Nomad Foods: Quality At Value Price (NYSE:NOMD)

Frozen food department of grocery store.

Katrina Wittkamp

Nomad Foods (NYSE:NOMD) is a holding company that owns several of the market leaders in frozen foods across most of Western Europe and a significant portion of Eastern Europe. Its core products are frozen fish and frozen vegetables.

The company was born as a leveraged buyout of Iglo and Findus, the leaders in frozen food in Western Europe. NOMD was taken public in 2016. Since then, the company has acquired more brands in Western Europe (Goodfella’s Pizza, Aunt Bessie’s) and the Adriatic (Fortenova).

Because the frozen foods market is mature and grows slowly in Europe, NOMD has grown horizontally by acquisition into new markets. The company concentrates on market leaders alone. NOMD has also provided some examples of organic growth, although not many.

NOMD operations show increased revenues (boosted by acquisitions), and decreasing gross margins. However, the company has been able to control operating costs and therefore increase operating income at the same speed as revenues. With an asset light structure, NOMD does not suffer from significant operational leverage.

Although the company has almost €2.5 billion in long term debts, 7 times its average operating profits, it does not face significant maturity risks. The company’s revenues should absolutely collapse before the company becomes unprofitable. The company is also mostly protected from variable rates. The most unfortunate consequence of NOMD’s indebtedness is that it now lacks the cash to do aggressive acquisitions of distressed companies.

Although news from Europe grows darker by the hour, my belief is that NOMD provides some defense against a recession. The reason is that its brand portfolio is composed of market leaders, and that frozen foods behaved as an inferior good (consumption rises as income declines) during the latest Great Financial Crisis.

Finally, NOMD could improve its governance a little. The company pays millions to founders’ related companies in ‘consulting fees’, and has a dilutive preferred share dividend structure.

Trading at an expected FY22 PE close to 13, or an earnings yield of 7.5%, the company is not cheap on current terms. However, considering its defensive characteristics and its valuable brand portfolio, it seems like future value to me. It provides a significant margin of safety, the possibility of a modest return in a recessionary environment and a much higher return in an economic recovery.

Note: Unless otherwise stated, all information has been obtained from NOMD’s filings with the SEC.

Industry and competitive position

NOMD owns a series of market leaders in Western and Eastern Europe’s frozen foods market: Iglo (Northern Europe), Findus (Continental Europe), Bird’s Eye, Goodfella’s Pizza and Aunt Bessie’s (UK and Ireland) and Frikom and Ledo (Serbia and Croatia). It also owns La Cocinera (Spain) and Belviva (Belgium).

Although most of its brands (like Iglo, Findus or Bird’s Eye) are specialized in frozen fish and vegetables, they all have expanded into other categories in the frozen foods segment.

From Porter’s perspective, the company is in an interesting position.

On the customer side, NOMD has significant brand power. This can be easily checked in the online offerings of the supermarkets where its brands are offered. For example, in Esselunga, an Italian supermarket, Findus’ flounder is sold at €25.4/kg, while Esselunga’s own brand is sold at €18/kg, a 40% difference. In England, Bird’s Eye’s cod fingers are sold at £12.7/kg against £10/kg for its private label competitor, a 27% difference. Customers are willing to pay significantly more for NOMD’s products.

Owning recognized brands, NOMD is also able to negotiate in better terms with supermarket owners. Retailers control the shelfs, but they also need assortment. If the customer cannot find a brand he is used to consuming, then he may stop shopping in that supermarket.

On the supply side, NOMD’s more critical supplies are commodities that can be traded on price and quality alone, from different sources all over the world. The customer does not care about product quality either, at least not in rational terms and metrics. This is absolutely favorable for NOMD.

NOMD’s business is relatively asset light, with depreciation representing only 3% of revenues. The company has manufacturing and distribution facilities in most European countries, although its core facilities are in Germany, UK, Italy, Croatia and Serbia. With a unified market (except for Serbia and the UK), NOMD can move production across facilities with relative ease.

Maybe the worst aspect of NOMD’s market is substitution risk. With the advent of more health-conscious consumers, frozen products are less preferred than fresh food. This may prove a problem in the long term, although it may be solved by positioning. For example, NOMD is promoting Green Cuisine, a Findus sub-brand specialized in non-animal meat and protein.

The industry is also mature and growing slowly. Depending on the market report, expected CAGR ranges between 1% and 4%. This is low, considering that market reports usually overestimate growth. That is probably why NOMD has concentrated on growth by acquisition. However, we will study in the next section that NOMD has also generated organic growth as well.

On the flip side, frozen food is a defensive industry. Several reports from specialized sources like Food Navigator, Food Proc. Tech., or Retail Space Solutions, point out that the market did very well during the Great Financial Recession, growing sales instead of decreasing. Fresh food is usually more expensive than frozen food. It also requires more trips to the supermarket. This of course changes between countries, with colder countries having more expensive fresh food. For example, cod sells for £15/kg in Britain’s Tesco, against 12.7/kg for NOMD’s cod fingers. But in Italy, fresh fish is cheaper than frozen fish in Esselunga.

NOMD’s operational history

NOMD’s operational history makes it an interesting company too.

Starting on the top line, the company shows a consistent increase in revenue, that was generated by acquisitions but also by organic growth, depending on each market. To put examples, the only acquisition made in Germany is the original Iglo, but revenues in that country grew from €300 million in 2017 to €400 million in 2021. Other markets like Norway, Italy and Austria also show organic growth. Some others like France or Spain show organic decreases. Finally, the UK shows the biggest growth, but probably also aided by acquisitions (Aunt Bessie’s and Godfella’s).

Data by YCharts

Another interesting point at the revenue level is that the company’s sales did not jump during or after COVID. Many companies show ultra-record revenues in 2021 or 2020, and it becomes important to question their sustainability. In the case of NOMD, revenue growth follows the same trend before and after the pandemic.

At the gross margin level, NOMD shows sustained margins after the most important acquisitions were completed in 2017, until supply inflation started to erode margin in 2021. Most of NOMD’s supplies are commodities whose prices peaked long before inflation started being a common word in the developed economies. Now the trend is reversed, with commodity prices falling and end product inflation hitting hard in Europe. It is difficult to understand if margins are going to roll back to 30%, although the company has mentioned that it is rising prices fast. For my calculations, I keep a margin of 28%.

But the real magic comes at the SG&A level. NOMD has been able to benefit from its scale while keeping SG&A controlled (the company classifies SG&A as Other Operating Expenses).

Data by YCharts

Most importantly, SG&A seems to move in line with gross profits, both up and down. In many companies, SG&A grows with gross profits but then it cannot be reduced. This generates significant operational leverage. In the case of NOMD, the company does not need a big sales operation (like stores and employees) and can therefore deescalate these costs if necessary.

Data by YCharts

The end result is operating income that closely follows revenues. With debt not growing (nor decreasing) since the company went public, net income also moves close to revenues. Although both operating income and net income magnify the movements at the revenue level, the difference is not explosive as it is common to observe in operationally or financially leveraged companies.

Data by YCharts

NOMD’s financing

As I commented in the introduction, NOMD was born as a leveraged buyout of portions of Findus business in Northern Europe (called Iglo), subsequently acquiring other portions of the same business and new brands.

That means two things. First, the company started with significant debt. Second, it had to finance new acquisitions somehow.

Fast forward to the present, and the level of debt has not changed much, but the company has done several important acquisitions, as much as €1.4 billion (represented below as growth in goodwill and intangibles in the first chart, and as acquisitions in the second one).

Data by YCharts
Data by YCharts

Most of those acquisitions were financed with cash generated by the company. As can be seen below, the company has shown great cash generation capacity.

Data by YCharts

This is in part generated by the low level of investment required (approximately €80 million a year), but also by a fantastic cash conversion cycle that has been close to or even below zero. That means the company is able to sell its product faster than it has to pay for its raw materials. It also means that suppliers are financing part of the working capital.

Data by YCharts

NOMD has also engaged in some questionable share issuance and repurchase activity. The company issued 20 million shares at $20 in 2019, repurchasing all of them back in 2020 and 2021 for an average of $21 and $25 respectively. I do not understand the reasons behind those decisions. The company’s balance sheet was not strained in 2019, and most funds were used to repurchase the same shares at a higher price (and pay commissions in the process).

On a related note, NOMD has a strange Founder Preferred Share structure. The company’s founders and Co-Chairmans own 750 thousand preferred shares each, totalling 1.5 million. These shares do not generate a cumulative cash dividend, and have substantially the same rights as common shares. But, the FPSs are entitled to a special share dividend payable based on share price appreciation.

The system is best explained with an example: given that the latest special dividend was paid at an average share price of $25, if in 2023 the company’s shares trade at $35, the difference (40%) is divided by 5 (8%) and that figure is multiplied by 140 million shares (adjusted for splits and dilution). In that case, the founders would receive 11 million shares, or almost $400 million at those prices. The dividend system granted the founders 6 million shares in 2019 ($120 million) and 4 million shares in 2020 ($100 million). No shares were granted in 2021 because the year end share price (around $25) was not above 2020 levels.

These dividends are not considered an expense, but an adjustment on a €550 million equity account created in 2015 and called ‘Founder Preferred Shares Dividend Reserve’. The reserve has been consumed to €170 million. It is unclear what the treatment will be afterwards. There is no mention of the company being able to cancel the Founder Preferred Shares, or that they will stop accruing dividends once the reserve is depleted.

Of course, this system is way better than a simple cumulative preferred dividend that is accrued independently of how the company is doing. At least in this case, the shareholder can contempt with share appreciation generating these extraordinary dividends.

Risks ahead


Returning to debt, as of 2Q22, the company owns about €2.2 billion:

  • $920 million, maturing May 2024, paying LIBOR + 2.25. All of this debt has been swapped to €840 million euros paying fixed 2.5% in July 2021. This swap proved extremely profitable with hindsight.
  • €550 million, maturing in 2028, paying EURIBOR + 2.25 (currently about 4.75%).
  • €800 million, maturing in 2028, paying 2.5% fixed.
  • A credit facility for €175 million paying the reference rate + 2.25, maturing in 2026, from which no funds have been drawn yet.

The variable interest risk is relatively controlled, with only €550 million of exposure, at least until 2024. But the company faces maturity and roll-over risk. If rates remain elevated by May 2024, the company may need to issue debt at a higher fixed interest.

In terms of interest costs, current debts represent about €75 million yearly. As the profitability calculations below will show, only a catastrophic recession making the company’s sales decrease 50% or more could put interest payments at risk.

War in Europe

There is a chance the world enters a World War, and that Europe is the theater of that war. The results would of course be catastrophic, for Europe and for the whole world, considering the risk of a nuclear confrontation.

The problem with this kind of risk is that it is unhedgeable by traditional financial means. If you want to invest in any financial asset, even cash, gold or insurance, you have to believe that the world is not going to end in a nuclear war. Otherwise, every asset will be worth very little, and the only hedge is to stock food, build a shelter, etc. You cannot eat gold.

Recession in Europe

Even if we (hopefully) avoid war between Russia, Europe and the US, the situation in Europe is delicate. Particularly, the balance between increasing supply costs, decreasing competitiveness of its exports, and tighter financial conditions. These forces feedback on each other: higher input costs mean lower exports, which means a weaker currency, implying more inflation, and tighter financial conditions.

The scenarios for Europe also depend on the Russian war. If Europe can solve its supply problems, then tightening financial conditions could cause a mild recession. If the supply side issue is out of control, then Europe may need to negotiate with Russia. This again would imply a mild recession. The worst case scenario is Europe going all-or-nothing against Russia, resisting heroically to all sorts of material privations, at the expense of destroying its real economy. In this last case financial conditions are not important, because real supply will move the needle.

Considering the first two scenarios, NOMD provides a certain protection. As was mentioned in the industry section, frozen food behaves sometimes like an inferior good. Europeans may resort to frozen foods if fresh food is too expensive. This force will probably show itself with more strength in Northern European countries, because they produce less organic foods themselves, and therefore the price gap is more considerable (as was shown with the English and Italian examples in the industry section). Also because fresh food is more appreciated in the south. As an example, consider Italy, a country with two marked cultures: the more Latin southern Italians and the more German northern Italians. An article from Borsa Italiana (from 2015) showed that frozen food was consumed by 68% of northern Italians, but only by 8% of southern Italians, even although income is much higher in Northern Italy.

Financial scenarios

As I usually do, I provide a simple model for calculating different scenarios and providing an idea of the future.

In terms of assumptions, I consider a gross profit margin of 28%, an effective tax rate of 25% and interest payments of €75 million. For SG&A costs, I consider two assumptions. First, that SG&A can be controlled and moves as a percentage of gross profits, at a rate of 50%. Second, that SG&A is fixed at a level of €400 million.

Simplified financial model for NOMD

Simplified financial model for NOMD (Own, based on assumptions made using NOMD’s filings with the SEC)

Several things come up. First, the SG&A assumption changes the profit calculation substantially, by generating operational leverage. This is one of the aspects that I will follow more closely in future quarters. My guess is that the more revenue falls, the more SG&A should become variable, therefore one could consider a middle scenario between the two alternatives provided for each revenue level.

Second, for the company to enter net loss territory, therefore jeopardizing its debt repayment capacity, its revenues should fall 35% under the most conservative SG&A assumption. That scenario is almost impossible this year, considering that the company has already generated more than €1.4 billion in revenues for 1H22.

Third, for net income to fall to a yield of 5% (compared to a market cap of $2.5 billion), revenues should fall only 12.5% under the more conservative assumption. That means there is a significant risk of yield contraction, and probably share price decline.

Finally, if revenues are kept at 2021 levels, which has been true for 1H22 at the organic level (growing in nominal terms because of acquisitions), then the company trades at an expected net yield of 7.5% (€190 million net income over $2.5 billion market cap), or a PE of 13, for the more conservative SG&A assumption.


Without considering the current negative context, NOMD seems like a great company to me. It has powerful brands, it has grown organically and by acquisition, while keeping costs and debt at bay and translating revenue growth into bottom-line growth. The company has shown great cash generating capacity, and although it did not repay its debts, it did not increase them either, all while growing. Unfortunately, an investment is not the company alone, but rather the company plus price plus context.

The context is definitely foggy, although I have provided reasons to consider that NOMD provides some protection and does not face enormous financial risks in a recessionary context (ignoring catastrophic contexts).

Finally, I think that the current price is interesting. This is a quality business selling for a current earnings yield of somewhere between 7.5% and 5% under conservative cost assumptions.

In the future, several aspects should be followed closely. First and foremost, how SG&A behaves. This determines which model is correct for NOMD. If SG&A descends when gross profits do, it would be a great sign for NOMD, even with lower business. Second, how revenues move under a more recessionary context in Europe (not seen yet at the real economy level), in particular in Northern Europe. If economic data shows declining conditions in Europe (lower real income, higher unemployment, etc.) but NOMD’s revenues fall less, that would also be a great sign. Finally, I would like to see NOMD hoarding more cash instead of repurchasing shares. That cash could prove useful in 2024 when maturities come due, or to do some opportunistic acquisitions.

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