Greeting. Welcome to the Nomad Foods Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Anthony Bucalo, Head of Investor Relations. You may begin.

Hello, and welcome to the Nomad Foods third quarter 2023 earnings call. I am Anthony Bucalo, Head of Investor Relations, and I am joined on the call by Stefan Descheemaeker, our CEO; and Samy Zekhout, our CFO. Before we begin, I would like to draw your attention to the disclaimer on Slide 2 of our presentation. This conference call may include forward-looking statements that are based on our view of the Company's prospects, expectations and intentions at this time. Actual results may differ due to risks and uncertainties, which are discussed in our press release, our filings with the SEC and this slide in our investor presentation, which includes 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 and in the appendices at the end of the slide presentation available on our website. Please note that certain financial information within this presentation represents adjusted figures for 2022 and 2023. All adjusted figures have been adjusted for exceptional items, acquisition-related costs, share-based payments and related expenses as well as noncash FX gains or losses. Unless otherwise noted, comments from here on will refer to those adjusted numbers. With that, I will hand you over to Stefan.

Thank you, Tony, and thank you for joining us on the call today. Nomad posted a solid top and bottom line performance in the third quarter, following our excellent results from the first half of the year. Sales grew organically by 1.6%, our fifth consecutive quarter of organic sales expansion. Additionally, we generated strong adjusted free cash flow, successfully refinanced USD 700 million of our debt to lower interest charges and bought back €66 million for own shares at attractive prices. We have borrowed back more than 4% of our shares in the first nine months of the year. Our teams accomplished this while deploying new strategic commercial investments to drive growth and bring us back to positive volumes. Boosted by our share repurchases, we are again raising our annual adjusted EPS guidance. We're closely watching the development of weight loss drugs globally and the possible impact on food industry volumes. The long-term impact of these treatments is still under examination. However, in any scenario, we believe Nomad is in excellent position due to our unique portfolio of products, which are on target for consumers looking to eat healthy. Nomad is a highly resilient company, and over the past several years, we have effectively managed through several crisis. Through those challenges, we have protected our cost and margin structures to ensure that we maintain the right level of investment in our business. In reaction to historic inflation last year, we adjusted our price in 2022 and 2023, knowing that we would lose volumes. We've lost volumes, but this was a necessary decision to safeguard the integrity and strength of our business. Now that we have stabilized our business, returning to volume growth is our most important strategic objective. We made progress in the third quarter. We also made some difficult…

Thank you, Stefan, and thank you all for your participation on the call today. Turning to Slide 9. I will provide more detail on our key third quarter operating metrics, beginning with reported revenues, which increased roughly 1% to €764 million. Sales grew organically 1.6%. Third quarter revenues were negatively impacted by 1.1% of unfavorable FX. We delivered gross margin of 28.4% supported by pricing and cost control. This result was ahead of our plan. As previously discussed, Q3 was the most challenging quarter for gross margins for the year due to the comparison from the third quarter of 2022. Looking out to Q4, we remain on track to deliver stable gross margin for the year. This will be supported by an improving volume trend, pricing, strong cost discipline and robust RGM execution. Moving down to the rest of the P&L. Our gross profit came at €217 million in the third quarter. Cost of goods sold increased to €547 million, an increase of 2%, up €8 million versus last year. Adjusted operating expense of €100 million was up 11% year-over-year, reflecting stepped-up A&P investment. As a result, adjusted EBITDA was €140 million with adjusted EBITDA margin at 18.3%. Finally, we posted adjusted EPS of €0.43 per share in Q3. This translates to USD 0.45 per share at current spot rates. Turning to cash flow on Slide 10. We delivered strong cash flow in the first nine months of the year, driven primarily by working capital improvements and EBITDA growth. Additionally, we've been highly focused on effective inventory management and cash collection helping our working capital performance. We are well on track for annual adjusted cash flow guidance target of €250 million at a conversion rate of 90% to 95%. Maintaining this high level of conversion is paramount as we consider…

I will now turn the session over to Q&A. Operator, back to you.

[Operator Instructions] Our first question comes from the line of Jason English with Goldman Sachs.

Great news on the dividend. I look forward to more details to come in terms of payout ratio, magnitude, et cetera, early in the new year. On the quarter itself, I was surprised by retail disputes, a strange time of year to see retail disputes. And looking at your P&L, price growth accelerated on a two- and three-year stack basis. So is it fair to assume that you've implemented new price increases in the quarter. Those are the cause of the disputes? And if so, can you give us a sense of order of magnitude?

Thanks, Jason. Thanks for the question. Well, I think the world has changed a bit. In the past, in Europe, we had one negotiation per year at the beginning of the year, and then we have these volatile times with inflation going up. And you remember last year, we increased price three to four times. So instead of one negotiation, you had the two to three to four negotiations. So this year is a bit the other way around. Obviously, inflation is coming down, which is great for all of us, but still a volatile time. So I'm not surprised that we have this conversation -- healthy conversation instead of conflict because we never stopped the dialogue with these guys. So I think it's absolutely unavoidable and to some extent, sometimes necessary to make sure that we have the integrity in terms of pricing. I think the key piece for us is -- how can I say, is we've decided to do this way because we want to protect the long-term integrity of the business. And sometimes, it's obviously not easy because we are listed and we had a quarter coming in that should not prevent us from making the right decision in terms of negotiation. And that's absolutely fundamental for us and for the future and for our retailers. So that's what we had. In terms of what it did in Q3, in Q3 in terms of revenues, around 2% plus of revenues were "lost" with these negotiations. I think most of these negotiations are over. We still have a bit of left ahead of us. Q4, you will have obviously the remaining, it's going obviously during the first month. But then definitely, it's going to positively impact Q4 and definitely more -- even more so for Q1 with the right level of margin. So that's that. So that's -- the world is changing, Jason. And I think probably it's going to be a bit more stable in the future. But the number of negotiations have increased.

Okay. One thing that's also changed in the last year or so is the private label was no longer following you as closely or as quickly as they had been in the past with price increases. And you note in the slides that private label price gaps remain stable. So I assume that they still; a, still haven't followed on sort of your last rounds. And now if you're putting through more -- are you seeing them kind of would suggest in the slide that you're seeing them follow if price gaps are stable. But can you confirm that's the case? And then the second part of it, you're talking about a lot more merchandising activity on the forward, which makes a lot of sense, as you look to improve volume. But between that and rectifying some of the disputes of retailers, has there been any sort of price -- net price that you're effectively having to give back to fund that merch or rectify the tension with the retailers?

Jason -- sorry for my voice, I have a bit voice extension, but I'll try to answer your question. On the private label point, I think what's really important is that we have effective stabilization, but with a gap that is now, frankly, reaching a point where we think we can still operate while effectively leveraging all of the other aspects of our -- and mainly promotion in order for us to stay competitive versus them and reignite growth from that basis. So if you recall, the price gap was double digit, and it can double-digit increase versus the prior gap, then it started to go down and it has reached a level, let's say, of five-plus percent. And within that, really what we are taking -- what the actual we are taking right now is effectively acting at the promotion level, beefing up our A&P and at the same time as well, taking into consideration the change in the inflation dynamics that we see for the future. And this is where the negotiation and the compensation all to play there. We clearly want to reignite share growth. We want to revert the volume trend, which it has stabilized, I mean, at this stage and on its way back to effective recovery by Q1 and Q4, we'll see an improvement. In Q1, we'll see effectively a turnaround at that point in time.

Our next question comes from the line of John Baumgartner with Mizuho Securities.

Stefan, it looks as though in this latest run of Nielsen data, Nomad has seen some market shares improve across a number of countries, but Italy is still soft. And I think that's where the pricing -- the relative pricing has been more troublesome. How do you think about the time required once you're in market for consumers to shop the aisle or become aware of the promo and take advantage of it? I mean, I guess, what's sort of the natural purchase cycle for your categories? Is it four weeks? Is it six weeks? Just trying to better understand the willingness and ability for consumers to take advantage of promo once it's in market.

But to your point, I think frozen aisle is obviously is more something like your destination as such. And the average country by country, but let's say, give or take, is around 4x to 5x per year. So you can imagine between at the moment you're starting with your promotion and the impact it has in the market, it takes a bit of time, so what we see in Italy, we see some green shoots. It's very much in line with what we were expecting. And then basically, the last thing we need to do is to change course. So we've taken that but on the contrary we have started our RGM program, let's say, the fastest, let's say, with the very deep, especially in fish and what we're starting to see some green shoots, but definitely it's going to be complemented by A&P on top. So take that on top of the 4x to 5x also with a stabilization of COGS, stabilization of obviously, labor cost is starting to increase. But to some extent, in terms of cost of living is good progress as well, especially in a country like Italy. And then we see that they definitely end of this quarter -- end of Q4 this quarter and definitely next year, with the A&P, we are very confident that Italy will reverse the trends, which is what they're starting to do, especially in fish.

Okay. And then thinking more about the macro into 2024 and the persistent inflation in Europe and the impact on consumers' budgets and shifts in food spending, when you're lining up these brand investments, how are you thinking about -- I guess the competition just alternatives for consumers, are you mostly focused on winning in-store against other frozen or fresh categories? Is there also an angle here to try and capture some food spend from outside the home? I guess what are your expectations for how or where you'll source that incremental volume from going forward?

Well, the first thing is we've lost some market share. And so definitely, there is a piece of that we want to regain. That's the first thing. That's within the area and that we think that with the programs we have, we can do this, but also, we believe that we have this program of the Must Win Battle, they're supposed to grow in a disproportionate way compared to the others. That's what we've been doing. One more thing you will see as well is we're going to start in a very selective way to work on new categories on a country by country, very far from what happened something like 10 years ago, which was a bit of everything. But definitely, where we think that in a country, this category could be poultry, in some countries could be freeze dried and other. We have the right to win. We're going to do it. So there's going to be a long-term investment. So that's a combination of different things. When you think about poultry or you think about pizza, for example, definitely, you have a contest and competition with not only with frozen but also with chilled, so that's going to be the framework for us. So definitely focused on the all Must Win Battles with RGM, with obviously A&P. And with that, we think that within this frame, we are going to gain market share. And then on top of that, we're starting something which is, again, very focused behind new categories, and that will impact the frozen food, but definitely also above and beyond frozen food, which in and of itself, by the way, is doing well compared to many other categories.

Our next question comes from the line of Rob Dickerson with Jefferies.

Stefan, maybe just to kind of follow up on what you just said. I think in the prepared remarks, you'd stated volume growth was kind of back for the broader frozen category in 12 out of 16 markets. I mean, clearly, I guess, a few things going on in Q3 that you're not posting the volume growth, but then also it sounds like there is some incremental pricing that's gone through the market. So like as we get through Q4, as you say, you think the volume trajectory improves, I mean, are you into Q1, like should we be thinking that hopefully, as you get toward the end of the quarter, that you start to see volumes stabilize, and therefore, there could actually be volume growth next year despite the pricing because of ongoing higher A&P, and Must Win Battles?

Well, to your point, I think we have -- the programs we have with the combination of, let's say, more stable macros, definitely, we believe that we're going to come back to the previous algorithm, which was based on, obviously, volume growth, then you obviously higher sales then obviously definitely higher EBITDA and then double-digit EPS. So that's definitely what we want to come back, with the combination as we said A&P, RGM, which is really something that we have -- we've however, invested a lot and milder, let's say, macro. That's the idea. The concept of -- do we believe that we're going to gain market share and get back to volume growth next year? Absolutely. Where are they going to happen in which week? I can't tell you that right now. But definitely, we're very confident that we're going to gain market share and we're going to gain volume next year.

All right. Super. And then, I guess, Samy, just on the gross margin, I think you had said Q4 gross margin kind of in line have gross margin essentially flat for the year. I think that kind of implies Q4 gross margins essentially flat. But at the same time, I'm hearing some stuff about pricing and RGM initiatives and sure there's productivity. So I'm just curious kind of with some pricing coming through, it sounds like maybe that is clearly offsetting some higher costs. Otherwise, I kind of would think gross margin would be up.

You have -- I mean, you had a bit of an effect as well of mix because we had ice cream in Q3, and then we don't have ice cream in Q4. When you look at the trends, if you look at first three quarters to the fourth quarter, but versus a year ago, you started to see some improvement there, which is going to comfort the projection of, let's say, flat gross margin, I would say, for the year. So technically, the cycle has been that the first three quarters were slightly above 28%. And then effectively in Q4, it's going to be slightly lower than that. But for an average of the year, that's going to be flat versus a year ago. So it's clearly definitely the investment we are making in terms of productivity, in terms of investment behind our core brand and particularly on mix on our core category. And Must Win Battle in particular is going to start to pay off. We see effectively the trajectory starting to improve into the next year. But for this year, we definitely maintain our flat gross margin for the year.

Our next question comes from the line of Steve Powers with Deutsche Bank.

On the gross margin, actually, while we're here, you mentioned that 3Q came in ahead. Is that -- what was the source of the upside? Was it better ice cream sales? Or were there other drivers of the upside versus your expectations?

Well, this is expectation. I think we've been slightly higher, as you know, because effectively we had a bit of a better performance on the top line if you really look at that as expectation. And yes, ice cream has been doing really well there. There's a mix factor there and the continuation effectively of the return that we are putting, we're getting behind all of the cost savings and productivity initiatives. I mean, as you know, we're putting a lot of focus and a lot of effort in COGS in particular. But it's a combination of elements that we see. I mean that it's not only just the saving in itself, but you really have a good combo on focusing on Must Win Battle, stepping up effectively the mix by investing behind the Must Win Battle. RGM starts to get in motion on that, which is giving us a bit of a breathing space there, which we expect to continue to maintain and again, securing our hypothesis and our projects for the year at about flat gross margin.

Yes. Okay. Very good. And you mentioned 100% coverage and strong visibility on costs into '24. Is there anything you can offer us in terms of an overall cost outlook? Or any color on expected kind of timing of the cost curve into the next year?

Yes, we -- at the time we give the guidance there because, frankly, I have to say, I mean, so far, of course, we indeed have covered, I mean, for the year, that's obviously because we are now, frankly, at the level where we are. But getting into the nature, we're starting effectively to lock some of the deals available in the market, there is effectively some deflation on fish, some slight inflation on some of the veggies. I mean some of them more than others. And we are really trying to look at the market dynamics to frankly, make sure that we remain competitive versus the other players in the market. And frankly, we have a COGS structure that enabled us to adjust the price as necessary through promotion as we move forward to stay competitive there. But definitely, after two years of heavy inflation, we are seeing effectively a flattening and a decline in some of the categories. I mean, fish as an example, and a bit of an increase on the rest. So rest assured we'll keep you up to date, I mean, at this stage, but we are maintaining the strategy of trying to grasp as much as we can from the market in order to really help create value to invest in business.

Okay. That's very helpful. And last question, if I could. As the -- I think everyone is trying to kind of get a pulse and try to track your progress on volume recovery and market share improvement as you make good on the investments that you're currently making. As we do that from the outside, is tracked channel data a good barometer of your progress? Or is there a reason to believe that tracked channel performance will either lead or lag total portfolio performance?

Well, directionally, it's okay, absolutely. But then they have some puts and takes when obviously, you have the difference between sell in and sell out. You also have the food service, the piece. Then some countries are not covered as well. But directionally, it's okay. And then definitely with Tony, we can obviously help you to be a bit further -- I mean, more precise with the difference between, let's say, the numbers as such that are publicly available and then how to get to the final number. But directionally, it's okay.

[Operator Instructions] Our next question comes from the line of Jon Tanwanteng with CJS Securities.

It's Peter Lukas for Jon. You guys covered most of the stuff here in the prepared remarks and Q&A, but if you could just kind of maybe summarize the biggest puts and takes you're seeing in regards to working capital and cash flow expectations going forward.

Yes. I think as we have mentioned in our -- I mean cash flow is absolutely an essential critical measure for us because it drives effectively a lot of the commitment we have to driving shareholder value and through effective capital allocation. So we clearly have been investing a lot of efforts in order to step up our performance in all of the areas of working capital. I mean, let me make -- get them one by one, if you want, I mean on receivables is clearly something where we have to clearly get the perfect match between the overall receivable and the collection. And honestly, at this stage, we're really making a very good progress and have set of our performance, I mean, from that end, not necessarily in the change itself, but in the efficiency of collecting effectively money beyond our receivable. On inventory in payables, the point there was, as you recall, a year ago, we have stepped up our inventory, I mean, because of all of the conditions we have with the disruption in supply, with war and with specific supply issue, I mean, relating to some of the ingredients and we have taken the journey of the supply chain team has done an extraordinary work there to really drive down our inventory in order to support our business requirement. And you see that in a customer service level that are very good. And at the same time, you've seen a step change in improvement in our inventory that has been down together with our receivable that have now integrated is shown, the one-off effect of the past, particularly the unfair trade practice that has, let's say, dragged an impact on the overall payables. So net-net, if you want receivable, clearly, huge focus on a per market basis to make sure we perform in line with expectations. Inventory on a journey of taking the overall inventory level down while making sure that we maintain top performance in the area of customer service and the totality of all of that is really enabling to free up an amount of cash that is enabling our performance. So from a cash flow standpoint, we just reiterate the point that this business is designed to deliver 90% to 95% of free cash flow conversion, which, I mean, amounts to €250 million for this year, and we intend to continue to do that and to do each and every effort to even generate more cash beyond -- on top and beyond that in this and the out-years.

Very helpful. And then just last one for me. What is your expected net interest expense following the repricing?

For the repricing, we'll get back to you. Let me tell you the interest expense with the overall for the year, we'd be expecting probably around 118 million, 110 million, 150 million, I mean, overall for 2023.

And we have reached the end of the question-and-answer session. And I'll now turn the call back over to Stefan Descheemaeker for closing remarks.

Thank you for your participation on today's call. After the unique challenges of 2022, we continue to deliver organic sales growth while protecting our margins and investing in the long-term health of the business. Our A&P program is poised to drive growth. Our supply chain is in great shape and our RGM capabilities are expanding with each new quarter. We are already looking forward to an exciting 2024 of volume and market share recovery. Once again, we are on track to deliver our ambitious financial objective for 2023 and beyond. Thank you all. Operator, back to you.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.