Nomad Foods Limited (NOMD) Q1 2019 Earnings Call Transcript

Nomad Foods Limited (NYSE: NOMD)Q1 2019 Earnings CallMay. 09, 2019, 8:30 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 Taposh Bari. Please go ahead.

Taposh Bari -- Head of Investor Relations

Thanks Amanda. Thank you all for joining us to review our first quarter 2019 earnings results. With me on the call today are our 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 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 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 IFRS16, which is the new standard for leases. As such certain financial measures should not be directly comparable or maybe 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 material.

With that, I'll hand the call over to Stefan.

Stefan Descheemaeker -- Chief Executive Officer

Thank you, Taposh, and thank you all for joining us on the call today. Earlier today, we reported first quarter 2019 Earnings Result and reiterated our full-year adjusted EBITDA guidance. We are pleased to have begun 2019 with a strong start and are on pace to deliver against our long-term growth algorithm for a third consecutive year.

Highlights for the first quarter include organic revenue growth of 0.9% representing a ninth consecutive quarter of growth, despite the shift of Easter sale into Q2. Adjusted gross margins of 30.9% with 60 basis points of growth in the base business, offset by 150 basis points of acquisition mix. Adjusted EBITDA of EUR 122 million which grew 18% year-on-year and adjusted EPS of EUR 0.40 per share, representing growth of 14%.

First-quarter performance was underpinned by many of the same drivers in the past, lots of investment in our brands and solid growth from local categories. During the first quarter we achieved strong revenue growth, navigated the higher fixed 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 in the UK, in Austria which each grew 4% and the Netherlands, which posted growth of 11%. First quarter organic growth was led by price, which contributed to 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 prices in response to higher raw material costs, which are experiencing here mainly in fish. So far we have mitigated 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 peas decline 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 the core global skews were complemented by several local success stories. These include frozen in UK ready meals in Germany (inaudible) 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 first quarter demonstrating the ability of our regions to execute both -- led and country specific initiatives so I think to innovation with went on strategy in Q1 with the launch of green cuisine a range of plant protein products in the UK.

This launch at yet another dimension which growing new get portfolio, which has gone through a significant transformation over the past two years, which we had an impressive turnaround in the base business and the integration of two complimentary acquisition. Green Cuisine mark (ph) saw second plant protein launch in the past year and follows introduction of peas (ph) also brand of planned protein products loans last year in the Nordics.

(inaudible) performed well in first few months in the market driving 30% growth in those (inaudible) its has also attracted new users in the category with very food positive feedback from both consumers and retailers both peas in Green Cuisine are pea based innovations and bid on our brands strong heritage and expertise in these 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 the multi-channel of the (inaudible) campaign this summer. finally we strengthened our balance sheet to support future growth and it includes M&A as the packaged food space is going through a -- of significant change in this location this has in turn (inaudible) number of unique opportunities for us. We've been looking for wide for in 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 all shareholders. Our recently enhanced balance sheet provides us with the capacity and flexibility to drive value through accretive acquisitions and the we look forward to providing details where we have more news to share.

Before turning the call over to Samy, 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 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 we provide retailers and shoppers with the complementary dimension to our existing portfolio of coated fish products. This innovation leverages key food strength such as Artisan (inaudible) inclusions while still delivering the great based convenience (inaudible) are known for.

We will be supporting Artisan with exciting new media campaign featuring (inaudible) on land exploring our local Artisan markets. 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 relaunch which were recently introduced to the market in April. We applied a growth model across all aspects of the brands by changing the packaging design, upgrading product quality and launching a new multi-channel campaign celebrating the heritage of the strong brands.

The new campaign titled made with respect to introduce a new lead character the Godmother (inaudible) matriarch of the family, and this is the ultimate judge of the Goodfella's product quality. This reboot marks an exciting new era for the Goodfella's Pizza brand and we'll have support of our longer-term strategy of growing sales with a stronger gross margin profile.

To conclude, the year is off to a strong start. First quarter marks our ninth consecutive quarter of organic revenue growth and based on performance during the month of for April, we feel very good about the ability to build on the momentum into Q2. We are firmly on track to execute our growth plans for the year, and are making good progress on the recently acquired businesses and are eager to continue to add more complementary assets to (inaudible).

With that I will hand the call over to Samy to discuss the financials and guidance in more detail. Samy?

Samy Zekhout -- Chief Financial Officer

Thank you, Stephane and thank you, will your participation on the call today. Turning to slide 6, I will provide more detail on our key first quarter operating metrics beginning with revenues, which increased 15% to EUR 618 million driven by 0.9% organic revenue growth and 13.8 percentage points from the acquisition of Goodfella's.

Gross margin was 30.9% declining 90 basis points year-on-year base business, gross margin expanded 60 basis points, driven by volume mix and price and promotion, which more than offset COGS inflation acquisition mix negatively impacted gross margin by 150 basis points as we had anticipated, first quarter business growth, margin was affected by two timing factors unique to Q1 versus the rest of the year. First, we aligned the full basis of the quality increases , but only a possible impact from raw material inflation in the first quarter.

This phenomenon is beginning in Q2 second, the shift of Easter and relative promotion moved from Q1 to Q2 given the timing of the holiday versus the prior year. Moving down to the rest of the P&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 first quarter adjusted operating expenses were approximately EUR 5 million lower than we originally expected due to the timing of some media activities moving into subsequent quarters.

Within quality expenses A&P increased 6%, and indirect expenses increased 11%, adjusted EBITDA was EUR 122 million and as expected included a EUR 4 million benefit related to IFRS 16 the new standard on lease accounting effective this year excluding these benefit adjusted EBITDA grew a healthy 14% versus the prior year.

Adjusted EPS was EUR 0.40 for the quarter, an increase of 14% reflecting underlying EBITDA growth, higher finance cost and a lower effective tax rate and a higher share count as the results of the equity offering, IFRS 16 did not have a material impact on EPS during the first quarter.

Turning to cash flow on slide 7, we generated EUR 93 million of adjusted free cash flow during the quarter, an increase versus the EUR 82 million 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 priority known free cash flow as both an absolute metric and relative to adjusted profit. Factors contributing to first quarter adjusted free cash flow included adjusted EBITDA of EUR 122 million, a working capital outflow of EUR 11 million. CapEx of EUR 6 million, cash taxes were EUR 4 million, lower than the EUR 11 million adjusted P&L tax due to the timing of tax payment. And finally, cash interest and other was EUR 8 million, also lower than P&L finance cost due primarily to the non-cash impact of IFRS 16 on the P&L.

We are pleased with the amount of cash we generated in Q1. As, we also raised EUR 343 million of equity transaction that closed on March, 22nd. Accordingly, we ended the first quarter with EUR 753 million of cash on hand and net leverage in the high twos. We believe this level of leverage provides us with the necessary result 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 our adjusted EBITDA guidance of approximately EUR 420 million to EUR 430 million which assumes organic revenue growth at the low-single digit percentage rate.

Given the recent equity offering which resulted in a Company raisings EUR 343 million in capital and issuing EUR 20 million new shares, we now expect adjusted EPS to be in the range of EUR 1.18 to EUR 1.22 per share. This assumes a weighted average share count of 192 million for the year, this compares to our prior guidance of EUR 1.28 to EUR 1.32 which assumed 176 million 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 three 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 Goodfella's and Aunt Bessie's will significant -- is significantly less than we expensed in Q1 as we begin to anniversary the Goodfella's acquisition which could closed that during Q2 of last year. As a reminder Aunt Bessie's closes on July 2 last year. Moving on to gross margins we just received on Easter timing I mentioned earlier, it's important to note that Easter prayer tend to carry a higher level of promotion, which now shift into Q2 versus Q1 and which have an adverse impact on Q2 growth margin.

Further, keep in mind that we face and uneven gross margin comparison in quarter two and three of this year we call that we scaled back promotions during the second quarter of last year given an unseasonably hot (ph) started through the summer and as you may recall Q3 gross margin were negatively impacted by a fall harvest. As a result, we expect gross margin to decline year-on-year in Q2, an increase year-on-year as we finally, there was approximately EUR5 million of A&P spend, we've 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 a double-- double digit growth in quarter three and quarter four that concludes our remarks. I will now turn the session over to Q&A.

Thank you, operator back to you.

Questions and Answers:

Operator

Thank you (Operator Instructions) And we'll take our first question from Jon Tanwanteng with CJS Securities.

Jon Tanwanteng -- CJS Securities -- Analyst

Good morning, gentlemen. Thank you for taking my questions and excellent quarter.

Stefan Descheemaeker -- Chief Executive Officer

Good morning.

Samy Zekhout -- Chief Financial Officer

Good morning.

Jon Tanwanteng -- CJS Securities -- Analyst

Good morning. Could you tell us at the guidance that you've provided on the EBITDA includes all the IFRS benefits this quarter and moving forward?

Samy Zekhout -- Chief Financial Officer

Yes, it does.

Jon Tanwanteng -- CJS Securities -- Analyst

Okay and how much is that expected to be over the next several quarters?

Samy Zekhout -- Chief Financial Officer

It's EUR 50 million for the year.

Jon Tanwanteng -- CJS Securities -- Analyst

Okay, great. Thank you. And then can you give us an update on the use of proceeds from the recent equity raise is a purely for M&A or are there other use investments that you're planning part 10any color there would be helpful.

Samy Zekhout -- Chief Financial Officer

We effectively have been raising the equity, we now are sitting on EUR 753 million in cash and we intend to use that to, let's say, investing in deals to come, and we will be selecting those deals on the basis of the financial return that they will deliver.

Jon Tanwanteng -- CJS Securities -- Analyst

Okay, great. And could you also just comment on the IPO of Beyond Burger in the US and if your (inaudible) product can capitalize on the same trends and the consumers that are driving beyond an impossible and similar vegan products.

Samy Zekhout -- Chief Financial Officer

Jon it's an excellent question, it wasn't left in unnoticed obviously, $88 million of revenue with a 3.8 billion, which is close to all market cap by the way, so that's interesting though. Aside from that I think with what we see is the fundamentals of plant protein and the plant protein is definitely there too good to stay, to grow and we want to be part of this. And we starting with two very interesting launches, one is fees in the Nordics and we are doing very well. Great feedback from the consumers and from the retailers.

And we're just launching right now, Green Cuisine in the UK. So very well accepted by the trade. Obviously, more to come of obviously advertising the summer. And more fundamentally more to come, also in terms of skews. So we starting obviously with the limited assortments, and then as time goes by, we will obviously expand the range.

It's absolutely a very -- it's very important category for us and not limited to the Nordics and to the UK, is going to go way beyond, that you know. Then I will tell how it's going to impact our market cap with at least business wise, it makes a lot of sense.

Jon Tanwanteng -- CJS Securities -- Analyst

Great, thanks for the color, guys.

Operator

We'll take our next question from Robert Moskow with Credit Suisse.

Robert Moskow -- Credit Suisse -- Analyst

Hi, a few questions. Can you give a little more detail on why the $5 million in media shifted into second quarter. I thought in the last call, you were pretty specific about the timing of it. And just wanted to know that the circumstances.

Second, 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 first quarter, I think in your commentary you said that you are growing, the category is growing. But can you talk a little bit about your market share in first quarter?

Stefan Descheemaeker -- Chief Executive Officer

Yes, to start Robert, the first question on the 5 million, it's driven by the fact that we have seen some shift in which is primarily driven by the fact that a Goodfella's move from the month of the March to April and that has been configured into more seats of the shift from Q1 into Q2.

Robert Moskow -- Credit Suisse -- Analyst

Okay in market share?

Stefan Descheemaeker -- Chief Executive Officer

The market shares here on these stage is flat so I think it's within a good industry at this stage, it's flat and as -- obviously it's, we've been through a major price increase, which is fundamental and then as we said, we're going to see, we very --we are this stage we going moving according to plan so that's what expected and in the coming weeks and months we will see whether we know it's booming is expected-- as we said in terms of pricing (inaudible) so far so good, but we also know that it takes some time to fully to be -- fully reflected in the by the year by the consumers, but at this stage with that kind of price increase and we think that the flat performances of the good performances.

Robert Moskow -- Credit Suisse -- Analyst

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.

Stefan Descheemaeker -- Chief Executive Officer

(inaudible) Robert. Fish was I mean, we've been through a very significant cost increase that we've been able to know that we really in the understood let's say starting let say H2 last year and so we've organized also I think very well I think the countries have taken the challenge very -- I mean very well and the and I've ultimately it's been, obviously, it's always difficult but it's been reasonably received by the trade in the vegetable are different we don't see the same thing and it's more category by category. I would put it that way.

Peas for example, what we've seen is we see that the (inaudible) are declining for the first quarter for a very simple reason, we had a very poor harvest and so why would we promote for example, doesn't make any sense when you are supply constraints and so we did the right thing with peas. So in term of price increase for the future again fish was I would say unprecedented, it was big, and we don't see the same thing happening in the veg at theses stage.

Robert Moskow -- Credit Suisse -- Analyst

Yes, last question on -- you said you shifted the media by month. I thought I 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 it Goodfella's just kind of on track.

Stefan Descheemaeker -- Chief Executive Officer

Goodfella's is definitely on track -- I think you should read too much into one month, which was there, but the March was a combination of many different things, but we are not changing our fly wheel. In other words, what we said from the start with Goodfella's, we are going to first improve the quality, we are going to improve the packaging. We are coming with the new campaign, that's exactly what I mentioned with the Godmother and obviously made with respect, and it's really starting now.

So it's, sometimes it's fixed by one by a few weeks, which is anyway if we are not, we're not ready. I think we were very pleased with what we're seeing right now and pizza for us is doing well.

Robert Moskow -- Credit Suisse -- Analyst

Okay, great. Thank you.

Stefan Descheemaeker -- Chief Executive Officer

You're welcome. Thank you.

Operator

(Operator Instructions) And we'll take our next question from Bill Chappell with SunTrust.

Bill Chappell -- SunTrust -- Analyst

Thanks, good morning.

Stefan Descheemaeker -- Chief Executive Officer

Good morning.

Bill Chappell -- SunTrust -- Analyst

I may have missed it, did you quantified what the Easter shift was and is that if expected to be fully picked back up in this next quarter?

Samy Zekhout -- Chief Financial Officer

Yes, we did mention the fact that it was going to be around 1.5%.

Bill Chappell -- SunTrust -- Analyst

And that's what it -- I mean that's what you expect that kind of all along.

Samy Zekhout -- Chief Financial Officer

Yes. But the shift between Q1 and Q2 in sales growth.

Bill Chappell -- SunTrust -- Analyst

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 two, three quarters, and are there others driving that growth. Is it consumers driving the growth or is it just really you and kind of being back and innovating and advertising minded that's driving that growth.

Stefan Descheemaeker -- Chief Executive Officer

Well, I'd just say that I wouldn't say that if there is an acceleration, I think it's been has been very consistent in terms of low single digits growth. And that's by the way, that's the algorithm, and as we said, obviously saw a job to invest further in the category and then that's our ambition obviously, the long-term to see these algorithm improving terms of quality and quantity.

But that's -- that's going to take a bit of time, and back to market share by the way, I forgot to mention that on the MAT basis, we are increasing our shares. So that's a combination, no surprise in terms of summarized summary, no surprise in terms of category. And second flat short term but also on the (inaudible) basis will increase market share, despite price increase.

Bill Chappell -- SunTrust -- Analyst

Got it. But you're seeing volumes continue to improve, I guess, not just on pricing?

Stefan Descheemaeker -- Chief Executive Officer

Well, as we said, the first quarter, which was expected. We've seen obviously some volume reduction, which is a combination of the PPA and obviously initial reaction from the consumer in terms terms of price, but we see that obviously going down over time. (inaudible) in the results. And we obviously, I forgot to mention, which is also a big thing, which is the one -- the famous 1.5% coming from Easter.

Bill Chappell -- SunTrust -- Analyst

And then last one for me, we actually heard from -- (inaudible) from Coke and Pepsi and others that there was some inventory management around the Brexit noise. I know it's not a huge, there's a lot of local market manufacturing, but was there any kind of impact your business intra-quarter from that?

Stefan Descheemaeker -- Chief Executive Officer

No, we had mentioned the fact that we are going to be prepared for the (inaudible) already. So we just had about the EUR50 million from an inventory standpoint. And that's going to deplete over the months to come.

Samy Zekhout -- Chief Financial Officer

And obviously, we see what October (inaudible), we remain up to cover with the ramp-up again. So that's -- life is full of surprises.

Bill Chappell -- SunTrust -- Analyst

Yes, it keeps it interesting. Thanks so much.

Stefan Descheemaeker -- Chief Executive Officer

Yes, you're welcome.

Operator

At this time there are no further questions, I'd like to turn the conference back over to CEO Stefan for any additional or closing remarks.

Stefan Descheemaeker -- Chief Executive Officer

Okay. Thank you, operator. And thank you for joining us on the call today to review our first quarter results. The year is off to a good -- strong start with Q1 representing our ninth consecutive quarter of organic revenue growth despite the Easter shift. We very much on pace to the deliver another year of growth against our and have a capitalized balance sheet is 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 second quarter results in August.

Operator

This concludes today's call. Thank you for your participation, you may now disconnect.

Duration: 31 minutes

Call participants:

Taposh Bari -- Head of Investor Relations

Stefan Descheemaeker -- Chief Executive Officer

Samy Zekhout -- Chief Financial Officer

Jon Tanwanteng -- CJS Securities -- Analyst

Robert Moskow -- Credit Suisse -- Analyst

Bill Chappell -- SunTrust -- Analyst

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