Earnings Call Transcript - NOMD Q2 2025

Operator, Operator

Greetings, and welcome to the Nomad Foods Second Quarter 2025 Question and Answer Session. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Jason English, Head of Investor Relations. Thank you. You may now begin.

Jason English, Head of Investor Relations

Good morning, everyone, and thank you for joining us today. I hope everyone has had a chance to read our press release and listen to our prerecorded management remarks, both of which are available on our website. In addition, we have posted a transcript of the prerecorded remarks and the accompanying presentation. At the conclusion of today's live Q&A session, we'll also post an audio replay of this call. Please note that during today's Q&A session, we may make forward-looking statements that are based on our view of the company's prospects, expectations, and intentions at this time. Actual results may differ due to risks and uncertainties, which are discussed in our press release, our filings with the SEC, and 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 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. All adjusted figures have been adjusted primarily for, when applicable, share-based payment expenses and related employer payroll taxes, exceptional items, and foreign currency translation charges or gains. Unless otherwise noted, comments from here will refer to those adjusted numbers. Joining me today are Nomad Foods CEO, Stefan Descheemaeker; and CFO, Ruben Baldew. Now let's get started with our first question. Operator?

Operator, Operator

The first question comes from Andrew Lazar with Barclays.

Andrew Lazar, Analyst

Thanks again to you guys for putting out the published prepared remarks. That's actually very helpful to us in sort of getting through the results pretty quickly. Maybe, Stefan, just as a starting point, I guess what gives you the confidence and sort of the visibility that you finally called the full-year guidance low enough, given the pattern more recently of missing and guiding lower over the past year?

Stefan Descheemaeker, CEO

Thanks, Andrew. It's a great question. And obviously, it's a very important question for us. And let me step back for just a second. I've been with the company for 10 years since we started and, quite frankly, to your point, I don't think we've been accustomed to this. So it's really something that we need to take into consideration with the guidance. The second point is, at the same time, over the last 10 years, with all the disruptions we've been through, I think we've been very good at learning from all these events. So let me first start with what I think is self-inflicted, and I'm really taking this on myself. I think we were too optimistic with our ERP implementation. That's the first piece. And the second level, we also had excess inventory in Q1 that, quite frankly, we did a poor job of anticipating. I'm acknowledging these two points. The lesson, though, is in terms of our ERP, we're slowing down the program just to make sure that we're taking the right level in terms of risk digestion of all the things we're doing, which is absolutely fundamental. And I'm very pleased with what the team is doing at this stage. In terms of excess inventory and the dynamics between sell-in and sell-out, especially during these volatile times, the team is doing a much better job at reading visibility between both. The second piece is especially in Q2 is the weather. For your information, June in Western Europe was the hottest June on record in the region. Some differences in the Nordics were milder, but countries like France, the U.K., and Belgium experienced numbers around minus 5%, minus 6%, minus 7% for the market, where we would have expected to be in the region of 1.5% to 2%. At the same time, we've been able to regain market share, especially in volume, which is good. Despite our categories, especially fish and vegetables, are undertrading during the hot weather, that’s not enough. For us, the learning is what can we do to ensure we have a better summer assortment because we don’t know whether this is a pattern for the future, but we need to be ready to hedge for 2026 and beyond. The teams are preparing for things like potatoes, natural fish, and other items that I will mention later to ensure we maximize future opportunities. With all this volatility, we decided to take a wider range into account potential risks, mostly around additional continuing heat waves. We haven't seen it yet. Let's face it, when it’s interesting to see that the first part of July was very hot, and we saw immediate impacts in terms of sell-out. The second half was better from our perspective, which means milder weather. We saw a correlation between the two. This is why we're taking this range. If there is no additional heat wave or similar conditions, we are unlikely to touch the lower end, but we took a wider range, and I believe it was the right decision, although not easy.

Andrew Lazar, Analyst

Great. And then maybe as a follow-up, the midpoint of organic growth guidance for the year would point to about 50 basis points of organic sales growth in the second half. If Q3 ultimately returns to some growth, as I think you hope it does, that would suggest, I guess, not a lot of improvement between Q3 and Q4. Am I thinking about that the right way? Or would you expect some of the sell-out demand to build sequentially as you go through the year? I’m just curious about your thoughts.

Ruben Sewnarain Baldew, CFO

Yes. Thank you, Andrew. Let me take that. So you're right. For the sake of the benefit of the whole group, our range between 0% and minus 2% assumes H2 growth between plus 2.5% and minus 1.5%, and indeed the midpoint is 2.5%. You're correct that, normally speaking, we should see growth in Q3, but also to clarify what Stefan just said, we saw the market in Q2 in volume down by 1%. With Easter, we expect that to be plus 1%, 1.5%, including the Easter effect. We don’t have all the sell-out data yet for all markets, but for the markets where we do have it from mid-June to mid-July, the data shows a market decline of minus 5.5%. To Stefan’s point, we’ve seen that immediately reflected in our performance. We really want to commit to growth in Q3, but it depends on what we see through the course of the quarter. If there's growth in Q3, as you mentioned, your math is correct, and the midpoint assumes a more prudent assumption for Q4. We're also very conscious that we've now lowered the guidance twice, and we will avoid that happening again.

Operator, Operator

Our next question comes from Steve Powers with Deutsche Bank.

Stephen Robert R. Powers, Analyst

Reuben, just to confirm on your Q3 commentary, you understand the marketplace trends into the quarter and the dynamics, but you are lapping the ERP supply disruption from a year ago. I think that was about a 2.5-point negative to last year's sales versus consumption. Just want to clarify that and ensure that this comparison still factors into your outlook.

Ruben Sewnarain Baldew, CFO

Yes, that's correct. We indeed have the ERP lag, which was last year in August and September, resulting in a 2.5% impact. The numbers I just quoted—2.5% on the top end of the range and minus 1.5% on the bottom end—are actually underlying a bit worse. So you're roughly talking about the top end being around 1.5% and the bottom end around minus 2.5%. We'll have that favorable comparator. Although, again, I have to stress that what we saw in July has shown a weak start, especially in the U.K.

Stephen Robert R. Powers, Analyst

Understood. The broader question: can you talk a little bit more about the inflationary pressures you've seen build lately and how those are likely to flow through '25 and into '26? I know it's very early, but just any kind of round numbers in terms of the magnitude of pricing that you would be considering in '26 at this point, assuming the trends hold?

Ruben Sewnarain Baldew, CFO

Yes. Thank you for asking that question. It's an important one. We started the year with an inflation assumption of around 2.5%, which we saw rising to 4% last quarter. This quarter, we're looking at a full-year inflation of around 4.5%. The increase from 4% to 4.5% is attributed to the weather; it's been the hottest summer in Western Europe since 2003. This extreme heat has caused significant crop damage, leading to an impact on our inflation assumption. This is also the main reason why you see the gross margin drop in Q2. Moving forward, as we mentioned last time, we will take price where we can. For example, we will increase prices in the U.K. However, we operate on yearly negotiation cycles mainly in Q1, and we don’t see this as a reason for a price uptick. Much of the recovery from inflation has already come through this year. Regarding next year, our commitment is ensuring we deliver our objectives for 2025 while laying the foundation for 2026. Yes, we will take pricing to recover in '26, but we also have to consider some headwinds, such as bonus releases that will impact next year.

Operator, Operator

Our next question comes from Scott Marks with Jefferies.

Scott Michael Marks, Analyst

The first thing I wanted to ask about: you made comments in the prepared remarks regarding some of the SG&A savings and targeted overhead expense reductions. Could you share any more details about those initiatives and how we should be thinking about them for the remainder of this year and into next year?

Ruben Sewnarain Baldew, CFO

Yes. Thank you. We have indeed seen a reduction in SG&A, driven predominantly by overheads—not by A&P, but by overheads. There is also an impact from some bonus releases, but there are substantial savings due to our focus on cost competitiveness and reducing indirect costs after inflation, compensating for it. This connects to the previous question about pricing and recovery. While we will take pricing, we are also aware that we need to remain cost-competitive and avoid overpricing compared to our competition. Some savings we have driven, including reductions in support functions and synergies in our go-to-market organization, will continue into '26.

Scott Michael Marks, Analyst

Understood. Next question: there was commentary about 10% of sales from innovation and renovation in 2024, with expectations for that to nearly double this year. Could you share your thoughts on the innovation pipeline and how you see that shaping up for the rest of this year and next year?

Stefan Descheemaeker, CEO

To your point, this year is going to be higher than prior years when combining renovation and innovation—both are equally important. Renovation is fundamental for ensuring we maintain and increase our superiority against main competitors, like private label. We have a very aggressive program to ensure we excel in our must-win battles. In terms of innovation, we are now at around 6.5%, which is a significant improvement. This increase marks a shift from previous years when innovation significantly declined as price became the only priority for retailers and consumers. We've implemented a series of initiatives in terms of chicken, fish, and snacks, with a focus on entering the snacking space, notably in Italy with products like fish strips. We are launching protein bowls in the next few weeks across the U.K., Netherlands, and Belgium, spurred by strong excitement from local teams. There is a significant pipeline of innovation as we become more adept at replicating successful products across different markets. It took us some time, but now we are focusing on must-win battles, combined with growth platforms in new countries, and this is making a difference.

Operator, Operator

Our next question comes from John Baumgartner with Mizuho.

John Joseph Baumgartner, Analyst

First off, Ruben, could you discuss some of the newer initiatives, such as the supply chain optimization program and the facility closure in Sweden? Can you provide details on this plan and its structural benefits?

Ruben Sewnarain Baldew, CFO

Thank you for that question. We announced a closure in a smaller factory in the Nordics. We’ve discussed this in one-on-ones and during other discussions regarding our overall network. We see an opportunity to optimize on several axes, including procurement, where we have made great strides and can do more in the coming years. The second area is network optimization, where we need to assess the total complexity of our network and the number of sites, as well as what we can do to optimize within those sites. After a year in this role, I can confirm that together with Stefan and our Chief Supply Chain Officer, we’re initiating a program to drive more cost competitiveness from these initiatives. We’ll share more details in the second half of the year.

John Joseph Baumgartner, Analyst

Could you walk through the future food lab you established? What categories are you focusing on, and do you plan on taking ownership interest in any of the partners, or is it more of a commercialization relationship? Any additional details would be helpful.

Stefan Descheemaeker, CEO

It's certainly interesting, and while it's early in the game, we’re learning how to partner more effectively. We were predominantly focused on ourselves for many years, but we are now learning how to collaborate with start-ups. We have some exciting developments in food service expected over the coming months, with a first example that remains confidential for now. However, we are learning a lot through these partnerships. We're going to begin with some countries where food service has prominence for us, such as Southeastern Europe, Switzerland, the Nordics, Spain, and Portugal. We are exploring partnerships and developing pilot plants, which will also benefit our innovation speed and approach. The attention from potential partners has been quite promising, and we're in the process of selecting those with whom we want to collaborate.

Operator, Operator

Our next question comes from John Tanwanteng with CJS Securities.

Jonathan E. Tanwanteng, Analyst

I was wondering if you could talk about the portfolio regarding how you might deal with hotter average weather structurally versus individual outliers like those seen in Q2. We’ve noticed more heat waves in recent years, and I’m curious if that’s something you’re preparing for in your portfolio, such as moving ice cream out of the Adriatic or adjusting your supply chain?

Stefan Descheemaeker, CEO

Jon, it's not just about adapting to this year's challenges; it's about addressing ongoing conditions. Generally, frozen food sees lower demand in summer than in spring or winter, so the combination of this lower demand and the added impact of heat waves is something we are keen to tackle. Our portfolio is much more diverse now than in the past. For example, we have chicken now, which performs well at barbecues, and marinated chicken has been a focus. We also have red meat, and we can capitalize on natural fish, which is well-developed in countries like Italy, but not sufficiently in the U.K. Consuming coated, marinated fish is not appealing at 30 degrees, but natural fish is preferable. Potatoes alongside barbecue offerings are also a strong area of development. We’re beginning to explore ice cream in new regions like Austria, and we are assessing our Asiatic strategies and impacts to help enhance sales. We're engaging with all our markets to understand insights and starting conversations with retailers to ensure we remain agile and can meet changing consumer needs. Frozen food can certainly perform well in hot weather, especially during heat waves.

Jonathan E. Tanwanteng, Analyst

That's very helpful, Stefan. Just any update on the capital allocation priorities? With the stock indicating down, you've done repurchases, or is there a preference for debt repayment here? Any thoughts?

Ruben Sewnarain Baldew, CFO

Yes. Thank you for that. We’ve executed significant share buybacks in H1, amounting to less than €20 million compared to the previous year. We just announced the dividend, and overall, we've been active in capital allocation through buybacks and dividends while maintaining our flexibility. Historically, we've shown an ability to execute M&A and acquire good companies. However, we currently don't see a significant M&A pipeline. Our approach to buybacks will also depend on our overall flexibility.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Stefan Descheemaeker for any closing remarks.

Stefan Descheemaeker, CEO

Thank you, operator. While I'm disappointed by our first-half performance, I remain nonetheless confident in the future that lies ahead of us. We have a great portfolio, a working strategy, and a talented team well-equipped to deliver our plans. We have stabilized our market share and have compelling plans to increase our competitiveness in the latter half of the year. We are positioned to deliver accelerating growth when the weather disruption subsides. I look forward to demonstrating this with results when we update you again next quarter. Thank you for your time and interest in Nomad Foods.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.