View all newsletters
Receive our newsletter – data, insights and analysis delivered to you
  1. News
May 12, 2022

Nomad Foods defends frozen-food position amid “weak” European demand

Nomad Foods plans second round of pricing and possibly a third.

By Simon Harvey

Nomad Foods, the largest frozen-food products supplier in Europe, saw sales growth tail off in the first quarter in a reflection of the elevated demand during Covid-related lockdowns in the initial three months of last year.

In what CEO Stefan Descheemaeker described as “unprecedented cost inflation”, Nomad also initiated a round of pricing toward the back end of the quarter, with a second bout in store, and even possibly a third.

Addressing analysts on a post-results call yesterday (11 May), Descheemaeker acknowledged consumers across Europe are “coming under increasing pressure from high inflation”, made worse for the company by the “unprecedented geopolitical challenge” from the war in Ukraine.

He fended off the challenge from a private-label perspective, arguing that own-label is somewhat behind the curve in pricing terms from the industry-wide increases in the cost of goods sold. However, CFO Samy Zekhout admitted the frozen-food category was “a bit weaker” during the quarter than ambient or perishable alternatives, albeit in the context of Covid lockdowns a year earlier.

Nevertheless, despite the slowdown in growth, sales in value terms remain above pre-Covid levels.

“As a private label, you’re starting from a lower baseline in terms of price, but you’re facing exactly, in absolute terms, the same kind of COGS [cost of goods sold] increase, which means that, if and when you’re going to pass the COGS increase, in relative terms, it’s going to be a steeper increase,” Descheemaeker said in response to a question on the call.

Zekhout maintained, fielding a question from another analyst, that over a longer-term horizon, frozen-food sales were holding up.

“I think at this stage, yes, let’s say frozen is a bit weaker than the others. But you need also to remember that during the same period last year, [frozen] significantly overperformed the other categories, ambient and perishable. So, overall, and when you see on a two-year basis, we’re still doing very well. I’m not concerned but, definitely, we want to see, obviously, things moving on.”

Nomad’s sales in the quarter ended 31 March, rose 3.6% in reported terms to EUR733m (US$764m). That was the same pace of growth as the corresponding three months of last year when the business posted revenues of EUR707m but below the 10.5% growth recorded in the first quarter of 2020.

And growth levelled off from 7% in the fourth quarter of last year and 4% in the third.

On an organic basis, sales dropped 4.5%, compared to growth of 1.8% in the first quarter of last year and 7.7% in the initial three months of 2020. It was also down from the fourth quarter print of a positive 4.5%.

Organic sales revenue declined, “reflecting difficult volume comparisons against the Covid lockdowns that were still in place this time last year”, Descheemaeker explained, adding other constraining factors.

“We lost sales in the UK due to a poultry shortage and lost sales in another large market due to a pricing dispute with a major retail customer,” he said. “Stripping out these one-off items, our organic revenues would have been down low single-digits for the period. We have since successfully resolved both issues.”

Lower organic sales and higher raw material costs also impacted gross margins to the tune of 250 basis points, coming in at 27.9%. It was a similar picture for adjusted EBITDA, which fell 4% to EUR132m.

Descheemaeker expects the pricing initiated in March, which he put in the mid-single-digit area, to translate to a better sales performance in the second quarter when the lockdown comparisons to last year will also be absent.

A second bout of pricing is planned to take effect from the back half of the fiscal year. “We expect the second wave of pricing to support margin recovery in the second half so that we can start 2023 with an appropriate level of margin,” Zekhout said. “We may need to execute the third wave of pricing towards the end of the year should inflationary pressures persist.”

Organic revenue growth for the full year is anticipated to be in a “low single-digit trend”, the CFO added.

After dropping 8.5% to EUR0.43 in the quarter, adjusted EPS guidance was set by Nomad at EUR1.71 to EUR1.75, which it said would represent 10-13% growth.

And the acquisition of the frozen food business of Croatia-based Fortenova Group last year was cited for the more upbeat EPS outlook.

“This guidance assumes high single-digit revenue growth with a modest organic revenue gain and the inclusion of Fortenova frozen food business for the full-year.”

Meanwhile, Descheemaeker said Nomad is “well prepared” on input costs for the rest of the year, with around 85% of raw material inputs hedged.

“On energy, we are effectively covered for 2022 and have begun hedging for 2023. In edible oils, we have had no shortage to date, and we’ve taken a covered position on all our requirements for 2022,” he explained. “With this supply crisis, we have accelerated the execution of our risk-mitigation strategies, and we have taken steps to diversify our sourcing portfolio across key ingredients.”

Just Food analysis, March 2022: Covid-19 two years on – frozen food seeks boost from cost-of-living crunch

Related Companies

Topics in this article:
NEWSLETTER Sign up Tick the boxes of the newsletters you would like to receive. A weekly roundup of the latest news and analysis, sent every Friday. The industry's most comprehensive news and information delivered every other month.
I consent to GlobalData UK Limited collecting my details provided via this form in accordance with the Privacy Policy
SUBSCRIBED

THANK YOU