Description

History

Nomad Foods was formed by Martin Franklin and Noam Gottesman as a SPAC that initially went public in April 2014 on the London Stock Exchange. A little over one year later, the SPAC acquired Iglo Foods Holdings Limited from private equity firm Permira for 2.6 billion Euro. Nomad now trades on the NYSE and is headquartered in the U.K.

Iglo traces its roots back to the 1920’s when Clarence Birdseye patented the Birds Eye Plate Froster for freezing fish. After the acquisition of the Birds Eye patents by General Foods in the 1930s, the Birds Eye brand was launched. In the 1950s Unilever acquired Birds Eye and the Iglo brand was launched in Belgium in 1956 and in Germany in 1961. In 2006, the private equity firm Permira acquired the Iglo Group from Unilever, and in October 2010, the Iglo Group acquired the Findus brand in Italy. Currently Iglo has leading market positions in frozen foods in several Western European countries including the U.K., Germany, and Italy.

Nomad’s second acquisition was made in November 2015 when it acquired the Findus Group which comprised the Findus operations in Scandanavia, France, Spain and Belgium. At the time of the acquisition, Findus operated six manufacturing facilities, employed 1,500 workers, and owned the rights to the Findus, Lutosa, and La Cocinera brands. The deal was valued at 500 million Pounds. Having already owned the Findus brand in Italy, this acquisition united the brand and combined the first and fourth largest frozen food companies in Western Europe. Findus frozen food products were first introduced in 1945 in Sweden and were exported to other European countries in the 1950s. Findus was acquired by Nestle in 1962 where it remained until 1999 when it was acquired by a Swedish private equity firm. Findus remained under PE ownership (three different funds) for 16 years until it was purchased by Nomad in 2015.

Nomad has made two additional acquisitions in its short history. It acquired the frozen pizza company Goodfella’s in April 2018 for 200 million Pounds. Goodfella’s held the #2 market share in the UK and #1 in Ireland in frozen pizza. Nomad acquired Aunt Bessie’s in July of 2018 for 240 million Euro. Aunt Bessie’s had the leading market share in frozen Yorkshire puddings and the #2 share in frozen potatoes in the UK. Nomad paid approximately 10.5x TTM EBITDA of 23 million Euro. These deals combined comprised about 40% of pro-forma revenue in the UK and they were funded with incremental debt and cash on hand.

Industry Overview

Currently Nomad is the largest frozen food company in Western Europe (and the third largest in the world behind Nestle and Conagra) with leading market share of 14% in the European savory frozen category. Nomad’s sales by country include 30% U.K., 17% Italy, and 15% Germany. The company sells a wide variety of products with a focus on frozen fish (40% of revenue) and vegetables (19%). It has the #1 branded market share overall in 11 of the 13 countries it primarily competes in including #1 in frozen fish in 11 of the 13 and #1 in frozen vegetables in 10 out of the 13. Its overall share within its markets for frozen fish and frozen vegetables is around 25% although this varies by country.

The frozen food market in Western Europe is highly fragmented with the 10-largest branded companies accounting for less than 40% of the total market. Many participants operate within a single geographic region or product category. In addition to other branded products, competition comes from private label products at traditional grocers as well as discounters such as Aldi and Lidl. Nomad is over twice as large as its next largest branded competitor, Dr. Oetker. However the share of private label in Nomad’s main categories is significant. In both Germany and the U.K., the combined share of Nomad and private label is in excess of 80%, meaning other branded competitors have limited share. In recent years, the overall frozen food market in Western Europe, excluding ice-cream, has grown total retail sales dollars by between 1% and 2% annually. The shelf space allotted to frozen foods is relatively stable due to the fixed amount of freezer space; however, there is some seasonal shift between sweet and savory with ice cream gaining space in the summer months.

Management

As previously mentioned, the company was co-founded by Martin Franklin and Noam Gottesman. Martin Franklin has a very successful business track record and is best known for the returns he produced (50x) after taking over Jarden Corporation in 2001. Other ventures haven’t been quite as successful (e.g. Platform Specialty Products, GLG, etc.) Gottesman is less well-known than Franklin but he is a billionaire with a long career in the investment industry. After leaving Goldman Sachs in 1995, he co-founded hedge fund GLG partners which managed nearly $25 billion at its peak.

Nomad’s CEO is Stefan Descheemaeker who was brought in at the time of the Iglo acquisition. Previously he was with the global food retailer Delhaize Group from 2008 to 2013 as the CEO of the European division. Prior to Delhaize, Mr. Descheemaeker had various roles at Interbrew including Head of Strategy and External Growth. After Ambev acquired Interbrew in 2008, Mr. Descheemaeker joined Ambev’s board of directors and served until last year.

The Turnaround

Nomad got off to a rough start after the 2015 acquisitions of Iglo and Findus. By the summer of 2015, the stock price had spiked to over $22 per share as the market was infatuated with “platform companies.” In fact, Nomad was even mentioned in Bill Ackman’s presentation highlighting the platform value of Valeant. Likely the involvement of Martin Franklin and Ackman (who owned shares) and the excited over platform companies led to market to vastly overvalue the stock. When the market sold off in early 2016, Nomad’s stock price crashed to below $7 per share, which valued the company below what it has paid for Iglo and Findus less than a year earlier.

The business performance at the outset was concerning. During 2015 and 2016, Nomad experienced larger than anticipated declines in comparable sales. For example, in the four quarters from Q2 2015 to Q1 2016, comparable sales declined by 5.4%, 8%, 7% and 6.1%, respectively. These poor results likely were a negative surprise for the market as the numbers were reported starting immediately after the Iglo acquisition.

The company blamed these difficulties on competition from discounters and private label but most of the damage was self-inflicted.  For example, prior to being acquired by Nomad, Iglo placed a major emphasis on new product development (NPD) and product innovation. In Iglo’s 2014 shareholder letter, the CEO (this CEO was not retained after Nomad acquired Iglo) wrote: “Our results for this year show that innovation is now the fundamental driver of growth for our business.” Along with these new product launches, Iglo undertook a European-wide advertising campaign called “Food of Life” to boost the brand and its new products. However, while the new product launches were well received, sales of core brands suffered.

Nomad’s current management recognized this and shifted its strategy to focus on “Must Win Battles” meaning the company redirected its focus to support its key products in key markets. For example, in a presentation given in early 2016, Nomad pointed out that 55% of spending on advertising and promotion (A&P) was directed towards core products in 2012, yet that percentage had declined to 32% and 26% in 2014 and 2015, respectively. Management has stated that its long-term target for the amount of A&P directed towards core products is approximately 70%. Also redirected its resources towards core product “renovation” rather than NPD.

Nomad management also pursued a more localized marketing approach in contrast with Iglo’s single European strategy given the realization that “food is local” and various tastes and histories in the countries in which Iglo and Findus operate may require a decentralized approach. Current CEO Stephan Descheemaeker wrote the following in the 2015 Nomad annual report:

However, as we experienced during 2015, there are real challenges that we need to resolve in order to stabilize our business. The retail environment across Europe continues to be increasingly competitive for traditional grocers and, by extension, for branded businesses— this has been particularly evident in our United Kingdom, Italian and German markets. These challenges had been exacerbated by an overly centralized commercial approach. While we are a pan-European frozen food business and enjoy the benefits of scale in executive leadership, supply chain and support services, we are leaders in a highly localized European food market across 17 countries, each with specific tastes and preferences. Recognizing this, we are turning to our local icons, such as Captain Birds Eye and other brand heroes, to rejuvenate our core categories—fishfingers, coated fish, peas and spinach among others. These are historically the bread and butter of our business and, accordingly, our “Must Win Battles.”

We believe this business strategy, organizational model and fixed cost structure, along with identified growth opportunities, will create long-term competitive advantages to ensure a sustainable and vibrant future.....Our strategy for the coming years is fully focused on supporting and nurturing our core categories to deliver growth. They are the jewels in our crown and for which our brands are known and loved. On a local level, we also have products that are individual to that country, such as Schlemmerfilet in Germany and minestrone in Italy. All our resources—from A&P to R&D through to promotional spend—will prioritize our “Must Win Battles,” whether pan European or local.

To management’s credit, the “Must Win Battle” strategy was successful. As of Q2 2020, Nomad had generated positive org

anic sales growth for 14 straight quarters with growth accelerating in 2020 due to the pandemic.

Financials

In 2019, annual net revenue totaled over 2.3 billion Euro with organic revenue growth of 2.1% compared to organic growth of 2.6% in 2018. Gross margins have been very stable at around 30% for the past three years and Nomad has had leverage on SG&A since integrating Aunt Bessie’s and Goodfella’s and improving efficiency overall. SG&A as a percent of revenue has declined from 14.2% in 2017 to 12.5% in 2019 and adjusted EBITDA margins have increased from 16.8% to 18.6% during that time.

Revenue and EBITDA in 2017 prior to the acquisitions of Aunt Bessie’s and Goodfella’s, was 1.96 billion and 328 million Euro compared to 2.32 billion and 432 million Euro in 2019 when both companies were owned for the entire year. In the year prior to the acquisition, Aunt Bessie’s generated revenue and EBITDA of 123 and 23 million Euro, respectively. Nomad reported that Goodfella’s was anticipated to generate 150 million and 22 million Euro in revenue and EBITDA, respectively within two years of being acquired. Given that EBITDA increased by over 100 million Euro, assuming the two acquisitions performed as expected, the EBITDA of the legacy business increased by 18%. Free cash flow more than doubled to 220 million Euro in 2019 compared to 2017 in spite of a significant investment in working capital in 2019. Capital expenditures as a percent of revenue are around 2%. There were some capacity issues during the height of pantry loading during the pandemic but generally speaking Nomad has adequate manufacturing capacity.

As of 6/30/20, Nomad had 960 million Euro cash and investments compared to 1.86 billion Euro debt for a net leverage ratio of 2x which is relatively conservative given the stability of the business.

Results for the six months of 2020 have been very strong as consumers stocked up during the pandemic. Organic sales increased 7.7% in Q1 and 12.3% in Q2 and EBITDA guidance was raised to 460 million Euro from 440-445 at the beginning of the year. Free cash flow has been exceptionally strong totaling over 250 million Euro in six months, compared to 220 million Euro for the full year last year. The company noted growth through new customers and increased household penetration as well as very strong repeat purchase rates in Q2. It believes that the additional trial due to the pandemic will lead to new, repeat customers going forward. Regarding 2H of 2020, the company projects sales will remain elevated but at lower rates of organic growth. Nomad’s latest innovation, Green Cuisine, is a line of plant-based protein which was recently introduced and will be rolled out to all Nomad’s markets later this year. Plans for the rollout were pushed back from Q2 to Q3 given the pandemic however revenue and margin are exceeding expectations thus far. Nomad believes Green Cuisine could be a catalyst for organic growth for years to come given the growing popularity of meat alternatives.

Capital Allocation

While it is still early, it appears that the acquisitions of Aunt Bessie’s and Goodfella’s have been value enhancing for Nomad. Since 2017, Nomad has invested nearly 550 million Euro in acquisitions and capital expenditures and EBITDA has increased by slightly over $100 million Euro since that time (through 2019, not including 2020) while net leverage has decreased. The company has been opportunistic regarding share repurchases and issuance. In 2017 Nomad repurchased approximately $100 million worth of stock at $10.75 per share from private equity firm Permira. In March 2019 the company raised about $350 million selling equity at $20 per share as it believed the shares were fully priced at that time, it wanted to ensure it had plenty of liquidity given uncertainties surrounding Brexit, and it saw acquisition opportunities. However, no deals were announced as the company’s acquisition criteria was not met and they ultimately passed on several opportunities. Last week Nomad announced a $500 million tender offer to repurchase its shares at prices between $23 and $25.50 per share. If fully executed, this will reduce the share count by approximately 10%. Given the strong cash generation in 2020 and relatively low leverage, I believe this is a value-enhancing transaction.

Going forward, the company has said that capital allocation will be directed towards tuck-in acquisitions in the European frozen food sector. On the Q2 quarterly call the CEO stated: “At the same time, we are refining our M&A focus towards European frozen acquisitions, which are primarily mid-sized in nature. This compelling and targeted pipeline will require us to carry significantly less cash on our balance sheet than we have in recent quarters.” Previously the company had mentioned acquisition targets outside of frozen and even possibly in North America. I believe this refined focus on European frozen is the right course of action as there are numerous targets, Nomad is already the largest frozen company in Europe giving it some leverage with retailers and wide distribution, and it is an experienced integrator. Smaller tuck-in deals like Aunt Bessie’s are less risky than very large deals and there are more of them. Given Nomad’s robust cash generation, the company will continue to attempt to compound its free cash flow much like Martin Franklin did at Jardin and like he attempted to do at Platform Specialty Products. I think the learnings from both the success at Jardin and the difficulties at Platform will inform the path forward for Nomad, especially the experience of having too much debt (and denominated in the wrong currencies) at Platform.

Valuation

While Nomad operates in Europe and its primary currencies are the Euro and Pound, its stock trades on the NYSE in USD. Its current market capitalization is approximately $4.9 billion and enterprise value is $5.9 billion after converting its debt and cash balances to USD at a current stock price of $24.47. EV/EBITDA is approximately 11x based on 2020 EBITDA and free cash flow this year will likely be close to $400 million or possibly greater depending on working capital and developments in 2H. At around $400 in free cash flow, the fcf yield is between 8% and 9% which I think it attractive given Nomad’s relatively low leverage, stable cash flows, and inorganic growth opportunities going forward.

Risks

A sustained rise in the value of the Dollar relative to the Pound and Euro would diminish the company’s value in terms of Dollars. Given that Nomad’s operations are entirely based in Europe, there is little it can do to offset Dollar strength. The primary currency risk from an operational standpoint is that portions of its purchases of fish are Dollar denominated.

While Nomad has grown organically for the past four years (assuming 2020 finishes with organic growth), overall category growth is low, only growing 1% to 2% annually. Nomad is not a high growth company and the business is very competitive, especially with private label and the discounters. 

Both Franklin and Gottesman own preferred stock which entitles them to an annual dividend, paid in ordinary shares, based on the appreciation in the common stock for the calendar year. The annual stock dividend is equal to 20% of the increase in the stock price subject to a high-water mark. The dividend last year (total of 6.4 million shares) was paid based on a stock price of $21.73, so no additional dividend will be paid until the stock price exceeds this amount for the last ten trading days of the calendar year. The preferred shares convert on a one-for-one basis into common stock after the seventh full year after the Iglo acquisition, which is 2022. This is not an ideal compensation arrangement but at least it is based on stock performance and provides incentive to the Co-chairmen. And the carry expires after 2022.

Positives

While competition is fierce, Nomad’s products have large market shares, especially compared to other branded competitors. This gives then additional clout with their retail partners and economies of scale.

Nomad and frozen are well suited to e-commerce. Nomad claims to have 40% higher market share on-line as compared to brick & mortar. In April 2020 on-line sales grew 80% year-over-year and represented 7% of Nomad’s overall sales. 

By reorienting its strategy in 2016/2017, management successfully changed the trajectory of the company and successfully integrated two acquisitions. I think Nomad has both a strong management team and a resilient business as evidenced by the durability of its brands. Iglo and Findus have been around for decades and have tremendous consumer recognition in Europe. The company’s CEO, Mr. Descheemaeker understands the industry well given his time at Interbrew and Delhaize. He understands the business from the standpoint of the food retailers (i.e. Nomad’s customers) and he has had a front-row seat to the operational and cost cutting methods of 3G (for better or worse). Additionally, Martin Franklin’s history with Jarden is somewhat similar to Nomad. In building Jarden, he repeatedly bought mundane consumer brands, cut costs, reinvigorated marketing and product development, and grew the brands over time.

The price is low enough to generate attractive returns going forward. With a HSD starting yield, organic growth of 1 to 2% and inorganic growth opportunities, I think double digit compounding is likely.

Catalyst

• $500 million Tender Offer
• Continued strong sales due to the pandemic
• Acquisitions