Nomad Foods Limited (NYSE:NOMD) Q3 2023 Earnings Call Transcript
Nomad Foods Limited (NYSE:NOMD) Q3 2023 Earnings Call Transcript November 9, 2023
Nomad Foods Limited beats earnings expectations. Reported EPS is $0.43, expectations were $0.41.
Operator: Greeting. Welcome to the Nomad Foods Third 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] Please note this conference is being recorded. I will now turn the conference over to your host, Anthony Bucalo, Head of Investor Relations. You may begin.
Anthony Bucalo: Hello, and welcome to the Nomad Foods third quarter 2023 earnings call. I am Anthony Bucalo, Head of Investor Relations, and I am joined on the call by Stefan Descheemaeker, our CEO; and Samy Zekhout, our CFO. Before we begin, I would like to draw your attention to the disclaimer on Slide 2 of our presentation. This conference call may 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 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 2022 and 2023. All adjusted figures have been adjusted for exceptional items, acquisition-related costs, share-based payments and related expenses as well as noncash FX gains or losses. Unless otherwise noted, comments from here on will refer to those adjusted numbers. With that, I will hand you over to Stefan.
Stefan Descheemaeker: Thank you, Tony, and thank you for joining us on the call today. Nomad posted a solid top and bottom line performance in the third quarter, following our excellent results from the first half of the year. Sales grew organically by 1.6%, our fifth consecutive quarter of organic sales expansion. Additionally, we generated strong adjusted free cash flow, successfully refinanced USD 700 million of our debt to lower interest charges and bought back €66 million for own shares at attractive prices. We have borrowed back more than 4% of our shares in the first nine months of the year. Our teams accomplished this while deploying new strategic commercial investments to drive growth and bring us back to positive volumes.
Boosted by our share repurchases, we are again raising our annual adjusted EPS guidance. We're closely watching the development of weight loss drugs globally and the possible impact on food industry volumes. The long-term impact of these treatments is still under examination. However, in any scenario, we believe Nomad is in excellent position due to our unique portfolio of products, which are on target for consumers looking to eat healthy. Nomad is a highly resilient company, and over the past several years, we have effectively managed through several crisis. Through those challenges, we have protected our cost and margin structures to ensure that we maintain the right level of investment in our business. In reaction to historic inflation last year, we adjusted our price in 2022 and 2023, knowing that we would lose volumes.
We've lost volumes, but this was a necessary decision to safeguard the integrity and strength of our business. Now that we have stabilized our business, returning to volume growth is our most important strategic objective. We made progress in the third quarter. We also made some difficult but necessary decisions with a few of our retail partners across several markets. This resulted in some volume losses that were outside of our original plan. Absent these dislocations, our volume progress would have been consistent with our sequential volume improvement plan. The majority of these discussions have been addressed and we expect that these losses will reverse in the fourth quarter and in the first quarter of next year, bringing us back on track.
Consistent with our objective to return to share and volume growth, we activated our A&P investment plan, raising our A&P spend in September to 5% of sales from 3.5% of sales last year. Utilizing these resources, we launched new advertising across Europe, and we have strengthened our media profile, leveraging the iconic Captain in our advertising for Nomad's leading fish brands across our key markets. Additionally, we've stepped up our in-store execution with new and exciting promotional activity across Europe, placing our leading brands directly in shoppers' line of sight. This heightened visibility is compounding the effectiveness of our advertising and driving demand. The initial result of our dynamic A&P program are highly promising. We expect our volume and share trends to improve in the fourth quarter, ultimately returning to growth in 2024 and beyond.
While our A&P program will be crucial to driving growth, we also remain laser focused on our other strategic plans. We are harvesting our supply chain cost savings to redeploy in marketing. Additionally, we continue to expand our revenue growth management capabilities. We have made significant progress on both initiatives and this is helping drive pull from consumers leading to volume and market share recovery. Looking ahead to the end of the year and next year, we are excited about our growth prospects. We expect to see an improvement in performance in Q4, which should carry well into 2024 and beyond. With that, I'd like to recap our third quarter key financial metrics, beginning with revenues. Our reported sales grew 1% and grew 1.6% on an organic basis.
This result was ahead of our original expectations. Gross margin was 28.4% with cost pressure offset by our pricing initiatives and cost control programs. Adjusted EBITDA was €140 million, while adjusted EPS came in at €0.43 per share, both ahead of market expectations. At current dollar spot rates, our Q3 adjusted EPS was USD 0.45 per share. In Q3, sales grew by 1.6% on an organic basis with strong pricing offsetting volume and mix declines consistent with our expectations. For the first nine months of the year, we grew organic sales 6%, and we remain on track to deliver our guidance of mid-single-digit growth for the full year. Our supply chain delivered excellent results, and we remain in a positive cycle of customer service and cost management.
This efficiency is helping support our new A&P investments. Our service levels rose to 98.6%, up 160 basis points. The hard work we've done on supply chain transformation is paying dividends at a crucial time. As volume demand picks up and commodity prices stabilize, our efficient supply chain execution will be critical in filling new customer and consumer needs. We have benefited throughout the year from a strategy of selectively assessing the risk profile of each individual raw material category we buy, making or buying more efficient. Looking ahead, we have begun the process of covering for next year, and we have good visibility on key commodity trends heading into 2024. Our value share was down about 1% in the quarter, consistent with our expectations.
However, our new A&P investments were rolled out towards the end of Q3. We expect an improving share trend moving forward. With our business performance on track with our expectations and our share repurchase, we are raising our adjusted 2023 EPS guidance to €1.57 to €1.60 per share from our previous range of €1.54 to €1.57 per share. This represents an adjusted EPS range of $1.66 to $1.69 per share at current spot rates. This guidance excludes the impact of any potential future capital allocation. While on the topic of capital allocation, we are pleased to share significant developments in our capital allocation strategy. Accretive capital allocation is crucial to our long-term goals at Nomad. We deployed €66 million to repurchase our shares in Q3.
In the first nine months of the year, we have invested a total of €118 million, reducing our share count by more than 7.6 million. As you may recall, in August of 2021, we announced a $500 million share repurchase program, which was successfully utilized and is set to expire at the end of this year. Proceeding with our share repurchase efforts, our Board of Directors has approved a new $500 million share repurchase program, which will expire by the end of 2026. In addition to our share repurchase program and subject to approval by our Board of Directors, we intend to initiate in early 2024, a regular quarterly dividend which we expect will be a key means of delivering reliable value to shareholders going forward. We will share further details early in 2024.
This enhanced framework for shareholder return, bolstered by our strong free cash flow profile, underscores our commitment to maximizing shareholder returns. Since 2022, it has been our plan to raise our media and promotion spending in the second half of this year to drive volume and share momentum. This quarter, we launched many new initiatives to reignite growth, such as our back-to-school Birds Eye campaign in U.K., our television sponsorship with Croustibat in France and our Captain Adventures TV and digital activation in Italy. We launched new fish shapes in Austria, Netherlands and Belgium, reincreasing chicken and cheese nuggets in Germany, in a wave of modern meal solutions in vegetables across Europe. We debuted new advertising with the Captain across our markets, connecting even more with our consumers and bringing attention to our delicious fish products.
Fish makes up just under 40% of our sales, and we are the leader across most of our market. To win at the point of sale, we've stepped up our promotion in supermarket aisles, bringing consumer attention to high-quality branded products. With the new promotion plans in place, the price gaps with our private label competitors have stabilized. Frozen food is a resilient category, and there are plenty of green shoots across Europe. Frozen is back in volume and value growth. September trailing 12-week data shows 1.5% volume growth in the category. And there is growth in 12 out of the 16 markets tracked. Additionally, the category is performing ahead of total food in volume terms across several key markets. Consumer behavior is showing signs of improvement as well.
In the U.K., for example, we see consumers putting more frozen food products on their plates, for instance, adding peas to fish fingers. For Nomad, the quarter is still in early stages, but we are seeing improving value share and volume trends in some of our biggest markets, U.K. and Italy, especially. There were many great commercial developments at Nomad during the quarter. In the U.K., we launched a back-to-school master brand campaign with Birds Eye to capture the attention of family settling back into the school year after summer breaks. We reached more than 90% of households with our Birds Eye brand advertising during the period. In the Adriatic region, we posted record ice cream sales driven by our excellent portfolio and supported by good weather, high service level and an acceleration in our point of sales program.
We benefited from our investment in supply chain, marketing and innovation. We also launched fish fingers in the region, and the initial results are highly promising. Following the sixth anniversary of Findus in Italy, we are now celebrating the 25th birthday of Carletto, a brand icon chameleon for Sofficini, our beloved pancake product. We celebrated with the introduction of a short movie about his life at a prestigious film festival for kids, creating significant media coverage from national newspapers and TV. Finally, Green Cuisine remains our plant-based pillar for iglo and keeps growing value share. In Germany, one of our core markets for the brand, our value share was up 7% in Q3. This was driven by focused activation behind the new campaign as well as product innovation.
We've gotten many questions from investors and analysts about how the retail trade looks with our new promotion plan now in full swing. We've got some great examples here of in-store execution in four of our top markets. In the U.K., we are combining our best-selling and most loved products in high-visibility ice freezer to give consumers combined meal ideas. This provides a great takeaway experience at an affordable price. We've lined up our fish fingers with Green Cuisine, Goodfella's and Aunt Bessie's. We also have our famous potato waffles in the mix. In France and Spain, we've ramped up Goodfella's distribution in recent months. In France, we've got a good example here of how we are catching the consumers' attention for what is a new brand in the country.
Notice the high visibility of the display, giving details on the product for new consumers first learning the benefits of this great brand. Since acquiring our Adriatic business, the addition of ice cream to our portfolio has been a great success. In Croatia, we have an example of our King ice cream promotions, especially our highly profitable single-serve versions. In Germany, we are on offense with our fish fingers and vegetables. In this aisle freezer, we have got our key spinach products on promotion next to our iglo fish fingers, both Must Win Battles in that market. We have many more examples across our business, and I'm happy to report that the reaction from these programs have been strong so far. With this in-store execution driving sales along with our new media, I'm highly optimistic about the outlook for the rest of the year and beyond.
With that, I will now hand the call over to Samy to review our financial results and guidance in more detail. Samy?
Samy Zekhout: Thank you, Stefan, and thank you all for your participation on the call today. Turning to Slide 9. I will provide more detail on our key third quarter operating metrics, beginning with reported revenues, which increased roughly 1% to €764 million. Sales grew organically 1.6%. Third quarter revenues were negatively impacted by 1.1% of unfavorable FX. We delivered gross margin of 28.4% supported by pricing and cost control. This result was ahead of our plan. As previously discussed, Q3 was the most challenging quarter for gross margins for the year due to the comparison from the third quarter of 2022. Looking out to Q4, we remain on track to deliver stable gross margin for the year. This will be supported by an improving volume trend, pricing, strong cost discipline and robust RGM execution.
Moving down to the rest of the P&L. Our gross profit came at €217 million in the third quarter. Cost of goods sold increased to €547 million, an increase of 2%, up €8 million versus last year. Adjusted operating expense of €100 million was up 11% year-over-year, reflecting stepped-up A&P investment. As a result, adjusted EBITDA was €140 million with adjusted EBITDA margin at 18.3%. Finally, we posted adjusted EPS of €0.43 per share in Q3. This translates to USD 0.45 per share at current spot rates. Turning to cash flow on Slide 10. We delivered strong cash flow in the first nine months of the year, driven primarily by working capital improvements and EBITDA growth. Additionally, we've been highly focused on effective inventory management and cash collection helping our working capital performance.
We are well on track for annual adjusted cash flow guidance target of €250 million at a conversion rate of 90% to 95%. Maintaining this high level of conversion is paramount as we consider our capital allocation strategies for the year and beyond. In the first nine months, we generated €125 million of adjusted free cash flow for a conversion ratio of 56%, our highest first nine-month conversion rate since 2020. Working capital decreased €151 million to €68 million, more than offsetting a €44 million increase in cash interest driven by our refinancing and repricing activities. CapEx of €59 million was up €4 million versus last year as we remain highly disciplined on supporting long-term strategic investments within our business.
Changes in cash tax increased €9 million to €53 million, while cash interest was up €44 million to €130 million, driven by last year's refinancing. With that, let's turn to Slide 11 to review our 2023 guidance, which we are updating today. This guidance is based on foreign exchange rates as of November 1, 2023. First, we are again maintaining our organic revenue projection of mid-single-digit growth for 2023 with our pricing more than offsetting volume declines. As our current A&P investment takes hold in the market and we approach 2024, our expectation is that we will develop a more balanced mix of price and volume. We expect to see the beginning of volume recovery in Q4 rolling into 2024. We are keeping our adjusted free cash flow guidance of approximately €250 million.
We expect our cash conversion ratio to be in the range of 90% to 95%, consistent with historical averages. As Stefan spoke to earlier in the presentation, with our underlying business performance in line with our expectations, and our share repurchase across the first nine months of the year, we are raising our 2023 adjusted EPS guidance last updated in August. We now expect adjusted EPS in the range of €1.57 to €1.60 per share or $1.56 to $1.59 per share at current spot rates. This excludes any additional impact of potential future capital allocation.
A - Stefan Descheemaeker: I will now turn the session over to Q&A. Operator, back to you.
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