Nomad Foods: A Second Round Of Price Hikes Should Improve The Margins

Jun. 11, 2022 11:35 AM ETNomad Foods Limited (NOMD)15 Comments3 Likes

Summary

  • Nomad Foods is one of the world's frozen meal specialists and the company has expanded its empire through M&A.
  • The organic revenue decreased in Q1, but Nomad expects to report a positive result over the entire financial year.
  • The focus on the free cash flow is important, as that will enable Nomad to strengthen its balance sheet ahead of more M&A.
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Pealing back the cellophane from a turkey TV dinner

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Introduction

I have been keeping an eye on Nomad Foods (NYSE:NOMD) for several years now but unfortunately the company's share price hasn't gone anywhere. Sure, it has had its runs in the past few years but with a share price of under $20 (and that after a very substantial share buyback program) an investor simply cannot be happy.

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Data by YCharts

The first quarter was quite good and Nomad has reaffirmed its full-year guidance

The reluctance of the market to be excited about Nomad's prospects is somewhat understandable. Although the reported revenue increased by almost 4%, this was 'bought revenue', non-organic revenue growth as the organic revenue decreased by approximately 4.5% (caused by a combination of 6.1% related to lower volumes, partially offset by an average 1.6% price increase).

Income Statement

NOMD Investor Relations

The total revenue came in at just under 733M EUR (Nomad Foods reports its financial results in Euro) and as the COGS increased at a rather fast pace, the gross profit and the operating profit came in lower and substantially lower than in the first quarter of 2021. So even after spending cash on acquisitions that boosted the revenue, the operating income shows a decrease.

There were also some exceptional items that weighed on the result and Nomad Foods can count itself quite lucky the finance costs dropped to just 15.5M EUR (down from in excess of 40M EUR in Q1 2021) allowing it to report a pre-tax income of 73M EUR and a net profit of 56M EUR which represents approximately 0.32 EUR per share.

Despite generating an EPS of just 0.32 EUR per share, Nomad Foods has confirmed its full-year guidance as it still plans to report an EPS of 1.71-1.75 EUR per share for the entire financial year. The explanation for this relatively upbeat guidance is easy to understand. The company is in the middle of a series of price hikes and is staggering those hikes to ensure its customers can deal with the series of hikes. And despite the negative organic revenue growth in the first quarter, Nomad still expects to report a 'low single-digit' organic revenue growth this year.

My original investment theses for Nomad Foods were all based on the free cash flow generated by Nomad Foods. Free cash flow should be an absolute priority for Nomad Foods considering the company has an 'acquire and deleverage' strategy.

In the first quarter of 2022, Nomad Foods reported an operating cash flow of 129M EUR before changes in the working capital position and after deducting the cash outflow related to the exceptional items and a 17M tax bill (the total amount of taxes due over the Q1 result was higher than the 9.1M EUR the company actually paid during the quarter) as well as the 28M EUR in lease and interest payments, the adjusted operating cash flow was 71.3M EUR.

Cash Flow Statement

NOMD Investor Relations

The total capex was just 20.4M EUR which means Nomad Foods generated a positive free cash flow of approximately 51M EUR. That's less than the reported net income but the difference could easily be explained by a higher capex versus the depreciation expenses while the cash interest expenses were higher than the reported finance expenses.

Divided over the current share count of 172.5M net shares outstanding, Nomad Foods' free cash flow was approximately 0.29 EUR per share. That's just over $0.30 at the current exchange rate. That's pretty low but we should see an improvement in the second half of the year as Nomad Foods has confirmed it will execute a second series of price hikes in the second semester, and potentially a third round towards the end of the year if the inflation rate remains high. I'm not expecting Nomad to purse additional M&A targets unless an opportunity that's too good to ignore pops up. For now, the focus should be on the balance sheet and to reduce the current net financial debt of almost 2B EUR.

Investment thesis

While the numbers look good, Nomad's share price will likely remain under pressure due to the inflationary aspects and the low visibility when it comes to consumer demand. It is possible a contracting economy may be good for its business if consumers would for instance forego going out for a meal and buy a quality frozen meal instead if they don't want to cook. I think it would also help the company if it could provide more clarity on its supply chain. When the Russia-Ukraine war started the company announced it had a plan B in place to replace the supply of Russian fish (if needed). As about half of the fish came from Russia in 2021, making sure the supply chain can still meet the demand for fish will be very important as well. Most competitors are sourcing a large portion of their fish from Russia as well so Nomad's situation is not unique, but it will for sure be a point of attention.

I still don't have a long position in Nomad Foods as the puts I have written expired out of the money. At this moment I also don't have an open position in written put options as the volumes were low and the spread has been high in the past few weeks. But notwithstanding the (hopefully temporary) headwinds the company is currently facing, I would still be interested in going long.

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This article was written by

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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