Earnings Call: Q1 2019

May 9, 2019

Good day, and welcome to the Nomad Foods First Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Tapoosh Barry. Please go ahead. Thanks, Amanda, and thank you all for joining us to review our Q1 2019 earnings results. With me on the call today are Chief Executive Officer, Stephan Deschmaker and Chief Financial Officer, Sami Zekout. 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 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'll also be discussing 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 2018 and 2019. All adjusted figures have been adjusted for exceptional acquisition related share based payment and related expenses as well as non cash foreign exchange gains or losses. And all comments from here on will refer to those adjusted numbers. And finally, users should be aware that 2019 figures have been presented in accordance with IFRS 16, which is the new standard for leases. As such, certain financial measures should not be directly comparable may not be directly comparable to 2018 figures. That being said, we have disclosed the impact of this change in the press release where the impact on comparability has been deemed material. With that, I'll hand the call over to Stefan. Thank you, Tabush, and thank you all for joining us on the call today. Earlier today, we reported Q1 2019 earnings results and reiterated our full year adjusted EBITDA guidance. We're pleased to have begun 2019 with a strong start and are on pace to deliver against our long term growth algorithm for a 3rd consecutive year. Highlights from the Q1 include organic revenue growth of 0.9%, representing a 9th consecutive quarter of growth despite the shift of Easter sale into Q2. Adjusted gross margins of 30.9 percent with 60 basis points of growth in the base business, offset by 150 basis points of acquisition mix. Adjusted EBITDA of EUR 122,000,000 which grew 18% year on year and adjusted EPS of EUR 0.40 per share, representing growth of 14%. 1st quarter performance was underpinned by many of the same drivers than in the past. Notably investment in our brands and solid growth from our core categories. During the Q1, we achieved strong revenue growth, navigated the higher fish prices, advanced our innovation strategy and strengthened our balance sheet to fund future growth. Organic revenue growth of 0.9% was driven by strong execution in a number of markets, notably the UK and Austria, which each grew 4% and the Netherlands, which posted growth of 11%. 1st quarter organic growth was led by price, which contributed growth of 4.1%. Partially offsetting this growth was a 3.2% decline in volume, which was impacted by a later Easter this year. As you know, we have raised price in response to higher raw material costs, which we experienced this year mainly in fish. So far, we have navigated the environment well by remaining laser focused on executing our growth model. We continue to invest in our brands with the majority of our resources focused on our core categories, which once again delivered solid growth of 3.3% in Q1. Success in our core portfolio continues to be a result of efforts at both a global and local level. Fish, our largest global category delivered another strong quarter with fish fingers and coated fish posting 3% and 4% growth, respectively. As expected, sales of pea declined in Q1 due to last year's poor harvest, which limited supply in the marketplace. That said, we were successful in replacing lost peas volumes with growth in other areas of our vegetable portfolio, notably Steam Fresh in the UK. Strong growth in our core global SKUs were complemented by several local success stories. These include poultry in the UK, ready meals in Germany and minestrone in Italy. As a reminder, local core categories combined to represent nearly half of our core portfolio. This group of categories grew an impressive 5% during the Q1, demonstrating the ability of our regions to execute both, centrally led and country specific initiatives. Turning to innovation, we advanced our strategy in Q1 with the launch of Green Cuisine, a range of plant protein products in the UK. This launch adds yet another dimension to our growing UK portfolio, which has gone through significant transformation over the past 2 years between an impressive turnaround in its base business and the integration of 2 complementary acquisitions. Green Cuisine marks our 2nd plant protein launch in the past year and follows the introduction of Peas, our sub brand of plant protein products launched last year in the Nordics. Peas has performed well in its 1st few months in the market, driving 30% growth in our Swedish veterinarian portfolio. It has also attracted new users in the category with very positive feedback from both consumers and retailers. Both Peas and Green Cuisine are pea based innovations and build on our brand's strong heritage and expertise in this high protein crop. We look forward to providing you with an update on Green Cuisine in the coming quarters after we build distribution and begin to support this new range of products with a multi channel advertising campaign this summer. Finally, we strengthened our balance sheet to support future growth and this includes M and A. As you know, the packaged food space is going through a period of significant change in dislocation. This has, in turn, created a number of unique opportunities for us. We've been looking for a while and are currently evaluating a number of interesting opportunities. We're not going to comment on specifics, but rest assured that we committed to making the right deal at the right time that is in the best interest of our shareholders. Our recently enhanced balance sheet provides us with the capacity and flexibility to drive value through accretive acquisitions and we look forward to providing details where we have when we have more news to share. Before turning the call over to Sami, I would like to highlight a couple of new and exciting products and marketing campaigns being rolled out in the market. On Slide 5, you can see 2 current examples. The first on the left is Artisan, one of our largest product launches in 2019. Artisan is a new range of coated fish that will provide retailers and shoppers with a complementary dimension to our existing portfolio of coated fish products. This innovation leverages key food traits such as artisan bread and seasoned inclusions, while still delivering the great taste, convenience and value that our brands are known for. We will be supporting Artisan with an exciting new media campaign featuring our captain, who now finds himself online exploring a local artisan market. Artisan is currently being distributed across a handful of markets and, as I mentioned, will be one of our big bets in 2019 along with plant protein and modern vegetable launches. On the right hand, you can see the Goodfella's brand reboot, which we recently introduced to the market in April. We applied our growth model across all aspects of the brand by changing the packaging design, upgrading product quality and launching a new multichannel campaign celebrating the heritage of this strong brand. The new campaign titled Made With Respect introduced a new lead character, the godmother, who serves as the matriarch of the family and is the ultimate judge of Goodfella's product quality. This reboot marks an exciting new era for the Goodfella's Pizza brand and will help support our longer term strategy of growing sales with a stronger gross margin profile. To conclude, the year is off to a strong start. 1st quarter marks our 9th consecutive quarter of organic revenue growth and based on performance during the month of April, we feel very good about the ability to build on our momentum into Q2. We are firmly on track to execute our growth plans for the year, are making good progress on the recently acquired businesses and are eager to continue to add more complementary assets to our portfolio in due course. With that, I will hand the call over to Sami to discuss the financials and guidance in more detail. Sami? Thank you, Stefan, and thank you all for your participation on the call today. Turning to Slide 6, I will provide more detail on our key Q1 operating metrics, beginning with revenues, which increased 15 percent to EUR618,000,000 driven by 0.9 percent organic revenue growth and 13 percentage points 13.8 percentage points from the acquisition of Armbraces and Goodfella. Gross margin was 30.9% declining 90 basis points year on year. Base business gross margin expanded 60 basis points driven by volumemix and price and promotion, which more than offset COGS inflation. Acquisition mix negatively impacted gross margin by 150 basis points. As we had anticipated, 1st quarter base business gross margin was affected by 2 timing factors unique to Q1 versus the rest of the year. First, we realized the full benefit of price increases, but only a partial impact from raw material inflation in the Q1. This will normalize beginning in Q2. 2nd, the shift of Easter and related promotion move from Q1 into Q2 given the timing of the holiday versus the prior year. Moving down to the rest of the P and L. Adjusted operating expenses increased 9% year over year, primarily due to the inclusion of acquisitions. As a percentage of revenue, adjusted operating expenses improved to 13.8% from 14.5% in the prior year, reflecting acquisition synergies, expense discipline and phasing. 1st quarter adjusted operating expenses were approximately EUR 5,000,000 lower than we originally expected due to the timing of some media activities moving into subsequent quarters. Within operating expenses, A and P increased 6% and indirect expenses increased 11%. Adjusted EBITDA was EUR 122,000,000 and as expected included a EUR 4,000,000 benefit related to IFRS 16, the new standard on lease accounting effective this year. Excluding this benefit, adjusted EBITDA grew a healthy 14% versus the prior year. Adjusted EPS was €0.40 for the quarter, an increase of 14%, reflecting underlying EBITDA growth, higher finance costs and lower effective tax rate and a higher share count as a result of the equity offering. IFRS 16 did not have a material impact on EPS during the Q1. Turning to cash flow on slide 7, we generated €93,000,000 of adjusted free cash flow during the quarter, an increase versus the €82,000,000 generated in the same period last year. In an effort to increase our organizational focus and accountability on cash, we have made the decision to redefine our cash KPI with a priority now on free cash flow as both an absolute metric and relative to adjusted profit. Factors contributing to Q1 adjusted free cash flow included adjusted EBITDA of EUR 122,000,000 a working capital outflow of EUR 11,000,000 CapEx of EUR 6,000,000 cash tax cash taxes were EUR 4,000,000 lower than the EUR 11,000,000 adjusted P and L tax due to the timing of tax payments. And finally, cash interest and other was $8,000,000 also lower than P and L finance costs due primarily to the non cash impact of IFRS 16 on the P and L. We are pleased with the amount of cash that we generated in Q1. As you know, we also raised 3.40 €3,000,000 of equity in a transaction that closed on March 22. Accordingly, we ended the Q1 with €753,000,000 of cash on hand and net leverage in the high 2s. We believe this level of leverage provides us with the necessary resources and flexibility to pursue our strategic growth ambition, which include organic growth as well as the acquisition of food companies where we can unlock value. With that, let's now turn to slide 8 to review our 2019 guidance, which is based on foreign exchange rates as of May 7, 2019. For the full year 2019, we are reiterating adjusted EBITDA guidance of approximately EUR 420,000,000 to EUR 430,000,000 which assumes organic revenue growth at the low single digit percentage rate. Given the recent equity offering, which resulted in a company raising EUR 343,000,000 in capital and issuing 20,000,000 new shares, we now expect adjusted EPS to be in the range of EUR 1.18 to EUR 1.22 euros per share. This assumes a weighted average share count of 192,000,000 for the year. This compares to our prior guidance of 1.28 to 1.32, which assumes which assumed 176,000,000 shares outstanding. To help you with your model, there are also some quarterly movements in the remaining periods of the year that I would like to highlight. Starting with revenues, as you know, Easter fell 3 weeks later this year versus last, resulting in approximately 1.5 points of revenue growth moving out of Q1 and into Q2. As a result, we expect Q2 organic revenue growth to be higher than in Q1. We expect some incremental contribution of revenues in Q2 from group sellers and ARM basis, albeit significantly less than we experienced in Q1 as we begin to anniversary the Goodfella's acquisition, which closed during Q2 of last year. As a reminder, Aunt Betty closed on July 2 last year. Moving on to gross margins. With the shift in Easter timing I mentioned earlier, it's important to note that the Easter period tends to carry a higher level of promotion, which now shift into Q2 versus Q1 and which will have an adverse impact on Q2 gross margins. Further, keep in mind that we faced an uneven gross margin comparison in quarter 2 and 3 of this year. Recall that we scaled back promotion during the Q2 of last year, given an unseasonably hot start to the summer. And as you may recall, Q3 gross margin were negatively impacted by a poor harvest. As a result, we expect gross margin to decline year on year in Q2 and increase year on year in Q3. Finally, there was approximately $5,000,000 of A and P spent, which shifted out of Q1 into the rest of the year, mostly into Q2. Taking all of these factors into consideration, we expect Q2 adjusted EBITDA to be relatively unchanged versus the prior year followed by double digit growth in quarter 3 and quarter 4. That concludes our remarks. I will now turn the session over to Q and A. Thank you. Operator, back to you. Thank And we'll take our first question from Jon Tanwantengen with CJS Securities. Good morning, gentlemen. Thank you for taking my questions and excellent quarter. Good morning. Good morning. Good morning. Could you tell us if the guidance that you've provided on the EBITDA includes all the IFRS benefits this quarter moving forward? Yes, yes, it does. Okay. And how much is that expected to be over the next several quarters? It's €15,000,000 for the year. Okay, great. Thank you. And then can you give us an update on the use of proceeds from a recent equity raise? Is it purely for M and A or are there other uses of investments that you're planning? Any color there would be helpful. We will be we effectively have been raising the equity and now sitting on €753,000,000 in cash and we intend to use that to, let's say, invest in deals to come and we will be selecting those deals the basis of the financial return that they will deliver. Okay, great. And could you also just comment on the IPO of Beyond Burger here in the U. S? And if your pea protein products can capitalize on the same trends in the consumers that are driving Beyond and Impossible and similar vegan products? Jon, it's an excellent question. It was not left unnoticed obviously, €88,000,000 of revenue with the €3,800,000,000 which is close to our market cap by the way. So that's interesting. Aside from that, I think what we see is the fundamentals of plant protein. And the plant protein is definitely there to stay, to grow, and we want to be part of this. And we're starting with 2 very interesting launches. 1 is PEASE in the Nordics and we're doing very well. Great feedback from the consumers and from the retailers. And we're just launching right now a green cuisine in the UK. So we're very well accepted by the trade. Obviously, more to come in terms of obviously the timing in the summer. And more fundamentally, more to come also in terms of SKUs. So we're starting obviously with the limited assortments and then as time goes by, we will obviously expand the range. It's absolutely a very important category for us and not limited to the Nordics to the U. K. It's going to go way beyond. But then time will tell how it's going to impact our market cap, but at least business wise it makes a lot of sense. Great. Thanks for the color guys. We'll take our next question from Robert Moskow with Credit Suisse. Hi. A few questions. Can you give a little more detail on why the $5,000,000 in media shifted into 2nd quarter? I thought on the last call you were pretty specific about the timing of it and just wanted to know that the circumstances. 2nd, we use Nielsen to track your market share data that's probably not perfect. And last year you had some pretty significant gains versus private label across several categories. Those market share gains seem to slow in Q1. I think in your commentary you said that you're growing, the category is growing. But can you talk a little bit about your market share in Q1? Yes, I'll start, Rob. I'll start with the first question on the media, some in Europe. So it's probably driven by the fact that we have been seeing some shift in campaigns, which is probably driven by the fact that Goodfella has moved from the affiliate march to early April and that has been contributing to mostly to the shift from Q1 into Q2. The market share? The market share at this stage is flat. So I within a good industry at this stage, it's flat. And as we know, obviously, we've been through a major price increase, which is fundamental. And then as we said, we're going to see at this stage we're moving according to plan, so that's what's expected. And in the coming weeks months we will see whether it's moving as expected, as we said, in terms of price elasticity. So far so good, but we also know that it takes some time to be fully reflected and understood by the consumers. But at this stage with that kind of price increase, we think that the flat performance is a good performance. Is the intention to now start increasing on vegetables as well as fish or not? And how would that affect your pricing kind of ramp up for the year? Let's put it that way, Robert. Fish was I mean we've been through a very, very significant cost increase that we've been able to that we really understood, let's say, starting, let's say H2 last year. And so we've organized ourselves I think very well. I think the countries have taken the challenge very well. And ultimately it's been obviously it's already difficult, but it's been reasonably well received by the trade. In veg, it's a bit different. We don't see the same thing and it's more category by category. I would put it that way. In peas, for example, what we've seen is we see that our peas are declining for the Q1 for a very simple reason. We had a very poor harvest, and so why would we promote for example? It doesn't make any sense when you are supply constrained, So we made the right things, we did the right things with PEASE. So in terms of price increase for the future, again, fish is what I would say unprecedented, but it was big and we don't see the same thing happening in veg at this stage. Last question. On GoodFellas, you said you shifted the media by a month. I thought I had picked up that there was some reconfiguration of Goodfella's product line. I don't know if it's packaging or product or what. Is there anything to that or is Goodfella is just kind of on track? Goodfella is absolutely on track. I don't think you should read too much into 1 month, which was March with a combination of many different things. But we're not changing our flywheel. In other words, what we said from the start with the Goodfella, we're going to first improve the quality, We're going to improve the packaging. We're coming with a new campaign. That's exactly what I mentioned with The Godmother and obviously Made With Respect and it's really starting now. It's sometimes it's fixed by 1 by a few weeks which is anyway if we're not ready, we're not ready. I think we're very pleased with what we're seeing right now and PIZZA for us is doing well. Okay, great. Thank you. You're welcome. Thank you. And we'll take our next question from Bill Chappell with SunTrust. I may have missed it. Did you quantify what the Easter shift was? And is that expected to be fully picked back up in this next quarter? Yes. We did mention the fact that it was going to be around 1.5%. And that's what I mean that's what you expected kind of all along? Yes. So the shift between Q1 and Q2 in sales growth. Okay. And then in terms of just the overall category, I mean, you say it's healthy, it's growing. Is there any way to kind of quantify it's accelerating over the past 2, 3 quarters? And are there others driving that growth? Is it consumers driving that growth? Or is it just really you and kind of being back and innovating and advertising behind it that's driving that growth? Well, at this stage, I wouldn't say that there is an acceleration. I think it's been very consistent in terms of low single digits growth. And that's by the way that's our algorithm and as we said obviously it's our job to invest further in the category and then that's our ambition obviously in the long term to see this algorithm improve in terms of quality and quantity, but going to be to take a bit of time. And back to market share, by the way, I forgot to mention that on an MAT basis we are increasing our share. So that's a combination. No surprise in terms of summary, it's no surprise in terms of category, and second, flat short term, but also on an MAT basis to increase market share despite price increases. Got it. But you're seeing volumes continue to improve, I guess not just on pricing? Well, as we said, the Q1, which was expected, we've seen obviously some volume reduction, which is a combination of PPA and obviously initial reaction from the consumer in terms of price, but we see that obviously going down over time and very fast. And obviously I forgot to mention, which is also a big thing, which is the famous 1.5% coming from Easter. And then last one for me, we've actually heard from bigger companies from Coke and Pepsi and others that there was some inventory management around the Brexit noise. I don't I know it's not a huge there's a lot of local market manufacturing, but was there any kind of impact to your business intra quarter from that? No, we had mentioned the fact that we are going to be prepared for the March 29 deadline originally. So we just had about $15,000,000 impact from an inventory standpoint and that we are going to deplete over the months to come. And obviously we see what October tells us. At some stage, we may have to come up with the ramp up again. So that's life is full of surprises. Yes. It keeps it interesting. Thanks so much. Yes. You're welcome. Thanks. At this time, there are no further questions. I'd like to turn the conference back over to CEO, Stephane, for any additional or closing remarks. Okay. Thank you, operator, and thank you for joining us on the call today to review our Q1 results. The year is off to a good strong start with Q1 representing our 9th quarter of organic revenue growth despite the Easter shift. We're very much on pace to deliver another year of growth against our algorithm and have a well capitalized balance sheet ready to be deployed. With that, thank you for your participation, and I look forward to updating you on our progress where we next report Q2 results in August.