Nomad Foods Limited (NYSE:NOMD) Q4 2023 Earnings Call Transcript
Nomad Foods Limited (NYSE:NOMD) Q4 2023 Earnings Call Transcript February 29, 2024
Nomad Foods Limited misses on earnings expectations. Reported EPS is $0.32 EPS, expectations were $0.34. Nomad Foods Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Nomad Foods Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Amit Sharma, Head of Investor Relations for Nomad Foods. Thank you. You may begin.
Amit Sharma: Hello, and welcome to Nomad Foods' fourth quarter 2023 earnings call. I'm Amit Sharma, Head of Investor Relations. And I'm joined on the call today by Stefan Descheemaeker, our CEO, and Samy Zekhout, our CFO. By now, everyone should have access to the earnings release for the period ending December 31, 2023 that was published at approximately 6:45 a.m. Eastern Time. The press release and investor presentation are available on Nomad Foods' website at www.nomadfoods.com. This call is being webcast and a replay will be available on the company's website. This conference call will include 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 Relations 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 and should be read together with IFRS results. Users can find the IFRS to non-IFRS reconciliation 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 2022 and 2023. All adjusted figures have been adjusted for exceptional items, acquisition-related costs, share-based compensation and related expenses, as well as non-cash FX gains or losses. Unless otherwise noted, comments from hereon will refer to these adjusted numbers. With that, I will hand you over to Stefan.
Stefan Descheemaeker: Thank you, Amit. I would like to begin by offering a few highlights from our solid fourth quarter and full year results. I would then offer a few comments on our accelerated growth outlook and the health of the frozen categories, before handing it over to Samy for detailed review of our quarterly financial results and our initial 2024 guidance. Nomad Foods delivered another quarter of solid top- and bottom-line performance. Fourth quarter organic sales increased by 1.9%, our sixth consecutive quarter of positive organic growth, as our volume trends improved sequentially in each month of the quarter. Quarterly and full year gross margins improved substantially, and we continue to generate strong cash flows, enabling us to initiate a quarterly cash dividend.
I'm proud of our team to enable us to continue our uninterrupted track record of top-tier financial performance and finish 2023 with record high annual sales and EBITDA. I'm even more excited about our building momentum as the key drivers of our long-term profitable growth begin to accelerate. As the impact of challenging macros recedes and we return to our typical operating cadence, we expect even stronger top- and bottom-line growth in 2024 and for many years to come. Specifically, we expect 2024 organic sales to increase by 3% to 4%, including positive volume and share. Adjusted EBITDA is expected to increase by 4% to 6% to €556 million to €567 million, and adjusted EPS is expected to be in the range of €1.75 to €1.80, which implies 9% to 12% growth.
We expect another year of strong cash flow generation with cash flow converging the 90% to 95% range. With that, let me provide a few highlights on our fourth quarter performance. Fourth quarter net sales increased by 1.4% as organic growth of 1.9% was modestly offset by unfavorable ForEx. Our volume/mix declines improved sequentially from the last quarter and moderated to the lowest levels since the third quarter of 2022. Fourth quarter gross margins improved by more than 160 basis points due to disciplined pricing, optimized promotions and continued focus on productivity. Our full year gross margin also came in better than expected even as we absorbed substantial COGS inflation, enabling us to continue to increase A&P investments behind our brands.
Adjusted EBITDA of €117 million and adjusted EPS of €0.32 per share both came in ahead of expectations. We generated nearly €174 million of free cash flow during the quarter and €300 million for the full year, one of our highest, with cash conversion ratio of 109%, well above our targeted range. Our long track record of consistently strong cash flow is at the foundation of our effective capital allocation to enhance shareholder value. To that effect, we initiated a quarterly cash dividend of €0.15 per share, a notable milestone for Nomad Foods and a testament to the quality and resilience of our business and our confidence in our ability to generate significant cash flows and a sustainable long-term growth. At the retail sales level, as reported by NielsenIQ, our value sales for the 12-weeks period ending December 31st increased by nearly 2%, including sequentially improving volume and market share trends.
Our recent year-over-year volume growth and share trends have already turned positive in many key markets, giving us greater confidence in delivering positive volume growth in 2024. The frozen food segment in Europe remains healthy. Underlying consumption in our core categories in key markets continued to grow with improving volume trends over the last few periods. Even with the unprecedented level of inflation-driven pricing in the last two years, frozen food remains highly relevant for most consumers. Frozen food enjoy high household penetration in our key markets in the mid- to high-80% range. And even more importantly, household penetration has remained largely stable even with the extraordinary pricing in the last two years. And it's not that difficult to see why.
Frozen food categories align perfectly with a number of secular consumer trends, including convenience, taste, nutrition, sustainability, and remain highly affordable. For instance, using our value packs and promotion, a family of five can enjoy a meal of fish fingers, waffles, and peas for around $10 in many markets, highlighting the tremendous value proposition of our product offering, a key consideration for consumers in the current environment. We are positioning ourselves to capture a greater share of this growth by increasing our focus in investments behind our biggest and most profitable opportunities. Our total advertising and promotion spending increased by nearly 30% in the fourth quarter and a disproportionately large share of these investments were made against our top 20 Must Win Battles.
These high-priority opportunities account for nearly half of our retail sales and even higher bigger share of our gross profit. Our recent trends in many of these opportunities are very encouraging and give me greater confidence in our revised growth plans as we look to 2024. The significant ramp up in our fourth quarter A&P investment will continue with 2024. Specifically, we launched our master brand campaign to drive greater affinity to our brands in the first quarter to build an emotional connection to our brands and to remind consumers of the most relevant and loved aspects of their relationship with our iconic brands. Our messaging will also focus on highlighting the stronger health claims of our brands to emphasize the naturalness and goodness of our products, given the increasing debate around obesity and ultra processed foods.
Along with driving the core, higher A&P will also help reignite our innovation engine. Historically, new products have accounted for nearly 5% of our annual sales and it fell below that level in 2023. We committed to regaining our innovation momentum and have an exciting pipeline of new products to be launched through the rest of the year. I mentioned two of these innovations last week, Iglo branded Mexican coated fish fillet in Germany, and King's branded multi-layered premium ice cream for the home occasion [in Adriatic] (ph). We have planned a full spectrum of marketing support and retail activation behind both these innovations, along with our other new products in our pipeline. As expected, the majority of these, the difficult but necessary, pricing discussions with a few of our retail partners, which I mentioned in our last call, were resolved successfully.
Retail environment remains dynamic, but we have successfully completed pricing conversations in majority of our markets and we remain on track to complete the rest over the next few months. At the same time, we are optimizing our promotion spending and reallocating resources where we see the largest potential impact. As I mentioned in my comments at the CAGNY conference last week, we are investing in our growth capabilities, in our data, in our analytics to position us for accelerated growth in 2024 and beyond. These investments are meaningfully upgrading our retail execution. We have better insights and a wider, more comprehensive revenue growth management toolkit to maximize our profitable volumes. These strategies are working, and I strongly believe that they position us to capture a greater share of the frozen food growth in our markets.
Our increasing investments to drive accelerated growth is underpinned by our productivity agenda, particularly across our supply chain. The resilience and nimbleness of our supply chain during a period of unprecedented volatility is unmatched across the frozen food aisle. But I'm even more proud of the fact that we are accomplishing it while increasing our focus on driving greater efficiencies across our network. We are optimizing our manufacturing and logistic network, reducing complexities and establishing strategic relationship with key suppliers to reduce supply risk and generate procurement savings. Our supply chain delivered strong cost savings and higher cash flows in 2023, even as our service levels improved to over 98%. We expect similar trajectory in 2024.
While on the topic of cash flow, as I mentioned earlier, we generated €300 million of free cash in 2023, our second highest annual cash flow ever. Strong cash flows are a foundation of our value-enhancing capital allocation strategies. We bought back more than 6% of our shares outstanding in 2023, initiated the quarterly cash dividend, and adopted a new $500 million share repurchase program, highlighting the strength and flexibility of our balance sheet as we continue to execute a balanced capital deployment strategy intended to maximize shareholder returns. In conclusion, we delivered record high sales and EBITDA in 2023, with improving margins and strong cash flows. Our quarterly volume trends improved sequentially, positioning us to deliver positive volume and share growth in 2024.
We are increasing our growth investments to unlock the full potential of our attractive frozen categories and iconic brands, positioning us to deliver sustained attractive growth in 2024 and for many more years to come. I'm highly confident of delivering our revised long-term targets of 3% to 4% organic revenue growth, 5% to 7% adjusted EBITDA growth, 7% to 9% adjusted EPS growth, and 90% to 95% cash conversion, which I believe will deliver superior returns for our shareholders. With that, let me hand the call over to Samy to review our fourth quarter results and our 2024 guidance in greater details. Samy?
Samy Zekhout: Thank you, Stefan, and good morning, everyone. I am pleased to present another quarter of solid performance at Nomad Foods. For the fourth quarter, reported net revenues increased by 1.4% to €761 million. Organic sales increased by 1.9% while unfavorable FX impacted quarterly sales by 0.5%. Our organic sales growth was driven primarily by pricing, as we continue to benefit from pricing to cover inflation. Our volume/mix was down 5.6% during the quarter, a marked improvement from the third quarter and our lowest volume/mix decline since quarter three 2022. Fourth quarter gross profit increased by 7.9% to €208 million, while gross margin increased by over 160 basis points from the year-ago quarter to 27.3% due to better procurement and cost discipline, improving volume trends, and contribution from pricing and favorable RGM execution.
Adjusted EBITDA increased by 3.2% to €117 million in the quarter, as higher gross profit was partially offset by higher operating expenses. Our adjusted operating expense increased by 14% from the year-ago quarter due to the step-up A&P investment as well as higher indirect expenses. Adjusted net income declined by 9.4% due to higher interest expense from our last year's refinancing, while adjusted earnings per share of €0.32 declined by only €0.01 from the year-ago quarter, as impact from higher interest costs was partially offset by share buybacks. At current euro/dollar spot rate, our quarter four adjusted EPS was $0.35 per share. For the full year 2023, net sales increased by 3.6% to €3.04 billion, including 4.9% organic sales growth.
Gross margin increased by nearly 50 basis points to 28.2%, while adjusted EBITDA increased by 2% to €535 million. Full year adjusted EPS of €1.61, or $1.74, declined due to higher interest expense from the refinancing of our debt. During 2023, we repurchased more than 11 million shares of our common stock for nearly $185 million under our previous buyback authorization. As Stefan mentioned, we now have a new $500 million share repurchase authorization. We delivered yet another year of strong cash flow in 2023, with full year adjusted free cash flow of €300 million, driven by strong working capital improvement, higher EBITDA, and favorable timing on certain receivables. Full year and fourth quarter cash flows came in well ahead of our expectation as we continue to be highly focused on effective inventory management, cash collection to improve our working capital performance.
Specifically, full year working capital decreased by nearly €155 million, more than offsetting a nearly €40 million increase in cash interest. 2023 CapEx of €82 million increased modestly from last year as we remain highly disciplined on supporting long-term strategic investment. Given the strong Q4 cash performance, full year cash conversion came in at 109%, well ahead of our targeted 90% to 95%. Maintaining a high level of cash conversion is paramount to ensuring the strength of our balance sheet and to continue to execute our effective capital allocation to deliver enhanced shareholder returns. We paid our first quarterly cash dividend of €0.15 per share earlier this week, reinforcing our ability to generate strong, consistent cash flows and in our attractive long-term growth.
Turning to our guidance for 2024, we are pleased with our building top-line momentum as we enter 2024. We expect to deliver net revenue growth of 3% to 4%, adjusted EBITDA growth of 4% to 6%, and adjusted EPS of €1.75 to €1.80 per share. We continue to expect strong cash flow, with cash conversion in a range of 90% to 95% range. Our 3% to 4% organic growth in 2024 is expected to be relatively balanced between price and volume/mix, including positive volume growth for the full year. Volume trends are already beginning to inflect to positive growth in many of our key markets. We expect continued sequential improvements in the first half and consolidated volume to turn positive in the second half. We expect our gross margin trends to continue to improve in 2024 as we benefit from improving volumes, greater focus on productivity initiative, and favorable costs.
Digging into inflation more specifically, we expect relatively flat inflation for the full year, with lower fish and protein costs offset by headwinds in some of other cost buckets, including vegetables. As Stefan mentioned, we remain committed to investing behind our brands. Overall A&P spending increased by nearly 13% in 2023 and we have planned to an even greater increase in 2024, particularly in the first half as we drive strong volume and share performance in 2024. At US dollar/euro exchange rates as of February 17, our adjusted EPS guidance translates into $1.89 to $1.95 earnings per share and implies 9% to 12% year-over-year growth as we lapped impact from higher interest costs in 2023 and continue to benefit from lower share count. In terms of quarterly cadence, our top-line is likely to be largely in line with historical pattern.
However, the second half will account for a disproportionately higher share of our profit and earnings given the timing of cost flow-through due to the balance sheet [re-measurement] (ph) and the timing of our A&P investments, particularly in the first quarter. Absent of any strategic acquisition and given our strong cash flow, we remain committed to returning capital to shareholders through the recently instituted dividend and opportunistic share repurchases. We have a proven track record of top-tier financial results and are even more excited by the opportunities we have ahead of us. We are confident of delivering attractive growth at or near the top-tier of our food peers in 2024 and for many years to come. I will now turn the call over to the operator for your questions.
Thank you.
Operator: Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of John Baumgartner with Mizuho Securities. Please proceed with your question.
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