Nomad Foods(NOMD) - 2021 Q3 - Quarterly Report

Interim Management Report This report provides an overview of Nomad Foods Limited, detailing its general information and liquidity position General Information Nomad Foods Limited (NYSE: NOMD) is presented as Europe's leading frozen foods company, headquartered in the UK but incorporated in the British Virgin Islands. The company's portfolio includes iconic brands such as Birds Eye, Findus, iglo, and following a recent acquisition, Ledo and Frikom - Nomad Foods is Europe's leading frozen food company with brands including Birds Eye, Findus, iglo, Aunt Bessie's, Goodfella's, Ledo, and Frikom[3] Liquidity Review For the nine months ended September 30, 2021, the company experienced a net decrease in cash and cash equivalents of €177.8 million, resulting in an ending balance of €211.6 million. The decrease was primarily driven by significant cash used in investing activities, notably the Fortenova acquisition, which was partially offset by cash provided by refinancing activities Cash Flow Summary (Nine Months Ended Sep 30, € million) | Indicator | 2021 | 2020 | | :--- | :--- | :--- | | Net cash generated from operating activities | 161.6 | 321.3 | | Cash used in investing activities | (632.5) | (13.1) | | Net cash provided by/(used in) financing activities | 293.1 | (563.7) | | Net decrease in cash and cash equivalents | (177.8) | (255.5) | | Cash and cash equivalents at end of period | 211.6 | 552.3 | - Net cash from operating activities decreased by €159.7 million year-over-year, mainly due to a cash outflow for trade and other payables in 2021 versus an inflow in 2020, when sales were boosted by the COVID-19 pandemic[7] - Cash used in investing activities increased by €619.4 million, primarily due to the €640.1 million acquisition of Fortenova Group's Frozen Food Business Group (FFBG)[8] - Financing activities provided a net cash inflow of €293.1 million, a significant reversal from the prior year's outflow, driven by a net increase in borrowings of €391.3 million from refinancing activities[9] Risk Factors This section details the various business, operational, financial, and share-related risks faced by Nomad Foods Limited Risks Related to Our Business and Industry The company faces significant business and industry risks, including intense competition from private labels and discounters, the need to adapt to changing consumer preferences for health and sustainability, and potential supply chain disruptions. The ongoing impacts of the COVID-19 pandemic and Brexit create uncertainty regarding demand, costs, and labor availability. Dependency on a limited number of large retail customers and third-party suppliers also poses a considerable risk - The frozen food market is highly competitive, with pressure from private label products, discounters, and online retailers[18] - COVID-19 has shifted consumer behavior to online shopping and larger basket sizes, while reducing demand from food service[18] - Sales are subject to changing consumer preferences towards natural, nutritious, sustainably sourced products, and meat substitutes[21] - The COVID-19 pandemic could materially impact operations through supply chain disruptions, increased demand for retail products that strain capacity, and potential facility shutdowns[26][27] - Brexit introduces risks of increased costs and administrative burdens from new import/export regulations between the UK and EU, potentially impacting supply chains and profitability[32] - 95% of 2020 revenue was from the EU and UK[33] - The company is vulnerable to fluctuations in the availability and price of raw materials like fish, vegetables, and poultry, which can be affected by weather, disease, and government policies[40][41] - The top 10 customers accounted for 41% of revenue in 2020, creating significant dependency and pricing pressure from large, powerful food retailers[45] Risks Related to The Fortenova Acquisition The acquisition of Fortenova's Frozen Food Business Group (FFBG) introduces risks related to entering new product categories (ice cream) and geographies (Central and Eastern Europe) where the company lacks prior experience. There is a risk of business partners terminating agreements due to change-of-control provisions and potential difficulties in enforcing warranties provided by the seller - The Fortenova acquisition may trigger change-of-control provisions, allowing customers or partners of FFBG to terminate their agreements[75] - The acquisition represents an entry into the new product category of ice cream and new geographies in Central and Eastern Europe, where consumer habits and seasonal trends differ from the company's existing markets[77] - The company may not be able to enforce claims under the warranties provided by the Fortenova Group in the acquisition agreement, potentially exposing it to unexpected liabilities[76] Risks Related to Our Acquisition Strategy The company's growth strategy relies on acquisitions, which carry inherent risks. These include the potential inability to successfully integrate acquired businesses, which could lead to unforeseen expenses, and the risk of overpaying due to significant competition for acquisition targets. Furthermore, due diligence may not uncover all liabilities of a target business - The company may not be able to consummate future acquisitions or successfully integrate them, leading to unanticipated expenses and failure to realize expected benefits[78] - Future acquisitions may be financed through additional debt or equity, which could increase financial constraints or dilute existing shareholders[79] - Due diligence may not reveal all liabilities of a target business, potentially leading to substantial impairment charges or other losses post-acquisition[83][87] Risks Related to Regulations As a food producer, the company is subject to extensive and evolving regulations across multiple jurisdictions, including the EU and UK, governing food safety, labeling, environmental standards, and data privacy (GDPR). Compliance costs can be significant, and failure to comply could result in fines, product recalls, and reputational damage - The business is subject to extensive regulations in the UK, EU, and other countries covering production, labeling, safety, and distribution[88] - Non-compliance can lead to fines, recalls, or criminal sanctions[88] - Operations are subject to numerous health, safety, and environmental regulations[92] - Stricter legislation could require significant investments and increase operating costs[92] - Changes in data privacy regulations, such as the GDPR, expose the company to risks of non-compliance and significant fines, which can be up to 4% of annual global revenue[96] Risks Related to Financial Management The company's financial management risks are centered on its significant indebtedness, which requires substantial cash flow to service. It is exposed to interest rate risk from variable-rate debt and exchange rate risk due to its multinational operations. The carrying value of goodwill and intangible assets, which constitute a large portion of total assets, is subject to impairment risk - The company has significant indebtedness, and its ability to make payments depends on generating sufficient cash flow, which is subject to factors beyond its control[99] - Variable-rate debt subjects the company to interest rate risk[102] - The transition away from LIBOR to alternative rates like SONIA and SOFR introduces further uncertainty[103] - As of December 31, 2020, intangible assets (including goodwill) totaled €4,058.2 million, representing a significant portion of total assets (€5,580.6 million) and are at risk of impairment[110] - The company is a holding company that relies on dividends and distributions from its subsidiaries to meet its obligations[118] General Risk Factors General risks include dependency on information technology systems, which are vulnerable to cyber-attacks and disruptions, potentially harming business operations. The company also faces risks from changes in accounting standards and the possibility of incurring liabilities not covered by insurance. Failure to maintain effective internal controls over financial reporting could also adversely affect the company - The company is increasingly dependent on IT systems and is vulnerable to disruptions, failures, or security breaches, with cyber-attacks increasing in frequency and sophistication, particularly since the COVID-19 pandemic[120][121] - Failure to maintain effective internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, could result in a loss of investor confidence and potential regulatory sanctions[126][127] Risks Related to our Ordinary Shares Investors in the company's ordinary shares face risks of significant dilution from the issuance of additional shares tied to outstanding equity instruments, including Founder Preferred Shares and LTIP awards. The share price may be volatile. As a foreign private issuer incorporated in the British Virgin Islands, shareholders may have fewer protections and receive less information compared to investors in domestic U.S. companies - Shareholders face potential significant dilution from the conversion of 1,500,000 Founder Preferred Shares and the issuance of shares under the LTIP, which had 3,803,359 outstanding equity awards as of November 2, 2021[128][132] - As a foreign private issuer, the company is exempt from certain SEC reporting and NYSE governance rules, such as filing quarterly 10-Q reports and having a majority-independent board, which may offer less protection to shareholders[136][137] - Shareholder rights under British Virgin Islands law differ from U.S. law and may offer limited protection or recourse for minority shareholders[139][141] Risks Related to Taxation The company's tax treatment is subject to changes in tax laws in the various jurisdictions it operates in, including the BVI, UK, and U.S. A failure to maintain its current tax status, such as being deemed a U.S. resident for tax purposes, could negatively affect financial results. Disputes with tax authorities could also lead to unforeseen tax adjustments - Changes in tax laws or practices in the BVI, UK, U.S., or other jurisdictions could change and reduce net returns for shareholders[145] - If the company were considered a resident for tax purposes in the U.S. or another country where it currently lacks a taxable presence, it could be subject to income tax on its profits, negatively impacting results[146] Condensed Consolidated Interim Financial Statements This section presents the unaudited condensed consolidated interim financial statements, detailing the company's financial position, performance, and cash flows Statements of Financial Position As of September 30, 2021, total assets were €6,074.6 million, an increase from €5,580.6 million at year-end 2020. The growth was driven by increases in goodwill and intangible assets, largely due to the Fortenova acquisition. Total liabilities also increased to €3,761.8 million, primarily from higher loans and borrowings to finance the acquisition Condensed Consolidated Statement of Financial Position (€ millions) | | Sep 30, 2021 | Dec 31, 2020 (Restated) | | :--- | :--- | :--- | | Total non-current assets | 5,170.2 | 4,612.2 | | Goodwill | 2,256.0 | 1,902.5 | | Intangibles | 2,274.2 | 2,155.7 | | Total current assets | 904.4 | 968.4 | | Cash and cash equivalents | 211.6 | 393.2 | | Total assets | 6,074.6 | 5,580.6 | | Total current liabilities | 909.2 | 917.1 | | Total non-current liabilities | 2,852.6 | 2,537.4 | | Loans and borrowings | 2,179.6 | 1,736.3 | | Total liabilities | 3,761.8 | 3,454.5 | | Total equity | 2,312.8 | 2,126.1 | Statements of Profit or Loss For the nine months ended September 30, 2021, the company reported a profit of €152.2 million on revenue of €1,902.6 million. This compares to a profit of €166.4 million on revenue of €1,858.2 million in the prior-year period. The decrease in profit was primarily due to significantly higher net financing costs in 2021 Condensed Statement of Profit or Loss (€ millions) | | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenue | 599.4 | 576.3 | 1,902.6 | 1,858.2 | | Gross profit | 167.6 | 175.2 | 564.0 | 555.4 | | Operating profit | 80.6 | 87.0 | 284.8 | 259.3 | | Net financing costs | (15.0) | (15.7) | (90.4) | (44.2) | | Profit before tax | 65.6 | 71.3 | 194.4 | 215.1 | | Profit for the period | 51.7 | 56.4 | 152.2 | 166.4 | | Basic and diluted EPS (€) | 0.29 | 0.29 | 0.85 | 0.84 | Statements of Comprehensive Income/(Loss) For the nine months ended September 30, 2021, total comprehensive income was €209.2 million, a significant increase from €146.5 million in the same period of 2020. The increase was driven by a positive swing in other comprehensive income, which included actuarial gains on pension plans and gains on cash flow hedges, contrasting with losses in the prior year Condensed Statement of Comprehensive Income (€ millions) | | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Profit for the period | 51.7 | 56.4 | 152.2 | 166.4 | | Other comprehensive income/(loss) for the period, net of tax | 21.0 | (19.8) | 57.0 | (19.9) | | Total comprehensive income for the period | 72.7 | 36.6 | 209.2 | 146.5 | Statements of Changes in Equity Total equity increased from €2,126.1 million at the beginning of the year to €2,312.8 million as of September 30, 2021. The increase was primarily due to total comprehensive income of €209.2 million, partially offset by transactions with owners, including the settlement of the Founder Preferred Shares dividend and share repurchases - Total equity increased by €186.7 million during the first nine months of 2021, from €2,126.1 million to €2,312.8 million[155] - Key changes included total comprehensive income of €209.2 million, a €79.5 million reclassification for the Founder Preferred Shares dividend, and a €10.5 million reduction from the repurchase of ordinary shares[155] Statements of Cash Flows For the nine months ended September 30, 2021, net cash generated from operating activities was €161.6 million, a decrease from €321.3 million in the prior year. Investing activities used €632.5 million, mainly for an acquisition, while financing activities provided €293.1 million from debt refinancing. This resulted in a net decrease in cash of €177.8 million Condensed Statement of Cash Flows (Nine Months Ended Sep 30, € millions) | | 2021 | 2020 | | :--- | :--- | :--- | | Net cash generated from operating activities | 161.6 | 321.3 | | Cash used in investing activities | (632.5) | (13.1) | | Purchase of subsidiaries, net of cash acquired | (597.3) | (1.0) | | Net cash provided by/(used in) financing activities | 293.1 | (563.7) | | Repurchase of ordinary shares | (10.5) | (479.8) | | Issuance of new loan principal | 800.0 | — | | Repayment of loan principal | (408.7) | (11.7) | | Net decrease in cash and cash equivalents | (177.8) | (255.5) | Notes to the Financial Statements This section provides detailed notes to the interim financial statements, covering accounting policies, acquisitions, and key financial disclosures Note 2: Basis of Preparation The financial statements are prepared in accordance with IAS 34. Effective January 1, 2021, the company adopted IFRS 9 for hedge accounting, applying it prospectively. This change aligns accounting more closely with the company's risk management strategy and required adjustments to opening equity balances for the cost of hedging approach - The company adopted hedge accounting under IFRS 9 on January 1, 2021, applying it prospectively to better align with its risk management strategy[169] - The adoption of the cost of hedging approach under IFRS 9 resulted in a net €1.6 million adjustment to opening reserves in the Statement of Changes in Equity[172] Note 4: Acquisitions The company completed the acquisition of Fortenova Group's Frozen Food Business Group (FFBG) for €640.1 million on September 30, 2021, resulting in provisional goodwill of €352.2 million. It also finalized the purchase price allocation for the Findus Switzerland acquisition, leading to a restatement of the December 31, 2020 balance sheet, which increased intangible assets and decreased goodwill - On Sep 30, 2021, the company acquired Fortenova's FFBG for €640.1 million, expanding into Croatia, Serbia, and other Central/Eastern European markets[212] Provisional Purchase Price Allocation for Fortenova Acquisition (€ million) | | As reported Sep 30, 2021 | | :--- | :--- | | Total identifiable net assets acquired | 287.9 | | Total purchase consideration | 640.1 | | Goodwill | 352.2 | - The valuation for the Findus Switzerland acquisition was finalized, resulting in a restatement of the Dec 31, 2020 balance sheet that increased intangible assets by €41.6 million and decreased goodwill by €35.5 million[208][211] - If the Fortenova acquisition had occurred on Jan 1, 2021, management estimates combined revenue for the nine-month period would have been €2,142.9 million and profit before tax would have been €236.8 million[215] Note 5: Segment Reporting The company operates as a single reporting and operating segment: "Frozen Foods." For the nine months ended September 30, 2021, Adjusted EBITDA was €373.8 million, up from €347.4 million in the prior year. The UK remains the largest market, contributing €564.3 million in revenue for the period - The company considers itself to have one reporting and operating segment, "Frozen Foods"[217] Adjusted EBITDA Reconciliation (Nine Months Ended Sep 30, € million) | | 2021 | 2020 | | :--- | :--- | :--- | | Profit for the period | 152.2 | 166.4 | | EBITDA | 335.5 | 310.9 | | Adjustments | 38.3 | 36.5 | | Adjusted EBITDA | 373.8 | 347.4 | External Revenue by Geography (Nine Months Ended Sep 30, € million) | Geography | 2021 | 2020 | | :--- | :--- | :--- | | United Kingdom | 564.3 | 555.2 | | Italy | 310.0 | 311.4 | | Germany | 288.5 | 285.2 | | France | 139.8 | 150.1 | | Rest of Europe & Other | 500.0 | 455.3 | | Total | 1,902.6 | 1,858.2 | Note 6: Exceptional Items For the nine months ended September 30, 2021, the company recorded €21.6 million in exceptional items. These costs were primarily related to a business transformation program (€7.1 million), integration costs for Findus Switzerland and Fortenova, and Brexit-related expenses (€4.7 million) Exceptional Items (Nine Months Ended Sep 30, € million) | Item | 2021 | 2020 | | :--- | :--- | :--- | | Business transformation program | 7.1 | — | | Findus Switzerland integration costs | 3.7 | — | | Release of indemnification assets | 5.0 | 17.8 | | Brexit | 4.7 | 0.9 | | Factory optimization | 2.3 | 7.6 | | Other | (1.2) | 1.0 | | Total exceptional items | 21.6 | 27.3 | Note 12: Financial Instruments In June 2021, the company undertook a major debt refinancing, repaying its €400.0 million 3.25% notes due 2024 and issuing €750.0 million of 2.5% notes due 2028. It also refinanced its senior secured term loan facility and replaced its revolving credit facility. The company continues to use cross-currency interest rate swaps to hedge its $916.4 million USD-denominated loan - In June 2021, the company repaid its €400.0 million 3.25% notes and issued €750.0 million of new 2.5% senior secured notes due 2028[251] - An additional €50.0 million was tacked on in July 2021[252] - The company also refinanced its €553.2 million senior secured term loan facility and replaced its €80.0 million revolving credit facility with a new €175.0 million facility that includes ESG-linked pricing[253][254] - The company continues to hold a $916.4 million senior USD loan due in May 2024, which it hedges into a fixed-rate EUR-denominated debt using cross-currency interest rate swaps (CCIRS)[255][256] Note 16: Share Capital and Reserves As of September 30, 2021, the company had 176.6 million ordinary shares and 1.5 million Founder Preferred Shares issued. During the period, the company issued 3.875 million ordinary shares as a dividend for Founder Preferred Shares and repurchased 507,396 ordinary shares for $12.8 million. In August 2021, a new share repurchase program of up to $500 million was authorized - In January 2021, the company repurchased 507,396 ordinary shares for $12.8 million (€10.5 million)[285] - On August 5, 2021, the Board authorized a new share repurchase program for up to $500 million of the company's ordinary shares[286] - On January 4, 2021, the company issued a share dividend of 3,875,036 ordinary shares related to the Founder Preferred Shares[284]