Introduction

Nomad Foods (NYSE:NOMD) grew pretty fast in the past few years as the company took advantage of the low cost of debt to acquire smaller competitors in the fragmented landscape of frozen foods. As the cost of debt has increased in the past few years, Nomad's focus shifted from growth to balance sheet management, and the majority of the free cash flow is used to reduce the net debt position on the balance sheet, which will obviously also help to keep the interest expenses within reason. I have a long position in Nomad Foods and I have written put options with strike prices of $15 and $17.5. As I like the company's management and wouldn't mind building an overweight position if the opportunity presents itself, I am keeping a close eye on the company's developments.

I have been following Nomad Foods since 2019, and you can read all my older articles here.

Looking at the Q1 results confirms the full-year expectations

In the first quarter of 2024, Nomad Foods reported a total revenue increase of 1.1%, including a 0.3% organic revenue increase. While that sounds acceptable, unfortunately, the company had to deal with increasing operating expenses and the EBITDA actually decreased by about a sixth to EUR122M.

As you can see below, the total revenue increased to almost EUR784M, which represents a EUR8.6M increase, but the total COGS increased by almost EUR22M, which reduced the gross profit by almost EUR14M. Fortunately, some of the other exceptional items decreased, which meant the operating profit decrease remained limited to just under minus 10%.

The finance costs stabilized: the net finance cost in the first quarter of this year was EUR30.1M, which is just a tad higher than the EUR29M it recorded in Q1 2023, so the company's approach to its debt position is quite good. Subsequent to the end of the first quarter, Nomad Foods disclosed it repriced an existing term loan, which will save the company in excess of EUR3M per year in interest expenses. That's good financial management, and it shows the company has its priorities straight.

But of course, the lower gross profit and EBITDA also meant that the pre-tax profit and net profit were lower than in the first quarter of last year. In Q1 2024, Nomad Foods recorded a EUR34.5M net profit, representing an EPS of EUR0.21.

In my previous articles, I always focused on Nomad's free cash flow performance considering the full-year capex and lease payments tend to be lower than the depreciation and amortization expenses which means the full-year free cash flow traditionally is higher than the reported net profit. That wasn't the case yet in the first quarter of the year.

As you can see below, the operating cash flow was EUR122M before changes in the working capital position and on a pre-tax and pre-lease basis. After taking the latter two into account, the adjusted operating cash flow was EUR59M after also taking the EUR48.4M interest expenses into account and using the EUR7.4M in taxes owed based on the H1 result rather than the EUR8.9M in taxes that were actually paid during the first semester.

While the EUR59M in adjusted operating cash flow was still more than sufficient to cover the EUR18.8M in capex, resulting in an underlying free cash flow of EUR40M before exceptional items, it's perhaps important to explain the timing of the interest payment. While the company 'accrued' just EUR36M of finance expenses during Q1, the net cash outflow was much higher as not all of the interest payments get paid on a quarterly basis. The impact of the timing of the interest payments should be smoothed out throughout the year.

Secondly, Nomad also recorded EUR24M in cash outflow related to exceptional items. This means the net reported free cash flow was just EUR16M. On a normalized basis, before exceptional items and using a normalized interest expense, the Q1 adjusted free cash flow was closer to EUR50M or EUR0.31 per share based on the current share count of 162.7M shares outstanding.

The company's management considers the exceptional items to be non-recurring in nature. And as you can see below, the majority of the EUR23.5M recorded in Q1 was related to the business transformation program, which aims to standardize and simplify the business process. These non-recurring items will continue to be incurred for the next few years, so it makes sense for me to calculate the underlying free cash flow (before the exceptional items) as well as the reported free cash flow, which includes the non-recurring items.

The EUR3M in settlement of legacy matters is related to the release of acquired provisions related to previous M&A transactions.

I can't say I'm particularly pleased with the company's performance in the first quarter of the year. As you can see below, the adjusted EBITDA shrank to EUR122M, and I can't be happy with that.

However, Nomad's management team indicated the volume and market share evolution is going as planned, and the company reconfirmed its full-year guidance. That full-year guidance anticipates a 3- 4% revenue growth and a 4-6% adjusted EBITDA increase.

We know the adjusted EBITDA was EUR535M in FY 2023, and a 4% increase - the lower end of the guidance - would result in an adjusted EBITDA of EUR556M. Using the lower end of the guidance would result in an anticipated revenue of EUR3.09B.

We know the revenue was just EUR784M in Q1 while the adjusted EBITDA was just EUR122M. This means that, in the next three quarters, the company still has to report on, it needs to generate EUR2.3B in revenue and an adjusted EBITDA of at least EUR434M (for an adjusted EBITDA margin of almost 19%) to meet the lower end of the full-year guidance.

Investment thesis

At the current share price of $16.80, Nomad's enterprise value is approximately EUR4.3B for an EV/EBITDA of around 8 (excluding lease liabilities and the impact of lease amortization). The consensus estimates for 2026 call for an EBITDA north of EUR600M (with the adjusted EBITDA likely a bit higher than that) and that should push the debt ratio firmly below three times the adjusted EBITDA.

As mentioned in the introduction, I have a long position in Nomad Foods and I am slowly adding to this position by writing put options (with $15 and $17.5 strike prices and various expiry dates). Nomad Foods is a well-managed frozen foods company, and it is currently focusing on the right priorities by reducing its net debt.