 2 years. So with all these things, on top obviously of the plan that we put together business model, yes, we believe that 2020 when 2020 is going to grow by 1% to 2%. It's obviously ambitious because it's on top of 8.5%. But that's the culture of the organization we're delivering. And I think we have the best plans we ever had. So that's why we think you'll be going to make it work. And then beyond 2021, I would put it that way, we think again that with all the things we have, it's the growth is only starting. So we have we know what we have ahead of us in 2021 and beyond, and we're very excited with this. And then obviously, we also have things that are coming like Switzerland that we just completed end of last year, Obviously, Fortuna, but Fortuna is an option, obviously, that we as we announced, it's an interesting plan also in the back end. So a lot of good things between, let's say, the natural growth of our must win battles, as we say, green cuisine and also obviously a very focused M and A plan behind frozen food. So that's all the reasons. Okay, great. Thanks. And then just as a follow-up, just specifically on the marketing spend, it was good to see that 30% increase come through in 4Q, which brings high single digit for the year in terms of that advertising line. How do you think through your kind of overall marketing levels? Do you think that you'll have to increase even further for to support Spinda Switzerland? Sami? Yes. Sorry, it's Sidney. I wasn't here, sorry. SG and A will be about flat, I mean, year on year in 2021. So we are up the game in 2020 for the reason that we have mentioned, investing behind the Green Cuisine, must win battles, which we know are paying off. And the other piece which was important for us is to affect invest behind retention, as we have mentioned. But we clearly the intent is to continue to invest behind our brands. We have strong plans behind the core business and behind Sweden. And we will always try to balance each of the needs for supporting the brands and driving the appropriate ROI, I mean, on the investments we're making in advertising for sure. Perfect. Thanks, guys. Thank you. Our next question comes from Jon Tanwanteng with CJS Securities. Please proceed with your question. Hi, good morning. It's Pete Lucas for Jon. Just how have industry and trade negotiations progressed so far this year in terms of pricing shelf space and promotions? Any meaningful difference and also any meaningful difference you're seeing between trends on the continent and the U. K. Given all the dysfunction that we've seen with Brexit and various different lockdowns? It's a good question, the Brexit. Let me handle the Brexit first because it's been our favorite topic for, well so many years. So the good news is behind us. So we still more than ever we're in a tax free zone between Europe and U. K, which is great. We always said it's great for us. That's the best result. And quite frankly, I can tell you by when the deal was announced on December 24, it was a very nice gift. Is it perfectly smooth at this stage? No. You have you can imagine you have obviously some logistics issues here and there, which makes the things a bit complicated. But as we've been extremely well prepared, it's we know that it's going to be fine. So, that's a big thing for us. It's Brexit and we're so pleased that by the way, we can always also think about more productive things, more interesting things than just playing defense with Brexit, which is absolutely great. Then back to your question about the negotiations. Well, let's say, negotiation with the trade is negotiation with the trade is not going to change. Sometimes you have a bit more inflation, sometimes you have a bit less inflation. This year, we have a bit more less inflation, which I would say ultimately makes things a bit easier. So, I don't think there is anything specific compared to previous years that are worth mentioning. Obviously, we need to deliver. We also said last year that it was a year of high demand. It's still a year of high demand, which make to some extent that piece of the conversation with the trade a bit easier. And yes, that's where we stand. I think our conversation with the trade is all about brand building, about their trade margin, which is overall is in good shape as well. So nothing specific to mention and no real difference between UK and Europe. Helpful. Thanks. And just one more for me. Can you talk about synergy and accretion potential from Finn to Switzerland? Do you think you've realized most of that this year? Or do you think it'll be a longer term process as you exit 2021? We always particularly in year 1, we're just going to be completing the year 1 transition, I mean, as we get into that. So the business is part of the family right now. We have the year 1 investment always with, let's say, that is playing for us in terms of planting the seeds. So if you think about the playbook that we have been applying in the past for our best year of Goodfella, which has been working really well when you look frankly at how the business is doing today. It reapply simply our playbook around frankly where we are clearly having a strong competitive advantage. I mean the focus on the must win battles, clearly, the extra thing that we can give to our top line through NRM, the focus on our cost and we will effectively drive the synergy that we planned for in the years to come. So clearly, the plan is on track, and clearly, the economics are having, let's say, put together in that context. Great. It's very much in line with what we've been doing to your point, Sami, with Goodfella's and on Besse's first investment behind sometimes assets that are a bit of orphan assets under investors. And we're starting with that, which is I think long term is the right thing to do. Great. Thanks. I'll jump back in the queue. Question comes from Bill Chappell with SunTrust. Please proceed with your question. Thanks. Good morning. Good morning, Vince. Just want to talk about kind of the surging demand for frozen and kind of the end of the year? And also what it's done for other categories? I mean, I remember it was 3, 4 years ago, one of the thoughts from Nomad was to move into breakfast items and that didn't really work so well because Europeans didn't particularly like frozen breakfast items, they like fresh. But kind of wondering if that's changed as people have been locked down and accelerated and whether they're maybe it opens up other categories within frozen for you to expand as we've kind of had behavioral change over the past 12 months? Yes. Well, it's a very good question, Bill, but it comes back to the very essence of our strategy, which is about resource allocation and where we want to play in frozen food. And hence, our definition of mushroom battles. Mushroom battles are our core categories are categories where we have leadership, we have good margin and we have growth potential. And back to this breakfast question, I think it would have taken ages and take so much resource to get there that it didn't make any sense and it wouldn't serve the category the other categories well. And that's why we've gone to these core categories that we're calling mushroom bottles. And I can tell you, they're doing extremely well year in, year out and it's mostly in fish, in vegetable and then in some local categories, obviously, like, for example, pizza with Goodfella's or other categories in local categories. And we're not going to deviate from there. So we need market share, we need growth potential and we need gross margin. So that's that. But beside that, we remain also extremely focused behind Frozen. As we know, last year, we've just confirmed that Frozen is where we are, where we are winning and where we want to play, and we are the leaders. And by the way, it's an extremely good category for a variety of reasons between, let's say, obviously, good for your health, good for your good for the planet, combined with categories like fish, vegetables or plant protein. So, on top of also e commerce that is doing well. So, we definitely believe that it would be just a mistake today to move away from this combination of focus behind frozen and within frozen behind the mushroom battles, including obviously, Wing Cuisine. It serves us well. We have a lot of tailwinds. We have developed our, let's say, a modest improvement of our business model for the existing business and also for the business we want to acquire within obviously the same frozen food category. Got it. No, thanks. I appreciate the color. And on Green Cuisine, help me understand kind of the thought process on the marketing and advertising in that it's certainly done well and had quick, but it seems like there are a lot of competition jumping in and will be more. And so are you looking at this of we just need to build out the brand equity and grow and build brand awareness? Or are we getting into a land grab where you really need to make a splash in terms of getting the brand out there because before there's so much noise in the category where it will be tougher for consumers to understand it? Well, the good news Bill is, it's the category in chilled and frozen, by the way, is growing very fast. And we, as a category leader in frozen, we need to make sure that we're going to have the category to grow even faster. So that's the starting point. So how we and this company in the past, years years ago did the same with other categories. We need to do the same. 1st is obviously is to make sure that we're going to grow the category. And it's starting with, obviously, differentiation with the orders. We believe and that's what our consumers and the retailers are telling us that we have a product superiority. The products are great. You know that, for example, last year, let's say, in December, we got the award of the best product frozen food products in the UK with our nuggets. They're great. There is a product superiority. And so but that's one element. The other element is obviously we have also a superiority in terms of distribution network. We're covering we have a vast network across of retailers across Europe. So that's another element. The third one is, to your point, is we decide we're deciding to we decide, as you know, to focus a lot and to put quite a considerable amount of money behind the category and behind Green Cuisine in terms of brands, brand building, which is also what it is. So all these elements are part of the flywheel that we have developed. The only difference is probably even more aggressive because it's a new category it's a category which has a lot to offer with also, by the way, very nice margin, and we're making very good progress. So that's that. But it's a big focus for us as you know. But you don't see it as a land grab right now. It's not a try to get anywhere and everywhere as fast as possible. Well, you need to make sure that people understand, all the consumers understand what it is. So it's a white space to some extent. So that's what it is. But it's how to increase how to develop a new category and we've been good at that in the past and we're going to do it again. Great. Thanks so much. Thank you very much. There are no further questions at this time. I would like to turn the floor back over to Stephane Deschmacher for any closing comments. Thank you very much, operator, and thank you for your participation today. We're pleased to have completed our 4th consecutive year of strong financial performance, underpinned by consistent organic revenue growth and complementary M and A and share repurchases. We have a well defined playbook and a strong set of plans to continue our momentum into 2021. As you've heard me say, while we're proud of the performance that we have delivered since 2017, we strongly believe that NoMad Food is still in the early stages of value creation. So thank you for your time and have a great day.