Taposh Bari - Head, IR Stefan Descheemaeker - CEO Samy Zekhout - CFO.

Steve Strycula - UBS Robert Dickerson - Deutsche Bank John Baumgartner - Wells Fargo Robert Moskow - Credit Suisse Jonathan Tanwanteng - CJS Securities.

Good day, everyone, and welcome to the Nomad Foods Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Taposh Bari, Head of Investor Relations. Please go ahead, sir..

Great. Thank you, operator, and thank you all for joining us to review our third quarter 2018 earnings results. With me on the call today are Chief Executive Officer, Stefan Descheemaeker; and Chief Financial Officer, Samy Zekhout. Before we begin, I would like to draw your attention to the disclaimer on Slide 2 of our presentation.

This conference call may make forward-looking statements that are based on our views of the company's prospects 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.

And finally, please note that the certain financial information within this presentation represents the figures for 2017 and 2018, and that all adjusted figures have been adjusted for exceptional acquisition-related and share-based payment and related expenses. And that all comments from hereon will refer to those adjusted numbers.

And with that, I'll hand the call over to Stéfan..

Thank you, Taposh, and thank you, everyone, for joining us on the call today. Earlier this morning, we reported third quarter financial results, which reflect another quarter of solid progress against our strategy. Highlights from the third quarter include organic revenue growth of 1.9%.

Adjusted gross margin of 28.4%, reflecting 50 basis points of improvement before the adverse effects from an unfavorable pea harvest and acquisition mix. Adjusted EBITDA was € 84 million, representing an increase of 7% year-on-year. And finally, adjusted EPS growth of 8% year-on-year to € 0.26 per share.

Based on year-to-date results and the visibility into the remainder of the year, we are raising our full year guidance to the upper end of the prior range. Turning to Slide 4, I would like to provide some more detail behind our third quarter performance.

Third quarter organic revenue growth was 1.9%, representing a seventh consecutive quarter of organic growth for Nomad Foods. Through the first 9 months of 2018, organic revenue growth was 2.1% with balanced contribution between volume and price.

We experienced strong performance in many of our largest markets during the third quarter, notably the UK, which was once again the standout performer with organic revenue growth of 5.8%. UK growth was broad-based, and led by fish and poultry.

The UK has benefited from strong marketing campaigns all year, including our new Captain campaign, which I am proud to say was recently recognized as brand relaunch of the year by the UK's Food and Drink Federation.

Strong execution in the UK is leading to increase its market share, higher household penetration and the significantly healthy dialogue with our trade partners.

Overall, we're very encouraged to see the UK hitting it's stride with strong year-to-date results, providing a solid foundation for the Birds Eye team to integrate our recent acquisitions, Aunt Bessie's and Goodfella's. Turning to other country highlights during the third quarter. Italy and Germany grew 3% and 1%, respectively.

Although, a very healthy growth rate a year ago. Other notable highlights include Austria, which grew double-digit. And the Netherlands, which grew mid-single digit. Sweden, which remains in turnaround but basically flat in Q3 after declining in the first half.

We successfully navigated through unseasonably warm temperatures in Q3, which as in the second quarter held back consumption of frozen food and resulted in a category, which was effectively flat.

As Samy will describe in more detail, weather also had an adverse impact on our pea harvest, which negatively impacted gross margin during the third quarter. Importantly, harvest uncertainty was factored into our prior guidance with Q3, capturing the large majority of the cost impact.

Overall, we are pleased with the results and the way the team has managed through the challenging external conditions. And more importantly, we are happy to see the harvest issues behind us. We continue to a greater portfolio through a combination of renovation and innovation.

On the renovation front, we brought our new Captain campaigns in Germany in the third quarter and the results have been outstanding. Similar to what we have seen earlier this year in other markets, this sort of tracking results for this new campaign are well above normal.

Indeed Germany -- German consumers are making both, a strong connection to the Iglo brand and recognizing our message around the fact that our fixed is re-food should be made.

Q3 also marks loads of several new innovations as we began to more closely align our portfolio with the emerging consumer trend, such as plant proteins, convenience, and health and wellness. We have been quite pleased with the trade response to our new products, which are attracting millennials to our brand into the category.

While still very early, we're happy with the progress and look forward to updating you in the coming months. Moving on to M&A. We're seeing strong performance from our recent 2 acquisitions, which are growing nicely on the top line. Gross profit and EBITDA are consistent with our expectations.

Since closing on Aunt Bessie's and Goodfella's earlier this summer, we've been working hard to develop the optimal organizational structure for these brands to be managed under one roof along with Birds Eye. Last month, we finalized and these plans, which become fully in place in the new year.

With a team now finalized, we have already started to apply a growth model and strategic framework, both on Bessie's and Goodfella's. In fact, our existing relationships have also opened up new business for the Aunt Bessie's brand earlier that we had originally explained. Turning to Slide 5. We also marked a good progress on the commercial integration.

At Aunt Bessie's, we recently relaunched a brand marketing new campaign designed to increase mid-week consumption of the roast dinner occasion. The new campaign tried to bring out the best in EU markets in new and exciting era for this relaunched [ph] brand. We expect to build on the momentum of this new campaign in the coming months.

We're also working on the full relaunch of the Goodfella's pizza brand, which we expect to go live in the spring of 2019. As part of the relaunch we'll be making noticeable enhancements across all elements of the marketing mix, including advertising, packaging and product quality.

Overall, all businesses are performing well this year and are expected to begin their transformation to the coming quarters, which will drive topline performance and enable the realization of synergies and subsequently higher gross margins.

To summarize, we're pleased with our third quarter and year-to-date financial performance, which was achieved against more difficult year ago comparisons and particularly challenging weather conditions this summer.

With 2 months remaining in the year, we are now tracking towards the upper end of our prior guidance range, which represents another year of solid organic revenue and adjusted EBITDA growth. As we look out in 2019 and beyond, we're excited by the opportunities ahead for our business and the category.

European frozen food remains a dynamic growth category, and our market-leading brands are well positioned to continue to gain market share. We have good momentum across all markets, a proven tool kit of capabilities, and the rightly move to grow both organically and through acquisitions.

And most importantly, we have the right team in place along with a winning culture. This will prove fundamental for 2019 and beyond, as we actively manage raw material inflation, notably in fish, and gain more clarity around Brexit.

In that, we look forward to reinforcing the sustainability of our growth model and delivering against our long-term growth algorithm for years to come. With that, I will hand the call over to Samy to discuss our financial results in more detail.

Samy?.

Adjusted EBITDA of €276 million, which grew 12% year-on-year; working capital was €160 million offset due to the seasonal effect of harvest, phasing and acquisitions; CapEx was €18 million, due largely to the anniversary of machinery and equipment purchases related to the Findus integration; cash taxes were €11 million, and finally cash interest and other was €31 million.

Notwithstanding a number of transitory factor during Q3 and throughout 2018, we remain committed to generating strong free cash flow and continue to expect cash flow conversion to be approximately 90% by year-end, once working capital seasonality reverse in our favor. Turning to Slide 8.

On 2018 guidance, which is based on foreign exchange rate as of November 8, 2018. Based on year-to-date performance and visibility into the rest of the year, we are raising our full year 2018 guidance to the upper end of the range.

We now expect 2018 adjusted EBITDA at the upper end of €365 million to €370 million, and adjusted EPS at the upper end of €1.14 to €1.17 per share. Once reflected in to U.S. dollar, the currency in which our shares trade, adjusted EPS guidance equates to a range of USD 1.30 to USD 1.33 per share.

Full year guidance continues to be based on an underlying assumption of growth, single-digit organic revenue growth. Based on current exchange rates, we expect FX translation to represent approximately 30 basis points of drive on the reported revenues in the fourth quarter, and 90 basis points for the full year.

Full year guidance continues to include approximately €20 million of expected EBITDA contribution from the combination of Goodfella's and Aunt Bessie's. As a reminder, this contribution will reflect 8 months of ownership of Goodfella's, and 6 months of ownership of Aunt Bessie's in 2018.

Looking out to Q4, we expect to report another quarter of low single-digit organic revenue growth. In addition, we continue to expect stronger year-on-year EBITDA growth in Q4 versus Q3, reflecting contribution from acquisition and sequential improvements in our gross margin rate. That concludes our remarks. I will now turn the session over to Q&A.

Thank you. Operator, back to you..

Thank you, sir. [Operator Instructions] And we will hear first from Steve Strycula from UBS..

Hi, good morning. Samy, a quick question on the pea harvest. Just want to walk through the treatment of the accounting a little bit.

Can you help us understand what is, do you really record the raw material inflation upfront in third quarter, and is largely contained there? We should receive a little bit of a benefit from pricing as it pushes through the retail system in Q4 and beyond? Can you walk us through those mechanics? And then I have a quick follow-up. Thanks..

Sure. Thank you, Steven. Yes, actually [indiscernible] the mechanics is pretty simple. When you have effectively a poor harvest as the one we have experienced, effectively, you get lower volume. And therefore, when you buy the products, which we do up from because we store, we freeze and store the product actually recognizing the inflation upfront.

So that's was exactly the impact that we incurred over Q3. And then once it is in our inventory, then the sellout happened in the following quarter. So to a large extent we incur the cost in Q3.

And after that, you reflect intervention into the following quarter as you mitigate the exposure driven by the higher cost either through pricing or other effect..

Okay. Great. And then a question for both you and Stéfan.

From a revenue base perspective, Stéfan, how should we think about the customer orders coming in for Aunt Bessie's and for Goodfella's? Are they coming in line as planned? A little bit better? And then from a cost perspective, as you think about the integration, when you should we start to expect synergies start to flow through? Is that a Q4 event and is it not really until the beginning of 2019? Thanks.

.

Okay. Starting with your first question, actually Steven, we're getting better-than-expected, which is the better than planned I would put it that way compared to a business plan. So that's -- synergies are starting -- top line synergies are starting to come in.

For example, access to our network, access to some of our trade relationship, for example, definitely had to on their own basis. At the same time, the trend, exactly that what we mentioned. Obviously, to some extent, it is partly or so lower mix in terms of trade. So that has an impact on gross margin. But very pleased with what we're seeing.

In terms of synergies, the majority of the synergies will come next year, say so first half of '19. We're seeing already some obviously -- some early signals of the synergies. But most of them will come in '19 and in '20.

Did I answer your question, Steve?.

Yes, thanks. I'll pass along..

And we'll move to our next question from Rob Dickerson of Deutsche Bank..

Great. Thank you. And Stefan and Samy, I had more of a bigger picture question with respect to '19. I know you you'd have, historically, you've shown this slide, right, that shows kind of your net revenue, management capabilities, inclusive of your capabilities, promos, price, price pack architecture and trade terms.

It was always -- this kind of always showed that 2019 is really when essentially all the stars aligned. And when we look at Q3, which is a good thing, right? We're not really seeing much pricing yet.

We're seeing strong volume growth on top of a very tough year ago compare, which signals that hopefully, consumer response and regional responsive, the new innovation and then the base business remain strong.

So I'm -- as we think out to 2019, are we thinking there might be a bit more price? Or there might be improved price pack architecture benefit such that you could hopefully keep the volume momentum? But we start to see a little bit more price so there could even be an acceleration on the top line or not? Thanks..

Thanks, Rob. Let me start first with the Q2 -- Q3 because just a little correction. There was obviously, a bit of phasing between Q2 and Q3. So promotions were much more -- when we phased from Q2 to Q3. So that's one of the reasons and obviously, you see that the 10 basis point from price and promotion. So that's one thing.

Second point you asked, price? We work very hard and we see the results in terms of net revenue management, which really something that is one of our strong points. It's about promotional efficiency, but there is also price. And then as we said, it's -- we're working very hard right now in terms of preparation of these plans.

As we know, the environment is more inflationary, especially, in fish. And so definitely the kind of things we're working on right now. UK, for example, which always comes ahead of other countries is really working very hard right now with the trade.

But very, let's say, in a very positive way, how to obviously make sure that the things are going to be reflected in 2019.

So that's -- so too early to say, premature to say, but networking management and the combination with very strong brands, obviously, will help to pass the price increases in '19 as a result of obviously a more inflationary environment in commodities.

And at the same time, the momentum is very strong, which always helps when you have a conversation with a trade..

I'm sure it does. And then quickly Samy, just some perspective on SG&A for the quarter, and go forward expectations. You -- your company did better than expected from -- a decent amount I think relative to where a lot of people were forecasting for the quarter in SG&A. But it's not due to a pullback in advertising or brand support.

So just wondering were there more efficiencies than you'd sought in the quarter or is it just general as Stefan said, could there be a bit more synergistic benefits coming through a little bit earlier. And therefore, as we look into Q4 and go forward, then maybe the SG&A is a bit more efficient than we'd thought? And that's it. Thank you..

Yes, thank you. Thank you for the question Rob. We have only seen actually in AMT, a shift of about €2 million to €3 million from the Q3 to Q4. Far many to adopt if you want the AMT to gather with our business plans. But as far as indirect are concerned, there's no change with the plan, for the total Europe. So it's probably a phasing approach there.

We definitely are determined to continue invest in our brand, and continue to leverage our expense disciplines with versus the plan we're exactly on par versus the full-year plan..

And we'll go to our next question from John Baumgartner of Wells Fargo..

Good morning, thanks for the question. Samy, just in terms of the M&A, on the margin front, I think your excessive trade promotion has been an issue for I guess both of these businesses.

So where do you stand right now in terms of adjusting those programs? How far along are you at Goodfella's? And then I guess given that Bessie's only closed in July, is it too soon to think that we can see material benefits in merchandising already in Q4? How should we think about the phasing there?.

I think you're right. When you -- just I was invited to go back to a growth model in the Must Win Battles. When we really worked very hard for each and every Must Win Battles, to have to be ready with obviously, the right packaging, with the right quality, with the right advertising loaded [ph] things.

And then, from that moment, when you're ready one up the other, then you can obviously invest -- you can really go through the -- the food growth model, including obviously, how to reduce promotion, how to be more efficient in terms of promotion, I would put it that way. And just consider this business as Must Win Battles, exactly the same way.

And we're not going to change. There can be tough time, but it is more than ever we have come to the conclusion you first need to have all of the components of your flag wheel [ph] ready so then ask to convert with the food story. And so all of this is going to be -- to start a bit early as you can see.

We already started with a new advertising campaign. Goodfella's is coming in Q1, as we said. We first need to make sure that we have the right quality, the right packaging and the right advertising. And so that's exactly what we're going to do.

We're not going to deviate, that's the way -- that's the only way for us to demonstrate the best efficiency in terms of promotional efficiency. So that's that. So we're not -- bottom line we're not changing the model. The model works. And we don't see any reason that it didn't work for the new acquisitions..

Okay. And then Stefan, I also wanted to touch on your approach to Brexit. We've already heard some reports of food companies stockpilings in inventories, in an event if it does take a hard turn. So can you update us on your thoughts in preparation there? Should negotiations kind of go south and you see a worst-case scenario.

I mean how much of a risk could it be?.

So let me first start with a bit of background. So business in UK is around 30%. But the good portion of this is also internal. So because we have big plans in the north, west of the country, that was tough to be very specific. So, and we're very pleased with that.

So from there, you know obviously you're working from different scenarios from, I would say, the worst case being the terminology, sorry for the terminology, John, but it's no deal Brexit. I'm becoming a specialist to something which might be, cannot approach, which basically wouldn't have a big impact on us.

Number one, because short-term, there will be a long transition. And second, the tariffs will be very low, if any. So we're working on the different solutions. Short-term anyway to your point, in the risk for example, no deal.

We're working on short-term solution in terms of how to make sure we have the right level of inventory, which by the way is better in frozen foods. That helps us obviously, compared to fresh or chips, so that's a big difference. And then there is no deal.

Obviously, we're investigating different solutions between the P&L and CapEx, but it's, that part is too early to say. That's going to take more time. but we are monitoring the situation very closely. I would put that way..

Okay. And then just one last one, if I could Stéfan.

In terms of the renovation in vegetables and the peas product, how are you seeing the trade and consumer response to that? And I guess going forward, how do you think about your capabilities in the meat alternative segment? Do you need to lean more on M&A for better capabilities and resources? Are there JV partners out there? How fast can you really develop that category relative to any internal constraints?.

Okay. So let me start with the short-term. So overall, I'm just taking even a broader view in terms of innovation, not necessarily limited to plant protein obviously, but plant protein included. The trade acceptance has been very good. Obviously, it's, with exception of Portugal, you remember that started earlier.

It's too early to say from the consumer standpoint because the first thing is obviously, we, we're loading first and then we see how the impact is. But that's it, the very first step, which is very engorging trade likes of products. They're very much in line with the new trends and the rest of it. And it's obviously, same thing in terms of peas.

So that's very good. But more to come obviously in Q1 2019. So back to your second question, which is should we do this, it's a classical question of buy or build. If I understand your question well. I think it's going to be a combination. We definitely believe we have a lot of expertise internally to build this product.

But at the same time, you also have to be very open-minded because a lot of things are happening right now in the market. And so basically we have to be open to any new innovations, any new partners. I think more and more things will be more in terms of partnership than anything else. So we're ready for this as well.

But definitely, the starting point is a very strong expertise internally..

And our next question comes from Robert Moskow of Credit Suisse. .

Hi, thank you. Just a couple small questions.

The guidance, kind of assume that the guidance for fourth quarter gross margin is that it would still be down year-over-year because of the acquisition, dilution or maybe you gave something more specific, I didn't catch? And then second, Stéfan, I got to imagine that private label is raising prices as well in response to the weak crop.

So in your view, is this a pretty logical conversation to have with retailers about private label and brands raising price at the same time? Thanks..

I will talk first. On your question I would say, yes, it will be down versus last year. But it will be up versus quarter 3..

And back to your second question, Rob. I would put it slightly differently. We are the category leader. So in most of the cases, it's our job to start with the price increase. And I wouldn't say that we haven't dialogued with the trade. But definitely we are monitoring afterwards what they're doing with their own private label.

I think that's the way it works more than a, let's say, next visit dialogue with them..

Okay.

Maybe the follow-up then is, is it pretty logical to assume that the private label pricing will have to raise, will have to move higher? And you have any kind of history to look back on to indicate what private label pricing tends to do in situations like this?.

The answer is yes, and as you're starting with the producer. Most of the time it's some sort of cost plus. So they're going to be very clinical with how to pass the price increase, is going to be very much COGS related. And then you obviously hold and it's going to absorbed by the trade.

Same thing, it's most of the time you can see in the past 2 years in U.K. it's been a very, I would almost say, mathematical..

Got it. Very good. Thank you..

[Operator Instructions] We'll go next to Bill Chappell of SunTrust..

This is actually Green on for Bill. Actually I just had a question following up on that last line.

Wondering if there's any regions, maybe in particular, where the retailer dynamics are maybe more competitive? That it may be more difficult to have those conversations, those pricing conversations, or if, kind of as the category, where you still feel like you have confidence that kind of doesn't matter the reach of the dynamic, you'll be able to work that pricing through?.

No. It's really the trade at the end of the day, whether they're coming from Italy or from UK or Germany or France. So they're dealing with the same kind of constraints. So I think what matters more is overall whether you have the right brands to these guys. And when you see our network geography that's exactly what we have.

So I would say definitely not necessarily by the way geography related but there will be some easy conversations, some others will be a bit more difficult, fine. But overall, the fact that we have the right brands, we have the right momentum, we're going to be disciplined as well by the way.

So it's important obviously, to file the price increases because it's also, it has an impact on the long-term. So that could happen at some stage, but that those relations will be a bit tense. But it's for the right reason..

Got it. Thank you..

And moving on, we have a question from Jon Tanwanteng of CJS Securities..

Good morning guys. Thanks for taking my questions and very nice quarter.

Any update on the M&A pipeline, what you are seeing there? Does your ability to keep up growing a flattish market put pressure on any of your peers who are losing share to perhaps help you?.

By definition in M&A, you need to be focused and you need to be, at the same time, flexible. So we're always looking at new targets, so targets. We're monitoring all situations. The other thing is by definition, we're never going to comment on what's available, what's not available at this stage or we're working on this or that.

But we just have -- and that's exactly what happened with both by the way, with Aunt Bessie's and Goodfella's. These are the current situation, we have been monitoring for months and sometimes for years. And then the moment is happening because for whatever reasons the shareholder want to sell, you have to be with positions.

The good news is also in terms of frozen food in €ope. As we are the leaders, which makes obviously, the whole situation much easier because inevitably, people will come to us. So that's a big plus for us..

Great. Thanks. Just a little more color on the new product development and innovation plans you have in the pipeline.

Is there a target from what percentage of your portfolio you want to be kind of new innovative products? And just a little bit of color and update on the performance of the newer stuff in Q3 and as you head into Q4 and Q1, what's rolling out?.

Overall, at this stage, we are in the region of 5% at the objective is to go to 10%. We don't want to be dogmatic, but at least it's a good discipline to get there.

And we've started really from a low baseline, remember the priority was first renovation and then move little by little to innovation, especially new trends, while respecting the Must-Win Battles, that was absolutely key for us. Now what we can see as I said as we started a little ahead of time in Portugal. So in Portugal, we have both.

We have the trade acceptance, which was very good and that's been reinforced by very, very positive acceptance -- more than acceptance by the consumers. So to the point that there is really a new category of consumers coming to a product with the Veggie Power. So that's very positive for us.

All the countries are a bit late, so we have already the ep one which is trade acceptance, which as I said, i very much in line with what we've seen in Portugal. So it's a very good acceptance. Time obviously, let's wait until the moment you have been fully loaded, Q1 2019, to see what will be the consumer acceptance is.

But we believe that if -- that what we've seen in Portugal should also happen in other countries..

Got it. Thank you very much. .

And with no other questions in the queue, I would now like to turn the call back to CEO, Stefan Descheemaeker for any additional or closing remarks..

Thank you very much, and thank you for joining us on the call today to review of our third quarter results. We are on pace to deliver another strong year of top and bottom line financial performance and our brands have good momentum in the respective markets.

We are making good progress on integration of our 2 recent acquisitions and look forward to the transformation in 2019 under the Nomad growth model. Thank you, and I look forward to updating you on our fourth quarter and full-year results in early 2019..

And thank you, everyone. That does conclude the call. We would like to thank you for your participation. And you may now disconnect..