Earnings Call Transcript - NOMD Q4 2020

Operator, Operator

Good day, and welcome to Nomad Foods Fourth 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 Taposh Bari, Head of Investor Relations. Please go ahead.

Taposh Bari, Head of Investor Relations

Thank you for joining us to review our fourth quarter 2020 earnings results. With me on the call today are Chief Executive Officer, Stefan Descheemaeker; and Chief Financial Officer, Samy Zekhout. 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-19. 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 and 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, and all comments from here on will refer to those adjusted numbers. With that, I will hand the call over to Stefan.

Stefan Descheemaeker, CEO

Thank you, Taposh, 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-19 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 fourth quarter 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 fourth quarter; 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 two years. Adjusted EBITDA of €119 million and adjusted EPS growth of 19% to €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 fourth 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 foods 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 million of investments behind Green Cuisine, our core and new consumer retention. Most of these investments were deployed during the fourth quarter, resulting in a 30% increase in A&P spend year-on-year. Near term, we dedicated 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 €345 million of adjusted free cash flow in 2020, an all-time record and nearly €120 million higher versus the prior year. Our strong operational performance in 2020 was complemented by a series of capital allocation actions. We initiated a $300 million share buyback program in March 2020, at the onset of COVID-19, and were quick to repurchase a significant amount of our stock under $17 per share. We followed that up by tendering nearly 500 million of our stock in September. In aggregate, we repurchased over €600 million of our stock, resulting in a significant reduction in our share count as we enter 2021. We have also been active on the M&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 Findus Switzerland, which further expands our European geographic footprint. And just last month, we entered into exclusive discussions with the Fortenova 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 Fortenova 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 fourth 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 Samy 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 prospects of our company in both the near and long term. Here you see our three 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 a 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 that are local jewels across Europe, and thanks to the support of our R&D and marketing teams, remain as relevant as ever with today's consumers. Second is our commitment to breakthrough innovation with Green Cuisine. This is a business that we have taken from €0 to €30 million in less than two years, and we won't stop there. We have plans to grow revenues to over €100 million by the end of next year. As we presented at CAGNY 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 new states and seeing strong response from retailers and consumers. And third, our efforts around M&A as we complemented our core with strategic acquisitions into new geographies, categories and channels. Putting it all together, we have the white 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 Samy to discuss the results in more detail and outline our guidance for the coming year.

Samy Zekhout, CFO

Thank you, Stefan, and thank you all for your participation on the call today. Turning to Slide 8. I will provide more detail on our key fourth quarter operating metrics, beginning with revenues, which increased 4.7% to €658 million, driven by 9.5% 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 expectations and was once again driven by our branded retail portfolio, which grew 12% during the fourth quarter. Growth continues to be most pronounced within our core products, namely fish fingers and coated fish, where demand is particularly robust. Strong growth in our branded retail business was offset by our non-branded channels, which represent approximately 10% of sales. Specifically, we experienced mid single-digit growth in private label sales and nearly 30% declines in food service due to the impact of restricted movements across Europe. Our gross margins expanded 160 basis points to 31.5% during the fourth quarter, reflecting favorable mix, pricing and promotions. Moving down to the rest of the P&L, adjusted operating expenses increased 15% year-over-year. This includes a significant increase in A&P, which grew 30% or €10 million 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 fourth quarter. Adjusted EBITDA increased 3% to €119 million and adjusted EPS increased 19% to €0.38 for the quarter, reflecting the significant share repurchase activity we have conducted since Q4 last year. Turning to cash flow on Slide 9. We generated €345 million of adjusted free cash flow in 2020, equating to a 131% cash conversion. As Stefan mentioned, we had an exceptional year of cash performance in 2020, which set 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 inventories, which will need to be rebuilt over the coming months, this performance was also largely driven by cash breakthrough interventions 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 million 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 $1.83 to $1.89 earnings per share. As a reminder, this guidance does not reflect any potential accretion that may result from our exclusive discussions to acquire the frozen food portfolio of the Fortenova Group. These discussions are ongoing and we expect to have an update for you in the coming weeks. On Slide 11, we outline 2021 guidance relative to history. What you can see here is our commitment to delivering sustainable financial performance every year. 2021 will mark our fifth 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 one and two-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 tailwinds, operational levers and capital allocation actions outlined here on Slide 12. That concludes our remarks. I will now turn the session over to Q&A. Thank you.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Andrew Olsen with UBS. Please go ahead with your question.

Andrew Olsen, Analyst

Hi. Good morning, guys.

Stefan Descheemaeker, CEO

Good morning, Andrew.

Samy Zekhout, CFO

Good morning.

Andrew Olsen, Analyst

Hi. Good morning. 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 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.

Stefan Descheemaeker, CEO

Okay. Let me take that one, Andrew. Let me stand back a bit first. I think where we're quite different is that when you see a bit of our journey before COVID, we had the three 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 one year and obviously we grew nicely, like many other people. But very importantly as well, we've also reinvested, as you know, another €10 million at the end of the year, which obviously serves us well for the beginning of this year and later. So that's a bit of 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 then in frozen food, which is doing very well now and obviously beyond, it's obviously a natural tailwind. They're all growing, which is very nice. Then you have COVID, obviously, which 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 a kind of program we put together last year. We announced this year, we 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 €0 to €30 million in less than two years. And as you know, we have the plan to increase up to €100 million or beyond the €100 million in the next two years. So with all these things on top, obviously, of the plan that we put together business model, yes, we believe that 2021, we're going to grow by 1% to 2%. It's obviously ambitious because it's on top of 8.5%, but that's the cultural organization we're delivering. And I think we have the best plans we ever had. So that's why we think we will 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, the growth is only starting. So 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, Fortenova is an option, obviously, that 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&A plan behind frozen foods. So that's all the reasons.

Andrew Olsen, Analyst

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 a 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 to support Findus Switzerland?

Stefan Descheemaeker, CEO

Samy?

Samy Zekhout, CFO

Yes. Sorry. Excuse me, I was on mute. SG&A will be about flat year-on-year in 2021. So we have upped 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 to protect 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 Switzerland, and we always try to balance, secure the need for supporting the brands and driving the appropriate ROI on investments we're making in advertising for sure.

Andrew Olsen, Analyst

Perfect. Thanks, guys.

Operator, Operator

Thank you. Our next question comes from Jon Tanwanteng with CJS Securities. Please proceed with your question.

Peter Lukas, Analyst

Hi. Good morning. It's Pete Lukas 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 UK, given all the dysfunction that we've seen with Brexit and various different lockdowns?

Stefan Descheemaeker, CEO

It's a good question regarding Brexit. Let me address Brexit first since it's been a significant topic for us over the years. The positive news is that it's now behind us. We remain in a tax-free zone between Europe and the UK, which is beneficial for us. We've always believed this is a great outcome. I can say that when the deal was announced on December 24, it felt like a nice gift. Is everything perfectly smooth at this point? Not exactly; there are some logistical challenges, but we have been very well prepared and are confident that everything will be fine. This is a key point for us regarding Brexit, and we’re excited to move on to more productive and interesting matters rather than just focusing on Brexit. As for the trade negotiations, they are what they are. They don’t vary much; sometimes inflation is higher, sometimes lower. This year, inflation is somewhat lower, which makes things a bit easier. I don't think there’s anything particularly noteworthy compared to previous years. We mentioned last year as a time of high demand, and that continues to be the case, making discussions with trade slightly easier. Our conversations with trade are focused on brand building and maintaining healthy trade margins, with no significant differences between the UK and Europe.

Peter Lukas, Analyst

Helpful. Thanks. And just one more for me. Can you talk about synergy and accretion potential from Findus Switzerland? Do you think you realized most of that this year or do you think it will be a longer-term process as you exit '21?

Samy Zekhout, CFO

We're completing the year one transition and gaining visibility as the year begins. The year one investment is crucial for establishing our foundation. Our previous strategies for our base, including Goodfella’s, have been effective, as demonstrated by the current performance of the business. By implementing our established strategies, particularly in areas where we have a clear competitive edge, focusing on essential objectives, and enhancing our top line through NRM, while also managing costs, we will actively pursue the synergies we have planned for the upcoming years. The plan is on track, and the economic factors have been aligned accordingly.

Peter Lukas, Analyst

Great.

Stefan Descheemaeker, CEO

It's very much in line with what we've been doing, to your point Samy, with Goodfella’s and Aunt Bessie’s. First, investment behind sometimes assets that are a bit of open assets underinvested, and we're starting with that, which is I think in the long term is the right thing to do.

Peter Lukas, Analyst

Great. Thanks. I’ll jump back in the queue.

Operator, Operator

Thank you. Our next question comes from Bill Chappell with SunTrust. Please proceed with your questions.

William Chappell, Analyst

Thanks. Good morning.

Stefan Descheemaeker, CEO

Good morning, Bill.

William Chappell, Analyst

I want to discuss the increasing demand for frozen products towards the end of the year and its impact on other categories. A few years ago, Nomad considered entering the breakfast market, but it didn't succeed because Europeans preferred fresh breakfast items. I'm curious if this preference has changed, especially after the lockdowns that may have altered consumer behavior and if it creates opportunities for expanding into other frozen categories as we've seen changes over the past year.

Stefan Descheemaeker, CEO

Yes. 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, you know our definition of must-win battles. Must-win battles are our core categories, our 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 resources to get there that it didn't make any sense, and it wouldn't serve the other categories well. That's why we've gone to these core categories that we're calling must-win battles. 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 besides 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 the planet, combined with categories like fish, vegetables or plant protein, 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 must-win battles, including, obviously, Green Cuisine. It serves us well. We have a lot of tailwinds. We have developed, let's say, our modus operandi of our business model for the existing business and also for the business we want to acquire within, obviously, the same frozen food category.

William Chappell, Analyst

Got it. Thanks. I appreciate the color. And just on Green Cuisine, help me understand kind of the thought process on the marketing and advertising and that it's certainly done well, but it seems like there are a lot of competition jumping in and will be more. And so are you looking at this like 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 before there's so much noise in the category where it will be tougher for consumers to understand it?

Stefan Descheemaeker, CEO

The good news is that the chilled and frozen categories are growing rapidly. As a leader in the frozen segment, it's essential for us to drive even faster growth in this category. Our first step is to ensure we enhance category growth, which involves differentiation from competitors. We believe, and feedback from our consumers and retailers supports this, that we have superior products. For instance, last December, we received an award for the best frozen food product in the UK with our nuggets, which highlights our product quality. Additionally, we have a strong distribution network, as we cover many food retailers across Europe. We're also focusing significant investment on building the Green Cuisine brand, which is crucial for our strategy. All these components are part of a flywheel we are developing, and we are approaching this with even more aggression since it is a new category with substantial potential and attractive margins. We’re seeing good progress, and this remains a major focus for us.

William Chappell, Analyst

But you don't view it as a land grab at this moment? It's not about trying to expand quickly in every direction?

Stefan Descheemaeker, CEO

We need to ensure that all consumers understand what it is. It's a relatively new concept. The focus is on how to develop a new category, and we have successfully done this in the past and plan to do it again.

William Chappell, Analyst

Great. Thanks so much.

Stefan Descheemaeker, CEO

Thank you very much.

Operator, Operator

There are no further questions at this time. I would like to turn the floor back over to Stefan Descheemaeker for any closing comments.

Stefan Descheemaeker, CEO

Thank you very much, operator. And thank you for your participation today. We're pleased to have completed our fourth consecutive year of strong financial performance, underpinned by consistent organic revenue growth and complementary M&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 Foods is still in the early stages of value creation. So thank you for your time and have a great day.

Operator, Operator

This concludes today's program. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.