Nomad Foods (NYSE:NOMD) 2Q24 results showed a positive inflection, with volumes growing for the first time in 3 years. The company’s higher promotion spending and lower pricing is making an effect. Despite the lower prices, the company’s gross margins increased substantially, most of which was spent in more A&P (30% up YoY). Overall, operating profits were flat.
Nomad is very confident that the year will bring significant growth in the second half, with reconfirmed guidance implying growth of 5% in the second semester. Management said that the semester is already contracted for the most part, so that risks are lower.
The company’s price has not changed much since my last article, but thanks to good management of volumes and pricing, it has been able to arrest the volume declines and is going to produce higher earnings this year. This makes the stock a more attractive proposition (compared to my previous Hold article), offering a higher earnings yield and a sufficient aggregate yield when considering even moderate growth. I change the rating to Buy.
2Q24 results
Volumes up: For the first time since 3Q21, Nomad volumes were positive, 1.6%. This is a significant improvement, particularly compared to 2023, when the company decided to apply a strategy of not lowering prices to find strained consumers, in order to protect the value of the company’s brands. 3Q23 saw volumes fall 13%, 4Q23 minus 8%. Then the company decided to lower some prices and increase promotional spending, to drive volumes. 1Q24 volumes were down 1%, and finally 2Q24 is up.
Prices down: Despite the 1.6% volume increase, FX adjusted revenues were up only 0.5% (1.1% without the adjustment, given the appreciation of the pound compared to the euro). This implies prices dragging revenue. The reason for this has been the company’s decision at the end of last year to lower some prices in what it calls its ‘Must Win Battles’ to remain competitive.
Losing share in some markets: Indeed, if we are to believe the company’s presentation, volumes in the frozen market have been positive for many months in 2023 and 2024 (not all of them). This implies that the company is growing behind the market. Management confirmed this view, and argued that the company is losing share in private label and lower margin products, whereas it is growing in its ‘Must Win Battles’, although also losing some share because of brand protection.
Winning markets: The company’s earnings release comments that the MWB product volumes were up 4% for the quarter, potentially above the market. In addition, new platforms like poultry were up 20% in some cases. The company is confident that it can translate its leadership in fish products to poultry products, and elevate the category.
Germany in trouble: When looking at the segment reports from the company’s financial statements, we observe that the company is growing in all geographies, but Germany (its second most important market). Further, the situation is deteriorating. In Germany, the company lost 20% in revenues YoY for the quarter, and 11% for the semester, implying the second quarter was worth than the first. The quarterly loss represents 2 percentage points of aggregate growth. Unfortunately, there were no mentions of this situation during the call.
Gaining gross margins: Despite lower prices with higher volumes, Nomad’s gross margins were up 270 bps, and gross profits were up 10%. This, the company argues, comes from losing revenues in the less profitable categories (like private label) while gaining in the most profitable categories (must win).
Gross profits invested in A&P: If gross profits went up 10%, operating expenses went up 15%. The earnings release comments that the increase was caused by an increase in A&P, capabilities development, and inflationary headwinds. A&P was up 30% YoY, as part of a strategy commented last year, in line with the lower prices in some categories, to regain volumes and share. The end result was operating profits, up 6% for the quarter and down about 1.2% for 1H24.
Good guidance for 2H24: Nomad confirmed guidance of revenues up 3% to 4% for the year. If we consider that for the first half, revenues were up 1%, then that implies Nomad has to grow significantly in the second half. Management is confident that will be the case, given that most of the orders have already been placed. During the call, management said that ‘we’re covered now around 90% — 91%, 92%. So with pretty good line of sight of what will happen this year.’
Valuation
If guidance is met, the company will post adjusted EPS of $1.89 to $1.94. However, the adjustments made by Nomad are a little excessive (for example, adding back very recurring acquisition integration costs or restructuring costs). For the 1H24 period, the company added back EUR 27 million in net income (for EUR 105 million originally, it’s a huge difference). Most if not all of that comes from these ‘exceptional items’ that are not exceptional at all.
We start with the company’s topline guidance of EUR 3.135 billion in revenues for FY24 (based on growth of 3% over last year’s EUR 3.044 billion). The company’s operating margin, including ‘exceptional’ items, is about 11.2%, representing EUR 350 million in operating profits. From there, we have to remove financial costs of about EUR 90 million per year and a tax rate of 25% to arrive at a net income of EUR 282 million, or $310 million.
This compares with a market cap of $3.1 billion for a P/E of 10x or a current earnings yield of 10%. On top of that, we have growth of 3/4% topline this year, which can potentially leverage even more on the bottom line via operational and financial leverage. I believe a yield of 12% for Nomad is fair and, above that, an opportunity.
The reason is that Nomad’s brands are leaders in their markets, and the company has shown tremendous resilience in a very challenging consumer context in Europe. Management was able to pivot from price-driven to volume-driven growth while consistently protecting operating profitability. In addition, the company’s profitability could be higher today, given the level of A&P investment. The category has some embedded protection against cycles given that it is not a super discretionary category (despite Nomad’s brands being a little premium and, therefore, more discretionary).
The main negative against the company is its financial leverage. The company has EUR 2.1 billion in debts against only EUR 330 million in cash, and has prioritized dividend payments and share repurchases before debt repayments. Although these debts mature in 2028 and 2029, they still represent financial leverage.
Overall, I believe Nomad is in a good position to grow if the European market recovers, as it has posted adequate management of the current European recession. The company offers a 10% current yield, plus between 3% or more in growth yield. I believe these figures are opportunistic, and therefore consider Nomad a Buy at these prices.
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