Nomad Foods Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 7 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the NoMad Foods First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note that this conference is being recorded. I would now like to turn the conference over to Amit Sharma.

Operator

Please go ahead, sir.

Speaker 1

Hello, and welcome to Nomad Foods' Q1 2024 earnings call. I'm Amit Sharma, Head of Investor Relations, and I'm joined on the call by Stephan Dishmacher, our CEO and Sami Zukut, our CFO. By now, everyone should have access to the earnings release for the period ended March 31, 2024, that was published at approximately 6:45 am Eastern Time. The press release and investor presentation are available on Nomad Foods' website atwww.nomadfoods.com. This call is being webcast and a replay will be available on the company's website.

Speaker 1

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 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 the IFRS results. Investors can find the IFRS to non IFRS reconciliation within our earnings release and in the appendices at the end of our slide presentation available on our website.

Speaker 1

Please note that certain financial information within this presentation represent adjusted figures for 2023 2024. All adjusted figures have been adjusted primarily for share based payment expenses and related employee payroll taxes. Non operating M and A related costs, acquisition purchase price adjustments, exceptional items and foreign currency translation charges and gains. Unless otherwise noted, comments from here on will refer to those adjusted numbers. With that, I will hand the call over to Stephan.

Speaker 2

Thank you, Amit. We'd like to begin by offering a few highlights from our Q1 as we made a solid start to the year. I would then offer a few comments on our accelerated growth outlook as we deploy our growth flywheel before handing it over to Sami for a detailed review of our quarterly financial results, hence we did return to our outlook. Nomad Food delivered another quarter of solid top and bottom line performance. 1st quarter net sales increased by 1.1%, including organic sales growth of 0.3%, our 7th consecutive quarter of positive organic sales growth.

Speaker 2

Our volume trends improved substantially, sequentially and on a year over year basis, which is very encouraging given our clear focus on returning back to positive volume growth in 2024. Our accelerating volume trends during the quarter validate the difficult choices we made over the past 18 to 24 months to protect the long term health and growth potential for brands. We made targeted investments during the quarter to further boost this recovery. These investments are being fueled by favorable cost and our productivity agenda, which we believe will position us to deliver higher margins and strong profit growth through the rest of the year. We paid our 1st quarterly cash dividend during the quarter and remain opportunistic buyers of our stock, supported by our strong cash generation.

Speaker 2

I'm excited about building momentum as our initiatives to drive sustained profitable growth begin to take hold and our volume recovery begins to accelerate. As a result, we are reiterating our 2024 guidance including net sales growth of 3% to 4% with positive volume and share growth, adjusted EBITDA growth of 4% to 6% and adjusted EPS in the range of €1.75 to €1.80 which implies 9% to 12% growth. With that, let me provide a few highlights on our Q1 performance. 1st quarter net sales increased by 1.1 percent as favorable ForEx complemented organic growth of 0.3%. Quarterly volume declines moderated significantly from last quarter accompanied with strong products and customer mix as we begin to deploy our revenue growth management toolkits across key markets and categories.

Speaker 2

As expected, contribution from pricing moderated as we lapped strong year ago pricing actions. 1st quarter gross margins declined by 200 basis points to 26.9 percent as the expected one time margin headwind due to balance sheet inventory evaluation more than offset higher underlying margins. Sami will provide more details about the revaluation impact, but I'm pleased with the improving trajectory of our underlying margins, which is being driven by clear focus on lower cost, productivity, favorable mix and optimized promotions. Given our expectations of a more favorable cost environment ahead, we remain confident in delivering higher gross margins for the full year, enabling us to continue to invest in our brands. Adjusted EBITDA of €122,000,000 and adjusted EPS of €0.37 per share both declined from the year ago quarter.

Speaker 2

We generated nearly €49,000,000 of adjusted free cash flow in the 1st quarter, a significant improvement from €25,000,000 in the year ago quarter. At the retail sales level, as reported by Nielsen IQ, our volume and share trajectory continues to show significant improvement and even turned positive in many of our key markets during the quarter, including UK and Austria. This recovery is being driven by the full activation of our renewed and upgraded flywheel to bring consumers back to the frozen aisle and to drive greater engagement with our brands. Winning with consumers, winning with our brands and winning with customers are the key pillars of our flywheel and we made the intended investment in the Q1 to achieve it. Our A and P spending increased by more than 20% as we expanded our master brand campaign to additional markets to drive greater engagements with consumers and to remind them the most relevant and loved aspects of their relationship with our iconic brands.

Speaker 2

We timed our Q1 pricing and promotional activities to maximize benefit from favorable seasonality and to align it with greater consumer interest in the frozen eyes. At the same time, our ongoing investments in data, analytics, capabilities and people helped us execute better itself. Enabled by our ongoing business transformation project, our center of excellence are delivering deeper data driven insights to our local markets to optimize their promotion spend, reallocating resource to the largest potential opportunities and winning additional merchandising events in stores. Our comprehensive revenue growth management toolkit is enabling us to fine tune our promotional frequencies and depth at a much more granular level. We are customizing our strategy at country and category level to support our consumers and deliver attractive price points to bring them back to the frozen aisle and to our brands.

Speaker 2

As I discussed at the recent CAGNY presentation, a key driver of our anticipated volume recovery is our increasing focus on our best and biggest opportunities. The top 25 of these must win battles accounted for nearly 2 thirds of our sales and an even greater share of our gross profits in the quarter. As planned, these top mushroom battles received a disproportionately large share of our growth investments. And as expected, delivered sales growth and gross margin fine excess of overall business including positive volume growth in 15 of the top 25 Muslim battles. Let me highlight a few of these success stories from the quarter.

Speaker 2

The first one is a strong rebound in our Fresh Finger business in Italy. After a difficult 2023, we deployed all elements of our growth flywheel to regain volume growth and drive greater penetration. The initial results from this initiative have been outstanding. FINDUS, our frozen fish brine in Italy delivered a strong turnaround in all key performance metrics, including a material improvement in our value and volume growth trends. Our market share is rebounding along with improving rate of sale.

Speaker 2

In fact, Findus is lifting the velocity and penetration of the entire frozen fish segment by bringing consumers back to the category. Our strong performance in our largest market, U. K. Is another example of a focused approach as our Q1 volumes in UK were up strongly and we even gained volume share. Our positive momentum was driven by a number of strategic promotions backed by strong media activation to drive consumer awareness.

Speaker 2

We supported our U. K. Vegetable portfolio with the continuation of our Sweetest Tea Guarantee campaign to highlight the superiority of our piece. We launched a series of influencer led content highlighting the great relative value of frozen as part of the 100 years of frozen celebration. And we highlighted poultry as a lean, affordable protein for consumers with our Chicken Worth dipping campaign.

Speaker 2

My final success story to highlight is Austria, where OIGLO brand is showing an outstanding turnaround leading to a nearly 80 basis points volume share expansion and stabilizing value share in the Q1. Our value and volume sales growth in Austria meaningfully outperformed our overall portfolio as we secured more promotion slots, while leveraging our life well fed campaign to drive greater consumer engagement. Our strong performance in these high priority opportunities is a testament to the power of our growth flywheel and gives us greater confidence in our outlook as our flywheel starts to spin faster. Our renewed growth flywheel is enabled by our productivity agenda, particularly across our supply chain, which continues to operate in a highly effective manner. We are operating with greater agility and nimbleness and building even greater flexibility in our coverage plans to remain well positioned to take advantage of the underlying volatility in many of our rising to record highs during the quarter.

Speaker 2

We are accomplishing it with increasing focus on efficiencies and productivity across our supply chain. We are optimizing our manufacturing, warehouse and logistic network. We are reevaluating many of our co packer relationships and reducing complexities throughout our supply chain. Our supply chain has been a key enabler for productivity savings and we expect it to deliver even greater contribution in 2024, particularly as the expected volume recovery lifts our fixed cost absorption. In conclusion, 2024 is off to a solid start.

Speaker 2

Our quarterly volume and share trends improved sequentially. And as I reflect on our performance, we believe it's clear that we are positioned for even better trajectory ahead. Our growth flywheel is working and we are fueling it to spin even faster by making disciplined investments in our brands, in our capabilities, in our operations and in our people. We are reiterating our full year guidance. Over the longer term, Nomad Foods is well positioned to deliver attractive top tier top and bottom line growth, which coupled with our balanced capital allocation strategy will lead to superior returns for our shareholders.

Speaker 2

With that, let me hand the call over to Sami to review our Q1 results in greater detail. Sami?

Speaker 3

Thank you, Stephane, and good morning, everyone. I am pleased to present another quarter of solid performance at Nomad Foods. For the Q1, reported net revenues increased by 1.1 percent to €784,000,000 Organic sales increased by 0.3%, while favorable FX contributed 0.8% to quarterly sales. Higher price mix contributed 2.5% during the quarter as we lapped year ago pricing and benefited from favorable customer and product mix. Quarterly volume were down 2.2%, a marked improvement from down 8% in the 4th quarter, as we return to volume growth in many of our key markets and remain on track to deliver positive volume growth for the full year.

Speaker 3

1st quarter gross profits declined by 5.9 percent to €211,000,000 As expected, 1st quarter gross margin decreased by 200 basis points from the year ago quarter to 26.9%. Let me spend a few minutes on our gross margin performance during the quarter. As I mentioned on our last earnings call, our Q1 gross margins were pressured by the anticipated impact from balance sheet inventory revaluation to account for year over year changes in inflation. This change is purely mechanical and impacts only our Q1 margins as we reset our inventory unit cost in January. On the underlying basis, our gross margin benefited from moderating costs, increasing productivity, higher margin mix and optimized promotions.

Speaker 3

We expect these drivers to continue through the rest of the year and enable us to deliver higher gross margin for the full year. Adjusted EBITDA decreased by 16.4% to €122,000,000 in the quarter due to lower gross profits and higher operating expenses. Our adjusted operating expense increased by 11.5% from the year ago quarter due to the planned step up in R and P investments, which increased by more than 20%. 1st quarter indirect expenses increased by 6.4%, including 2% FX headwind as we continue to invest to upgrade our capabilities and absorb wage and other non commodity inflation. Adjusted net income declined by 25% and adjusted earnings per share declined by €0.09 to €0.37 largely due to the margin dynamic I described earlier.

Speaker 3

We repurchased a little less than 500,000 of our ordinary shares for nearly $8,000,000 We have $492,000,000 left under our current $500,000,000 share buyback authorization. Our cash flows are off to a very strong start in 2024. We generated €49,000,000 of adjusted free cash during the quarter as our strong working capital improvements more than offset higher cash interest. Specifically, working capital was a 76 €1,000,000 benefit to the quarterly cash flows as our days of inventory declined substantially. Business transformation project driven capabilities have enabled a much more robust inventory management even as our volumes improved and our service level increased to record high levels.

Speaker 3

On the other hand, phasing of our cash interest expense was a nearly €30,000,000 headwind, driven mainly by the timing of term loan repricing. CapEx of €19,000,000 decreased modestly from last year as we delivered 81% free cash flow conversion during the quarter. We declared our 2nd quarterly cash dividend of $0.15 per share last week, highlighting our strong consistent cash flows and our commitment to effective capital allocation to deliver enhanced shareholder return. Turning to our guidance for 2024, we are pleased with our Q1 performance and are building momentum enabling us to reiterate our full year guidance. We continue to expect 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 and adjusted free cash flow conversion in the 90% to 95% range.

Speaker 3

Our 3% to 4% net sales growth in 2024 is expected to be relatively balanced between price mix and volume with positive volume growth for the full year. We expect continued sequential improvements in the Q2 and consolidated volumes to turn positive by the second half as our renewed growth flywheel begins to turn faster in response to our investments. As I mentioned earlier, our underlying gross margins are tracking well to deliver full year expansion. We continue to expect relatively flat to modestly lower inflation for the full year and are building greater flexibility in our coverage plans to potentially benefit from lower costs in some of our key commodities. Our improving volume trajectory reinforce our commitment to continue to invest behind growth.

Speaker 3

We continue to expect our A and P spending to remain elevated in 2024, particularly in the first half. At U. S. Dollar, euro exchange rates as of May 1, our adjusted EPS guidance translate into $1.89 to $1.95 earnings per share and implies 9% to 12% year over year growth. We are on track to deliver 90% to 95% adjusted free cash flow conversion for the full year and remain committed to returning capital to shareholders through highly effective capital allocation, including quarterly dividends and opportunistic share repurchases.

Speaker 3

I am pleased with our momentum in the Q1. It's a testament to the hard work and dedication of our talented workforce. Our growth strategies are working and we are even more confident in delivering top tier top and bottom line growth in 2024 and beyond. I will now turn the call over to the operator for your questions.

Operator

Thank you, sir. Ladies and gentlemen, we will now be conducting the question and answer session. Our first question comes from Rob Dickerson of Jefferies. Please go ahead.

Speaker 4

Thank you so much. Good morning, everyone.

Speaker 2

Good morning, Rob.

Speaker 3

Good morning, Rob. Hello.

Speaker 4

Stefan, just a quick question. I just heard Sami speak to positive volume growth for the year and then also volumes turning positive year over year in the back half of the year. If we go back in a

Speaker 2

couple of

Speaker 4

quarters, originally, I think the expectation was maybe sometime, let's say, late Q1. It seemed like maybe it could kind of go into Q2. So maybe like volumes could wind up still being positive toward the end of Q2. It just feels like it's moved forward a little bit. And I'm assuming that's just based upon kind of the timing of deployment.

Speaker 4

So I'm curious, 1, is that correct? And then 2, when would you say you expect to be fully deployed in terms of your brand building initiatives? Thanks.

Speaker 2

Well, let me start with the data, Rob. I think the trajectory of volume is interesting in itself. So Q3 last year minus 13%, Q4 -8%, Q1 this quarter is -2%. So this is the first piece. So the trajectory is very interesting, I would put it that way.

Speaker 2

The second piece is what we said at CAGNY, which is really the key point for us and we said, yes, we should expect a volume growth, but it's crossing the line during H2 and being positive overall on a full year basis. While you see the trajectory, by the way, we're also pleased with the way the trajectory continues in P4. So that's where we are. In terms of resources to your point, it's really interesting because it's a full deployment of all the elements of the flywheel. It started really end of Q3 with A and P last year.

Speaker 2

We really raised the game. We continued in Q4. We continued in Q1 plus something like more than plus 20% versus last year and it's going to be even higher by the way versus last year in Q2. So you can see that it's really starting to do well and it has by the way a very positive impact in our mushroom bottles and I'll come back on that later. So that's the big piece.

Speaker 2

The second big piece is RGM and the 1st 2 months were really promo based and it was deliberate. We wanted to make sure that all the consumers would come back in a milder environment in terms of cost of living that the consumers would come back to us and that was really the point. We wanted them to come back and then at some stage obviously the other components of the flywheel like quality, superiority and innovation and A and P obviously would start to kick in. And that's exactly what we're seeing. So from that standpoint nothing has changed compared to Cagney.

Speaker 2

We are just reiterating what we said and we're pleased with this trajectory, not only in terms by the way in terms of volume, -13, -8, -2, but also in terms of mix because when we see the mix within these volumes, we see that there are different categories. Let's say to make it simple, the top 25 muslin bottles, which is really what matters for us, The big things in terms of market share, in terms of gross margin is obviously goes faster to say the least than for example our private label components. So that's the combination of what we see right now and that's also what we're going to see in Q2 and beyond.

Speaker 4

Okay, super. And then for my one follow-up. Sami, just on the gross margin side, we clearly understand the dynamics occurring in this Q1. I do believe there should be gross margin expansion forthcoming, I think you said for the rest of the year applying each of the quarters Q2 to Q4. At the same time, you usually do have a nice seasonal dynamic in the Q2 to Q3 period relative to the other quarters.

Speaker 4

So I'm just curious as we kind of move through the year including Q2 relative to Q1, I mean, it sounds like there should be a fairly material step up in that gross margin just on a seasonal basis in Q2 relative to Q1. But then in the back half, the year over year improvement is driven partially by seasonality, but maybe also what you're speaking to on the productivity side. So I'm just trying to gauge essentially gross margin cadence and the year over year expansion potential for the rest of the year? Thank you.

Speaker 3

Rob, your interpretation is absolutely correct. I mean, that's exactly the pattern we're going to have. We've taken this one time adjustment in Q1, but the dynamic is such that between effective intervention we are making on the top line and particularly with RGM and the origination of volume growth, which is helping from a scale standpoint as well combined with cost savings and intervention we made from a productivity standpoint is gearing us effectively together with, let's say, stabilizing moderately low, if you want, inflation prices, I mean, there and potentially even declining on some category, we're getting to a point where gross margin is intended to grow, I mean, for the year. We will have that point effectively in Q2 and Q3 for the seasonality factor that you mentioned. So we will see a step up in Q2 and Q3.

Speaker 3

Let's a bit lower in Q4 and then leading the whole year to a growth in gross margin that would be effectively our commitment, I mean, for the year.

Speaker 4

Super. Thank you.

Speaker 3

Thank you, Rob. Thank you, Rob.

Operator

Our next question comes from Steve Powers of Deutsche Bank. Please go ahead.

Speaker 5

Hey, thanks for the questions. The first question, Stephane, you just spoke again in response to Rob's first question on the sequential improvement you've seen quarter over quarter, volumetrically and market share wise. I guess when I look at the data at least that we see from the outside, it looks like the month of March was somewhat of a step back from where you were in January, February and perhaps that corresponds to the recalibration on the promotional investments. But if you could talk a little bit about what you've seen through the 1st third of the year, month over month, that gives you the confidence that that quarterly progression of improvement will continue as we go into 2Q and then 2H?

Speaker 2

Well, I think to your point, I think it's we knew that it's never linear, do you things. That's very clear. I think what you need to see is the trends and also the actions that come with it. So we knew that Q1 P1, P2 were very solid promo driven in line with the revenue growth management. And so that's exactly what we wanted to do.

Speaker 2

And then there is a bit of I wouldn't say pause, but at least a lighter phase in terms of promo in P3. So that was expected. So that piece is obviously we're going to go month by month depending on where we stand. We're going to have higher promo, sometimes lighter promo. The big difference with the past is everything now is very much driven by revenue growth management.

Speaker 2

In the past it was probably a bit more let's say what the country is thinking and all these things. So that's very different. Now it's really the full utilization of the flywheel between promo one thing, A and P really coming starting to kicking big time now. Obviously, innovation coming back. We'll talk about innovation a bit later hopefully.

Speaker 2

And then obviously the rest of the fab will for us. So that's the piece. And so what you need to see is the projection. You're talking about the 1st third of the year. To your point, I think we like the trajectory.

Speaker 2

So in other words, April is we like what we see in terms of trajectory in P4. So that's that. So yes, I think the minus 13, minus 8, minus 2 is you need to see and nothing has changed for the country compared to CAGNY and what we said in terms of not only the volume, by the way volume is absolutely key. And that's why by the way we never provide these elements volume, but we know it's absolutely fundamental. So we see this.

Speaker 2

But let's not forget the other piece which is price and mix and we like what we see in terms of mix within our portfolio.

Speaker 5

Very good, very good. And actually that leads to part of my next question. So as we go forward, I think your full year guidance, which calls for relative balance between volumemix and pricing on the year. It implies less price contribution as we go forward. And I'm curious, is that from here, is that just more cycling prior year pricing?

Speaker 5

Or do you expect sort of net above the line investments in promotion from here, perhaps time with innovation to your point earlier or otherwise? How do we think about the you've been very clear about the advertising investments you foresee, but I'm curious as to how we think about incremental investments above the line in promotion and price?

Speaker 3

So Steve, just one point of clarification just to be super clear there. We have, let's say, adjusted our net sales, let's say, comments and perspective by highlighting volume and price mix together. For the main reason that effectively the focus on volume, it was important for us to clearly highlight that variable, hence the numbers that you are let's say that Stefan has been sharing with you earlier because you are mentioning volumemix. I think we look at volume and we look at price mix. So we have provided actually in the addendum a reconciliation of the 2 budgets so that you have the perspective there.

Speaker 3

And that enables us to really see the huge dynamic that we see now on volume and the strong momentum Stephane was alluding to. So what we are seeing right now, effectively as we lap now last year into this year and the fact that the environment is becoming moderately if you want to slightly declining on some of the commodities, we will see less pricing impact year over year, I mean, from that standpoint. On the other side, by the sheer fact of focusing our investments behind must win battle, meaning, let's say large category, big countries, highly profitable businesses and that are growing, we will have a likely if you want stronger mix effect as we move forward. So what you will see, you will see this gradual positive development on the volume side, But at the same time, if you want to add pricing starts to moderate, it's not going to be 0, it's just going to be just moderating because we will lose some pricing on those areas where we will see some form of inflation, but we'll have to do it in a very surgical way. At the same time, we will be promoting through RGM, as Stephane was alluding to, and making leveraging all of the legs of RGM.

Speaker 3

But the one thing that is going to come across is a stronger mix. And so you got a volume starting to clearly develop positively and price mix that would be skewed more towards mix than pricing overall.

Speaker 5

Okay, very good. Thank you so much. I will pass it on. I appreciate it.

Speaker 6

Thank you, Seamus.

Operator

The next question comes from Jon Tanwanteng of CJS Securities. Please go ahead.

Speaker 6

Hi, thanks for taking the questions. Stefan, I was wondering if you could talk about the must win battles. It was nice to hear that you grew 15 out of I think 25 of them. I was wondering if you could talk about the other 10 out of the 25 where you haven't seen the volume growth yet.

Speaker 1

Is that just because they

Speaker 6

haven't been activated or maybe a little bit later to start? Or do you have to make any adjustments there as we go forward?

Speaker 2

Well, to your point, I think we are we know we are classifying things between A, B and C. So the must win battles, you may remember, we started, obviously, we started with something like around 70% of our sales. And by the very definition of the focus on these must win battles, the 70% has become 80%, 85%, 90%. It means by definition you have to do the exercise again. We're doing it again and we're much more focused again And we have A, B and C.

Speaker 2

And let's say A represents around 2 thirds of our sales. And obviously, they have the highest margin. They have the obviously the the highest market share and also the highest progression. So within this 1.1% of sales and also minus 2% in terms of volume, Obviously, you can imagine that's where we are doing the best by far. The others, the big private, let's say, mushroom bottles are smaller.

Speaker 2

It's something like probably 20% of these numbers. So they're doing in line, I would say, with the rest of the business. And well, which is fine, but that's also just very reflective of where we're putting our money and in promotion, but also A and P. So in terms of A and P, it's interesting to see we're not only increasing big time the A and P, but also with this increased amount, we're focusing this increased amount to the A brand, to the A must do battles, which is a double increase and that's a big difference. So in a nutshell, it's not it doesn't mean that we're neglecting the B machine battles, but they represent around 20% of the A machine battles.

Speaker 2

And they're doing let's say to make it simple as in line with the rest of the business, I would put that way, the total business. So there is a difference. And that's exactly what the allocation of resources is. That's very clear.

Speaker 3

But in the just a couple of months, Stefan, I think in the context of what you're saying on the execution of the flywheel and when we talk about spinning and accelerating the flywheel in there, we did start at the big one, the most profitable and little by little we'll have the coverage of the 25, that's very clear. So there's an element of sequencing there. It was really important for us to continue on the momentum we established in Q4, continuing in Q1 and for the rest of the quarter. But prioritization of the must be impacted doesn't mean we are not investing, not considering the rest. It's a very important part of the portfolio.

Speaker 3

But when you allocate your assets effectively and your advertising assets, you really want to do it where the growth potential is the highest and where the profitability is maximized.

Speaker 6

Got it. That's very helpful. Thank you. And then both Stephane or Sami, I think you mentioned that you've seen lower commodities or inputs in your prepared remarks. How much, clients have you seen so far this year?

Speaker 6

Or are you seeing in the future? And kind of compare that how many of how much what percent of your inputs have secured so far and how much room does that leave you to benefit from lower prices

Speaker 2

as we go through the year?

Speaker 3

So we have at this stage covered about 80% of our full year commodities and that helps us if you don't breathe, let's say, keep some flexibility balancing effective supply requirement we have to make sure that we can produce what we want at the best possible price, but we are left with about 20 percent uncovered in the context of effectively moderated to effectively slightly declining prices on some of the commodities. So that puts us in a quite good position if you want to enable us now to frankly even manage our RGM intervention, promo intervention and margin development to allow us at the same time to reinvest and to improve our performance overall.

Speaker 6

Great. Thank you very much.

Speaker 2

Welcome. Thank you,

Operator

Joe. The next question comes from John Baumgartner of Mizuho Securities. Please go ahead.

Speaker 5

Good morning. Thanks for the question.

Speaker 2

Hi, John. Hi, John.

Speaker 5

Maybe first for Stephane, wanted to touch on promotion and specifically non price promotion and the lift from display in the portable freezers that you're placing outside the aisle. With frozen fish demand sort of coming off seasonally for the summer, should we expect that non price promo also becomes less of a support and price promo increases in the mix. I guess how do the demand drivers change seasonally to sustain the volume recovery that we're seeing until you get to Q4?

Speaker 2

Well, no, I don't think there is going to be a material change. The difference is now it's more structured than it used to be in the past. So the flywheel is really a great tool. We should show this to you one of these days because it's really a great tool that is not only used at the center, but it's really used at the regional level. And then depending on where the situation is trade wise and then let's say category wise, they may decide to go with non promo or promo.

Speaker 2

So it's very different country by country I would be that way, but the difference is now that it's really structured the right way. So there are countries where quite frankly non promo is still working, absolutely. And where it's working I can tell you where we're using it. There are some countries I can mention obviously the Adriatic for example, the non promo side is very big and then we're also testing in some of the countries in other regions and we are quite pleased with the results.

Speaker 5

Great. And then Sami, on the operating expense line, I think Stephane mentioned Q1 A and P spending was up 20%, but total OpEx was only up about 12%. What was the offset there that blunted the rate of total OpEx growth? Was it productivity? Was there a timing shift at all?

Speaker 5

And if it is efficiencies, what are your expectations for those to sustain for the duration of 2024?

Speaker 3

So there has been definitely, I mean, efficiencies, I would say, overall that we have seen operating, I would say, from that end. And a bit of phasing, I mean, there in a way that's effective. We are frankly trying to shift our spending where with the event. I mean, in one of the elements within the flywheel that we're trying to do is synchronization of the different elements there, which is at the same time we synchronize RGM, A and P and as well the in store activities and from that standpoint the whole flywheel is being exactly synchronized hence the point of the fact that the trend will be good, but then you may have effective some month to month, I mean, differentiation there. But from a productivity standpoint, effective, we see now a step up gradual step up across the year now as we have now programs both from, let's say, on the gross profit side with our cost saving program from a manufacturing standpoint.

Speaker 3

But as well we are seeing the same effect on the below the line effect on operating expense as we move forward. The ramp up of the marketing expense, I mean, of the A and P is clear. It's above 20% increase in Q1 and even more so in Q2 and Q3. And over the year, there will be a step change, I mean, as you as we have alluded to that point. And from an indirect standpoint, if you want, there's a combo of investments together with, I mean, some productivity intervention as we look at the total year.

Speaker 5

Thanks, Amy. Thanks, Stefan.

Speaker 2

Thanks, John. Thanks, John.

Operator

Our next question comes from John Tanwanteng of CJS Securities.

Speaker 6

Hi, thanks for the follow-up. Not to focus too much on the month to month as you spoke before, but could you give us a snapshot of volumes in April and how that's trended and if

Speaker 4

we should be taking any to reflect?

Speaker 2

I would say it follows an interesting trajectory. I hate to come up with obviously monthly results, but it's we're pleased with what we see. I would put it that way. And it's very much in line with what we said at CAGNY.

Speaker 6

Okay, fair enough. And then just as you head into the seasonally stronger quarters at Adriatic, are there any puts and takes as we think about the year over year comparisons there? You've had 2 very strong years in a row from there and does it make it a difficult comp?

Speaker 2

Well, it's a great question. I would do that way. When you see Adriatic, it's a business of 2 sides. You have, let's say, the ice cream, which is, to your point, it's quite seasonal, high margin. And they quite frankly they're really doing well and they have really performed well during Q1 end of Q1 starting already in April as well.

Speaker 2

And then you also have the rest of the business which is frozen food as you know, which is fish, which is veg and all these things. What we've seen in this business over the last 2 years and it's on its way to be finalized, we deliberately have switched the business from commoditized, let's say, categories in fish, in vegetable to something which is much more in line with the rest of our business in terms of fish fingers, in terms of coated fish and also prepared veg and all these things, which in a nutshell we're switching the volumes, but we're also increasing the margin. That's a big piece because it was really a business to your point where Q2, Q3 big margin and then Q3, Q4 and Q1 let's say low margin because it was more commoditized for frozen food. We're changing this. First, what we see is we try to expand the seasonality of ice cream, that's one thing, starting earlier, finishing later.

Speaker 2

And second, within the frozen food business, we are really switching from low margin to higher margin. It's a switch, takes time, so you have to change it. It doesn't mean that we are gaining volumes, but we have better volumes and that's what matters. And from that standpoint what's great by the way is we don't have to reinvent the wheel. We just have the people in Serbia and Croatia, they just have to check what's available in the rest of the business.

Speaker 2

And we have great as you know we have great fish fingers, we have great coated fish, we have great vest business. So that's a it's a really it's a quick launch, it's a lift and it's a shift and lift

Speaker 3

and launch,

Speaker 2

It's innovation, but it's low risk innovation. So we like the trajectory. So we don't think that they have reached that they have maxed out, quite the contrary.

Speaker 3

But it's important to note as well that the margin progress you will see in Q2 and Q3 are not only coming from the mix of the Adriatic, but they're coming effective from the base business. Yes, that is benefiting from the point I was making earlier on the gross margin impact that you saw in Q1 that is actually, let's say, moving let's say, translating over for the rest of the year into quite, let's say, important gross margin improvement given the dynamic that we have on the top line and on the cost as well.

Speaker 6

Got it. That's very helpful. Thank you.

Speaker 1

Thank you, John. You're welcome.

Operator

Ladies and gentlemen, we have reached the end of the question and answer session. I will now hand over to Stefan for closing remarks.

Speaker 2

Thank you, Judith, and thank you for your participation on today's call. We have proven track record of delivering uninterrupted growth. Our growth flywheel is beginning to spin faster, making me even more confident about the outlook. I'm excited by the opportunities ahead of us and look forward to meeting many of you in the coming weeks.

Operator

Thank you very much, sir. Ladies and gentlemen, that concludes today's event. Thank you for attending and you may now disconnect your lines.

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Earnings Conference Call
Nomad Foods Q1 2024
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