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Nomad Foods, Limited (NYSE:NOMD)
Q3 2017 Earnings Conference Call
Nov. 28, 2017, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Please standby -- we're about to begin.

Good day, and welcome to the Nomad Foods Third Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Taposh Bari, Head of Investor Relations. Please go ahead.

Taposh Bari -- Head of Investor Relations 

Thank you operator, and thank you all for joining us through to review our Third Quarter 2017 Earnings Results. With me on the call today are Stefan Descheemaeker, our CEO, as well as Jason Ashton, our Interim CFO.

Before we begin, I would like to draw your attention to the disclaimer on Slide Two of our presentation. This conference call may make forward-looking statements that are based on our view of the company's prospects at this time. Actual results may differ to due to risks and uncertainties which are discussed in our press release, our filings with SEC, as well as this slide in our Investor Presentation, which does include cautionary language.

We will also discuss non-IFRS financial measures during the call today, these non-IFRS financial measures should not be considered a replacement for, and should be read together with IFRS results. Users can find the IFRS to non-IFRS reconciliations within our earnings release as well as in the appendices at the end of this slide presentation that is available on our website.

Finally, please note that certain financial information within this presentation does represent adjusted figures for both 2016, and 2017. All adjusted figures have been adjusted for exceptional items, restructuring, and transaction-related items, and all comments from here on will refer to those adjusted numbers.

With that, I will hand you over to Stefan.

Stefan Descheemaeker -- Chief Executive Officer

Thank you Taposh, and thank you, everyone, for joining us on the call today.

We delivered strong Third Quarter results highlighted by 5.9% organic revenue growth, and 120 basis points of gross market expansion which resulted in our adjusted EBITDA of €79 million, and our adjusted EPS of €0.24 per share. Based on our year-to-date performance, we are raising our full-year guidance and now expect 2017 adjusted EBITDA of approximately €325 to €327 million.

Q3 represents a third consecutive quarter of positive organic revenue growth and market share expansion for Nomad Foods. These results are a testament to a strategic focus during the quarter for cutting brands and relentless execution by the entire organization. Turning to the Third Quarter highlights, first, we generated another quarter of strong organic revenue growth. Second, we continue to expand our gross margins. And third, we, once again, deployed [inaudible] [00:03:12] in a liquid manner.

I'd like to spend a few minutes on each of these points beginning with revenues. Third Quarter organic revenue of 5.9% based on the 2.2% growth that we realized during the first half of the year. Once again, our topline growth was driven by the combination of market share gains and category growth. In Q3 we gained nearly a full percentage point of market share against mixing the single digit growth resulting in 9% sellout growth for branded business. Q3 results reflect another quarter of steady execution along with category growth that was above average. To put these numbers in context on a 12-month basis, our category has grown approximately two percent versus our grand sellout growth of 4%. Organic growth continues to be driven by our core, which many of you know as [inaudible] [00:04:15]. This part of our portfolio grew 10% in the quarter. Equally important, we continue to see sequentially improving sales trends outside of our core. We experienced strong breadth of growth at the country level with ten of our 13 core countries, including the U.K. realizing organic revenue growth during the third quarter. It is very encouraging to see our strategy yielding results across most of the markets where we operate.

Sweden, which declined 1% in the quarter, has yet to achieve growth on a country level due to the loss of low-margin industrial and private label sales from the factory closure early this year. Nevertheless, we remain optimistic about the long-term growth prospect in Sweden due to its attractive frozen food category attributes and our 30% market share in the country, which ranks as the second highest of any country in which we operate.

Third Quarter gross margin expanded to 120 basis points due to a combination of one, favorable mix as a more profitable core portfolio out-performed in our highest margin geographies. Two, commercial margin improvement from management efforts has provided more efficiency and pricing actions.

Three, we continue to see the successful implementation of price increases in the U.K. against foreign exchange, and inflation. We continue to view gross margin expansion as a key driver of long-term value and are pleased with the progress we are making to date.

Finally, we had another active quarter of capital deployment with the repurchase of approximately 7.1 million shares as part of purchase share sales in September. While this marks the second time this year where we have been opportunistic buyers of our stock. I would reiterate that the willingness to pursue M&A isn't changed and remains a high priority for cash use.

2017 has been a good year for our company, and I remain encouraged by the prospects for our business into 2018 and beyond. As the global packaged food landscape continues to evolve, we are fortunate to be operating from a position of strength; we have seen growth and solid execution working in our favor. Our category, Savory's Frozen Food, aligns well with changing consumer preferences and continue to grow across western Europe. Our [inaudible] [00:07:06] portfolio frozen food brands as number and number two market share position across 85% of all core markets.

Organizationally, we are optimizing the right balance between global and local as we benefit from the financial resources scaling the provisional capabilities of the world-class attention company, while recognizing that food is local, that regional markets strategic activation is, in fact, a competitive advantage.

Finally, and most importantly, we're just hitting our stride. As a branded category leader, we have a critical role as category captain in ensuring that we not only sustain but build upon the growth of the frozen food category. We understand that this is a growth initiative that will time to translate into results reflecting our long-term commitment to the frozen category. To that end, we will look to build upon our core through innovation along consumer trend like health, and wellness, and convenience.

In summary, we're proud of the work that we have accomplished thus far in 2017, and continue to strive for more. With that, I will hand the call to Jason to review our third quarter results in more detail, along with an update on our full-year guidance.

Jason Ashton -- Interim Chief Financial Officer

Thank you Stefan, and thank you all for joining us on the call today.

Third quarter reported revenue increased 4.4% with organic revenue growth of 5.9%. Organic revenue growth was driven by volume and mix growth of 4.1%, and pricing growth of 1.8%. Reported revenue growth was offset by approximately 150 basis points of apex translation.

Slide Four illustrates the quarterly progression of our organic revenue growth with an overlay of our core portfolio, muscle, and battles since 2016. We have good momentum in our business and believe 2017 sets the foundation to sustain growth in the years to come.

On Slide Five we show organic revenue trends across our three largest markets. U.K., Italy, and Germany, as well as the remaining countries in our portfolio. Each of these groups experienced growth in Q3. As Stefan mentioned, the U.K. represents one of the more notable improvement in Q3 with revenues inflecting to positive 2.5% growth. Performance in the U.K. was driven by continued success in fish fingers and coated fish, as well as the activation of muscle and battles across our poultry line earlier this year.

Turning to Slide Six, gross margins expanded 120 basis points, to 30.3% with mix, price, and promotions as contributing factors. Mix was driven by category and geographic performance. We also continue to make good progress on net-revenue management which is resulting in better price and promotions, net of cost inflation.

On Slide Seven I will review our operating performance during the third quarter. I will skip revenue and gross profit commentary which I just discussed in detail. Operating expenses were up 27% year-over-year driven by more normalized indirect expenses. €71 billion of operating expenses we realized in Q3 was slightly better than our expectation of approximately 75 million, due to phasing and some expenses into Q4.

Within operating expenses, AMT increased 3%, an indirect increase to 43% year-on-year. As we have previously outlined, this year's Q3 indirect reflects a bonus accrual versus last year's Q3 results which included a reversal of the bonus accrual for first nine months of 2016. Resulting adjusted EBITDA was €79 million, representing 17% of revenues. Adjusted EBITDA declined 8% year-over-year reflecting the aforementioned factors.

Depreciation on a more [inaudible] [00:12:15] of €11 million declined to last year due to the closure of our factory in Sweden earlier this year. Adjusted net financing costs were €13 million, down 30% year-on-year reflecting the improved cost of capital with the successful refinancing of our debt in early May. The effective tax rate was 23%, in line with previous quarters. Leading to adjusted EPS of €0.24 for the quarter which grew 9%. This was due to 2% growth in adjusted profits, and a 6% year-on-year reduction in our weighted average share account.

The Q3 share account fully reflects our 2017 repurchase, but only partially reflects our September 2017 repurchase.

Turning to cash flow on Slide Eight, for the first nine months of the year, the key drivers in the operating cash flow performance asked from the EBITDA movement are working capital. As we had expected, there was an outflow of €25 million in the period, primarily due to the intake of the annual agricultural harvests. Pensions and other provision movements provided a net-inflow of €2 million. Adjusted capex, which excludes non-recurring integration costs of €3 million, increased by €10 million year-over-year, driven by the transfer of production in view of Sweden to other factories. Adjusted cash tax paid was €5 million higher than the prior year, owing to a change in the phasing of payments. This excludes €19 million of taxes paid related to the previously discussed settlement of one-time Legacy tax issues.

Restructuring and non-recurring cashflows of €71 million were largely driven by severance costs associated with the closure of production facilities in Sweden. On a further integration of the Findus where we are rolling the Nomad GLP system. Adjusted cash interest paid was €12 million compared to 2016 driven by savings from our debt refinancing in May. This excludes one-time refinance fees of €40 million. We are pleased with the adjusted pre-cashflow delivery of 149 million, an operating cash flow conversion of 80% through the first nine months of the year, and remain on track to deliver adjusted pre-cashflow in excess of €200 million for the year.

Turning to Slide Nine on our related for from 2017 guidance, based on our year-to-date results and visibility into the remainder of the year, we are raising our 2017 guidance. We now expect 2017 adjusted EBITDA of €325 to €327 million versus the prior range of 320 to 325 million. Our updated EBITDA guidance represents high single-digit growth versus 2016. We're excluding three offsetting factors this year. Noticeably currency translation, an extra trading day in last year's base, and this year's reinstatement of bonuses.

For the year guidance assumes that's organic revenue growth will grow approximately 3% in 2017 versus prior guidance of growth in the low single-digit percentage rate. It is continued to expect pre-cashflow to be at least €200 million for the year.

I'd like to provide you with a few more thoughts around the full year 2017 guidance which is based on foreign exchange rates as of November 27th, 2017. For both the full year and the Fourth Quarter, we now expect organic revenue growth of approximately 3%. Full year reported revenue is expected to include a 220-basis point offset related to currency translation, and the anniversary of a [inaudible] [00:17:39] comparison with the FX translation impact to Q4 being approximately 30 basis points. Gross margin rate is expected to be ahead of 2016 with Q4 showing the greatest year-on-year improvement. A&P investments are expected to be comparable to last year. We expect underlying indirect expenses to decline versus 2016, but this will be more than offset by the reinstatement of bonuses.

On cash flow, we continue to expect to generate adjusted free cashflow of at least €200 million. We expect this to be offset by €105 million of restructuring and non-recurring cash charges. Also included is a supplement to Legacy tax issues which we continue to anticipate will be in the €30 to €40 billion range.

That concludes our remarks; I will turn the session over to Q&A, thank you. Operator, back to you.

...

Questions and Answers:

Operator

Thank you. If you'd like to ask a question, please press *1 on your touchtone phone. If you find that your question has already been answered, please press *2 to remove yourself from the queue.

Our first question comes from Brian Holland with Consumer Edge Research.

Brian Holland -- Consumer Edge Research -- Analyst

Thanks. Good morning. Congrats on the quarter.

Starting with the guidance, obviously not a full flow-through of the Q3B. I just wanna break that apart a little bit and make sure I understand. Did any of the strength in Q3 steal, whether the shipments or anything like that, more discrete, that might have stolen from Q4? Does your Q4 internal outlook change at all based on anything we saw in Q3, or are we just staying relatively conservative? How would you view that?

Jason Ashton -- Interim Chief Financial Officer

I think the only flow through to Q4 was through operating expenses. Operating expenses were lower in Q3 due to the timing, and they will unwind in Q4. That leaves the upside in Q3 coming from better sales and gross margins which is reflected in the guidance.

Brian Holland -- Consumer Edge Research -- Analyst

Okay. Got it.

Then, obviously not expecting it would appear by the guidance a similar magnitude of organic sales growth. I presume that that's primarily driven by lapping Germany, etc. Can you just talk about the particular strength in Q3, and why we wouldn't expect that to continue going forward?

Stefan Descheemaeker -- Chief Executive Officer

I think that's a very good question, Brian, it's very simple. We're gaining market share, and we're going to continue to get market share, to make it simple. At the same time, and its very good news, the industry is doing well. Q3 was a bit along the high side with 4% which is probably lower than the average, which is more in the region of 2%. To your point, we're starting, as a grocery, some more less easy comps in Germany. I think the combination of these three things makes it..., We're very pleased with what we're doing. Very pleased with the Q3 and the beginning of Q4. But, obviously, at the same time, the industry is really going to come to a more "normal" level.

Brian Holland -- Consumer Edge Research -- Analyst

Last one for me, I'll pass it on. You said Q3; I believe you said the composite categories that you compete in were up 2%, you can correct me if I have those number wrong. Can you give us the composition of that growth? How much of that is pricing versus volume? And maybe just a little background there. What's driving the category? Is it excitement around stuff that you and maybe others are doing? Is it just price driven? Just how we think about that in the sustainability of growth particularly in the frozen door going forward as folks have generally understood that to be a category that's been under pressure for some time in your markets.

Stefan Descheemaeker -- Chief Executive Officer

Actually Brian, for Q3, it's 4% as opposed to 2%. It's a combination of all categories. It's a combination of 3% price and 1% volume. Where let's say the last year at this stage was volume flat in price of 2%. That's the one thing. The second thing is yes, indeed why, is it growing? I think playing the category leader has an impact. We have some very leading market position in some categories, like fish fingers, for example, in Germany. And we growing this time has an impact on the industry. It's a virtual circle. These are the markets at this stage.

Brian Holland -- Consumer Edge Research -- Analyst

Okay. Thanks, continued success gentlemen.

Stefan Descheemaeker -- Chief Executive Officer

Thank you.

Jason Ashton -- Interim Chief Financial Officer

Okay, Brian.

Operator

Our next question comes from Bill Chappell with SunTrust.

William B. Chappell -- SunTrust Robinson Humphrey

Thanks. Good morning.

Can you talk a little more just, not just your topline growth in the quarter, but for the whole category? Trying to understand how much of that was volume versus price, and then also what you think as we look to next year on pricing. I imagine most of the commodity inputs are in, at least for the first half. Are we gonna have another round of pricing? Or would that actually be a headwind for price?

Stefan Descheemaeker -- Chief Executive Officer

If you're looking at the 2018 of the statement, I'm not going to go through any guidance in the way you think; it's very simple, overall, it's us, most of the attention in the [inaudible] [00:23:56] of compensation. But it's quite reasonable, more in some countries than in others, but overall, it's still very benign which is good. You heard us saying that our ambition is to build the growth and to reinforce the growth of the whole industry. Right now, it's growing, and we don't see any reason why the industry wouldn't grow on top of this market share.

Jason Ashton -- Interim Chief Financial Officer

And Bill, in the Third Quarter, category grew 4%, 1% from volume, 3% from price, 4% being roughly double the industry growth rate over the past 12 months.

William B. Chappell -- SunTrust Robinson Humphrey

Got it.

Just digging into that a little bit, was that led by meals, fish fingers, vegetables, was there any one driver, or it was across the board.

Stefan Descheemaeker -- Chief Executive Officer

It's really across the board. Obviously, fish is a big category first. We've been leading the growth, that's definitely a big contribution to the growth. But overall, when you see the different categories where we're in, industry is growing. Ready meals, veg, and fish.

William B. Chappell -- SunTrust Robinson Humphrey

Okay.

I think probably the most impressive part of the quarter was the turn around of the growth in the U.K. Can you just give us a little more color? Do you feel as a retail landscape that's settled down, or you're just out-performing and taking back the share, you had lost over the past few years?

Stefan Descheemaeker -- Chief Executive Officer

What we defined, our core business, we are starting to gain market share. It's really the result of relentless execution, being focused on these things, making sure that the order confluence of a category would be in good shape in terms of packaging, in terms of trade margin, in terms of in-store execution and in terms of quality. We've been doing the one, by one, by one. It was sequential and was well executed. That's why we're doing well. The industry, is retail doing better? I think it has stabilized a bit. Still, you can see it on people, all the little, still making some good progress. I don't see any reason why they wouldn't continue that way. It seems pertinent where we are in, which is absolutely fine by us, and we think we can grow across the board within the retail landscape.

William B. Chappell -- SunTrust Robinson Humphrey

Got it. And the last one for me Stefan, why haven't, you think, made an acquisition this year? There are so many opportunities out there; the core business is running in the right direction. Is it the sellers are waiting for a higher price? You're focused on bigger deals? The right thing hasn't come up? Just trying to understand why something isn't breaking through.

Stefan Descheemaeker -- Chief Executive Officer

It is very simple. I think we're not going to deviate; we have a series of criteria which is we want to buy market leading brands business with competitive advantaged, strong management, cash flow, and synergy. That's the criteria that we are applying right now, and we're going to apply. If at some stage, and there is something we need to announce we will announce it.

William B. Chappell -- SunTrust Robinson Humphrey

Got it. Thanks, so much.

Stefan Descheemaeker -- Chief Executive Officer

You're welcome.

Operator

Our next question comes from Steven Strycula with UBS.

Steven Strycula -- UBS -- Analyst

Hi guys, congrats on a good quarter.

Stefan Descheemaeker -- Chief Executive Officer

Thank you, Steven.

Steven Strycula -- UBS -- Analyst

My question would be, I just drill it a little bit more into the implied guidance for the Fourth Quarter and to understand what really drove category strength in 3Q. Specifically, you commented that the category was up 4% versus where it has been trending closer to 2%. I wanna understand is that more due to the phasing of price increases rolling through across the industry? Or is the treatment of private label? Is it just anniversarying easy weather compare. Could you help us unpack that a bit, and explain why you're implicitly guiding to a slowdown in 4Q versus 3Q? Then I have a follow-up, thanks.

Stefan Descheemaeker -- Chief Executive Officer

I think it's a combination of the different parts you mentioned, on top of also, a bit of weather. You'll remember that some people were complaining in the ice cream arena that Q3 has been difficult for them for weather reasons. Then it goes the other way around for us. That is one reason. But a bit of pricing and at the same time we are, and that's more specific to us. We were still. Obviously, we were gaining market share versus last year with complaints especially in countries like Germany. That's a combination of the different elements where we think, again, we would love to be wrong, but that's where the industry is going to go back to something closer to 2%.

Steven Strycula -- UBS -- Analyst

As my follow-up, I wanted to understand, I think on the last call you highlighted, in terms of cadence that the Fourth Quarter would really be the highest absolute gross margin rate of the year, which would imply the Fourth Quarter growth margin of 31½ or better. I just wanna make sure I understand that properly. Then, what is the cumulative synergy realization for business caused by 2017 year-end? A lot of people just wanna know what is the incrementality for 2018? Thank you.

Stefan Descheemaeker -- Chief Executive Officer

Starting with the gross margin.

Jason Ashton -- Interim Chief Financial Officer

We continue to expect significantly stronger year-over-year gross margin in Q4, as we previously guided in the last call. That's due to the following factors, the anniversary of a full 2016 harvest, and some operational supply chain issues, particularly in Sweden. The pricing realization is coming through to the U.K. and good momentum on our net revenue management program. I think it progresses, which is driving the gross margin expansion in the Fourth Quarter.

Stefan Descheemaeker -- Chief Executive Officer

Back to your question of synergies, Steven, they're very simple. Bottom line, we remain on plans to realize our synergy in the €43, €48 range by the end of next year. Then giving a bit of color on 17, which has been a really important integration year. We closed a Legacy factory; we report those productions throughout the production network. We commenced all European implementation, and very importantly we implemented network new management across the network especially in the Findis countries. Not to advance from that standpoint which has been very good for us. Over the last two years, at this junction, everything is very much integrated, so we're working very hard into 17, and we have successfully relapsed some savings actually sooner than originally anticipated. Bottom line, more synergy in 17 overall the 43, 48 remains, obviously the target.

Operator

And once again, that is *1 to signal on your touchtone telephone.

Our next question comes from Rob Dickerson with Deutsche Bank.

Kaneka Boyle -- Deutsche Bank -- Analyst

Good morning. Thank you. Kaneka Boyle on for Rob. First question is that there was there any sizable step-up in organic sales in U.K. and other countries in the quarter? Is that something that we should see as sustainable performance in the near term over the next couple of quarters? Or was there something in this quarter's results that were more one-time in nature?

Stefan Descheemaeker -- Chief Executive Officer

Let's put it this way. I think a lot of the reason is rather simple. We are in a growth industry, but obviously, the industry is industry, I don't think you should ponder something like 4% that would be premature. Second, is we're gaining market share. I think these are the two main factors. Growth in an industry that is growing, and we're growing ahead of the industry. From there you can understand what is sustainable. The last piece is in some countries are probably more advanced than others. U.K. started a bit later than countries like Germany and Italy.

Kaneka Boyle -- Deutsche Bank -- Analyst

Okay great. Thank you.

Given your current category performance combined with conversations with retailers along with the 2018 innovation pipeline that you have, how do you view your topline growth potential next year?

Stefan Descheemaeker -- Chief Executive Officer

I will repeat what I've just said, is the objective is to gain market share in the category that is growing and more to come in the arena of Q4 announcement.

Kaneka Boyle -- Deutsche Bank -- Analyst

Okay. Great Thank you.

Operator

Our next question comes from Jon Tanwanteng with CJS Securities.

Jonathan Tanwanteng -- CJS Securities -- Analyst

Good morning, gentlemen. Very nice quarter. And thank you for taking my questions.

Stefan Descheemaeker -- Chief Executive Officer

Thanks, Jon.

Jonathan Tanwanteng -- CJS Securities -- Analyst

Just to add to prior M&A question, can you give us a bit more color on the pipeline, do you see more or less opportunity or competition versus three to six months ago. Has anything changed in landscape in terms of valuations and your ability to find or integrate an attractive asset?

Stefan Descheemaeker -- Chief Executive Officer

I'd say six months ago, one year ago I don't think we were looking actively at M&A; it thinks it would have been a big mistake by the way. What we were looking at the priority was to make sure those fundamentals would be restored. At this stage, we're looking at a few things. We'll update you when we have something to announce. Believe me; we will stay true to our criteria.

Jonathan Tanwanteng -- CJS Securities -- Analyst

Okay. Great.

Jason, you mentioned roughly 4 million of pushed out expenses into Q4, any color on that, and what was pushed out, and why?

Jason Ashton -- Interim Chief Financial Officer

Not much color. There were small amounts of phasing on A&P on both indirects, but nothing too specific.

Jonathan Tanwanteng -- CJS Securities -- Analyst

Okay. Great.

And finally, maybe it's a bit early but do you have any preliminary thoughts on the non-recurring items or other Legacy tax issues that may impact your cash flow for 2018.

Jason Ashton -- Interim Chief Financial Officer

There will be some non-recurring payments into 2018. We're still implementing GRP across, remaining Legacy Findis markets. We have some continuous improvement projects running through the business but one would expect to be a sizable reduction in this year's non-recurring cash payments.

Taposh Bari -- Head of Investor Relations

Jon, stay tuned, we'll give guidance on our Fourth Quarter call in March. But as Jason pointed out, we do expect the total cumulative non-recurring number to come down pretty meaningfully in 2018 versus 2017.

Jonathan Tanwanteng -- CJS Securities -- Analyst

Okay. Great.

Just to be clear, are there any other Legacy tax issues we should be concerned about?

Stefan Descheemaeker -- Chief Executive Officer

No.

Jonathan Tanwanteng -- CJS Securities -- Analyst

Great Thank you very much, guys.

...

Operator

It appears there are no additional questions at this time.

Stefan Descheemaeker -- Chief Executive Officer

With that. Thank you. As I said, our Third Quarter results demonstrate another quarter of progression. We have a high-quality portfolio with market leadership positions. And operating in a net [inaudible] [00:35:58] category. We have solid momentum in the year and believe we are well positioned to carry momentum into 2018. I look forward to updating you on our progress when we report Fourth Quarter and Full Year 2017 results in March. Back to you operator.

Operator

This concludes today's conference thank you for your participation. You may now disconnect

Duration: 37 minutes

Call participants:

Taposh Bari -- Head of Investor Relations 

Stefan Descheemaeker -- Chief Executive Officer

Jason Ashton -- Interim Chief Financial Officer

Brian Holland -- Consumer Edge Research -- Analyst

William B. Chappell -- SunTrust Robinson Humphrey -- Analyst

Steve Strycula -- UBS -- Analyst

Kaneka Boyle -- Deutsche Bank -- Analyst

Jonathan Tanwanteng -- CJS Securities -- Analyst

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