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Edited Transcript of NOMD earnings conference call or presentation 9-May-19 12:30pm GMT

Q1 2019 Nomad Foods Ltd Earnings Call

ROAD TOWN May 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Nomad Foods Ltd earnings conference call or presentation Thursday, May 9, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Samy Zekhout

Nomad Foods Limited - CFO & Director

* Stéfan Descheemaeker

Nomad Foods Limited - CEO & Director

* Taposh Bari

Nomad Foods Limited - Head of IR

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Conference Call Participants

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* Jonathan E. Tanwanteng

CJS Securities, Inc. - MD

* Robert Bain Moskow

Crédit Suisse AG, Research Division - Research Analyst

* William Bates Chappell

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, and welcome to the Nomad Foods First Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Taposh Bari, CFO.

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Taposh Bari, Nomad Foods Limited - Head of IR [2]

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Thanks Amanda. Thank you all for joining us to review our first quarter 2019 earnings results. With me on the call today are our Chief Executive Officer, Stéfan 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 view 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'll also be discussing 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 2018 and 2019. All adjusted figures have been adjusted for exceptional acquisition-related, share-based payment and related expenses as well as noncash foreign exchange gains or losses. And all comments from hereon will refer to those adjusted numbers.

And finally, users should be aware that 2019 figures have been presented in accordance with IFRS 16, which is the new standard for leases. As such, certain financial measures should not be directly comparable -- may not be directly comparable to 2018 figures. That being said, we have disclosed the impact of this change in the press release where the impact on comparability has been deemed material.

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

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Stéfan Descheemaeker, Nomad Foods Limited - CEO & Director [3]

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Thanks Taposh and thank you all for joining us in the call today.

Earlier today, we reported first quarter 2019 earnings results and reiterated our full year adjusted EBITDA guidance. We're pleased to have begun 2019 with a strong start and are on pace to deliver against our long-term growth algorithm for a third consecutive year.

Highlights for the first quarter include organic revenue growth of 0.9%, representing a ninth consecutive quarter of growth despite the shift of Easter sale into Q2. Adjusted gross margins of 30.9% with 60 basis points of growth in the base business offset by 150 basis points of acquisition mix. Adjusted EBITDA of EUR 122 million, which grew 18% year-on-year and adjusted EPS of EUR 0.40 per share representing growth of 14%.

First quarter performance was underpinned by many of the same drivers and in the past. Those are the investment in our brands and solid growth from our core categories. During the first quarter, we achieved strong revenue growth, navigated the higher fish prices, advanced our innovation strategy and strengthened our balance sheet to fund future growth. Organic revenue growth of 0.9% was driven by a strong execution in a number of markets, notably in the U.K. and Austria, which each grew 4% and the Netherlands, which posted growth of 11%. First quarter organic growth was led by price, which contributed growth of 4.1%. Partially offsetting this growth was the 3.2% decline in volume, which was impacted by a later Easter this year.

As you know, we have raised price in response to higher raw material costs, which we have experienced this year mainly in fish. So far, we have navigated the environments well by remaining laser-focused on executing our growth model. We continue to invest in our brands with the majority of our resources focused on our core categories, which, once again, delivered solid growth of 3.3% in Q1.

Success in our core portfolio continues to be a result of efforts in both a global and local level. Fish, our largest global category, delivered another strong quarter with fish fingers and coated fish posting 3% and 4% growth, respectively. As expected, sales of fish declined in Q1 due to last year's poor harvest, which limited supply in the marketplace. That said, we were successful in replacing lost fish volumes with growth in other areas of our vegetable portfolio, notably steamed fresh in the U.K. Strong growth in our core global SKUs were complemented by several local success stories. These includes poultry in the U.K., ready meals in Germany and minestrone in Italy. As a reminder, local core categories combined to represent nearly half of our core portfolio. This group of categories grew an impressive 5% during the first quarter, demonstrating the ability of our regions to execute both, statutory-led and country-specific initiatives.

Turning to innovation. We advanced our strategy in Q1 with the launch of Green Cuisine, a range of plant protein products in the U.K. This launch adds yet another dimension in which we are growing in U.K. portfolio, which has gone through significant transformation over the past 2 years between an impressive turnaround in this base business and the integration of 2 complementary acquisitions.

Green Cuisine marks our second plant protein launch in the past year and followed the introduction of PEASE, our sub-brand of plant protein products launched last year in the Nordics. PEASE has performed well in its first few months in the market driving 30% growth in those fish and vegetable portfolio. It has also attracted new users in the category with very positive feedback from both consumers and retailers. Both PEASE and Green Cuisine are pea-based innovations and based on our brands strong heritage and expertise in these high protein products.

We look forward to providing you with an update on Green Cuisine in the coming quarters after we build distribution and begin to support this new range of products with an emerging channel advertising campaign this summer.

Finally, we strengthened our balance sheet to support future growth, and this includes M&A. As you know, the packaged food space is going through a period of significant change in this location. This has, in turn, created a number of unique opportunities for us. We've been looking for why and are currently evaluating a number of interesting opportunities. We're not going to comment on specifics, but rest assured that we committed to making the right deal at the right time that is in the best interest of our shareholders. Our recently enhanced balance sheet provides us with the capacity and flexibility to drive value through accretive acquisitions, and we look forward to providing details where we have -- when we have more news to share.

Before turning the call over to Samy, I would like to highlight a couple of new and exciting products and marketing campaigns being rolled out in the markets.

On Slide 5, you can see 2 current examples. The first on the left is Artisan, one of our largest product launches in 2019. Artisan is a new range of coated fish that will provide retailers and shoppers with the complementary dimension to our existing portfolio of coated fish products. This innovation leverages key food strengths such as the artisan bread and seasoned inclusions, while still delivering the great taste, convenience and value that our brands are known for. We will be supporting Artisan with an exciting new media campaign featuring our Captain with [Ofunz] himself on land exploring a local artisan market. Artisan is currently being distributed across a handful of markets and as I mentioned, will be one of our big bets in 2019 along with plant protein and modern vegetable launches.

On the right-hand, you can see the Goodfella's brand reboot, which we recently introduced to the market in April. We applied our growth model across all aspects of the brands by changing the packaging design, [our breadth in] product quality and launching a new marketing channel campaign celebrating the heritage of these strong brands.

The new campaign titled Made with Respect introduced a new lead character, The Godmother, which serves as a matriarch of the family and is the ultimate judge of Goodfella's product quality.

This reboot marks an exciting new area for the Goodfella's Pizza brand and will help support our longer-term strategy of growing sales with a stronger gross margin profile.

To conclude, the year is off to a strong start. First quarter marks our ninth consecutive quarter of organic revenue growth, and based on performance during the month of April, we feel very good about the ability to build on our momentum into Q2.

We are firmly on track to execute our growth plan for the year, are making good progress on the recently acquired businesses and are eager to continue to add more complementary assets to our portfolio in due course.

With that, I will hand the call over to Samy to discuss the financials and guidance in more detail. Samy?

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Samy Zekhout, Nomad Foods Limited - CFO & Director [4]

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Thank you, Stéfan, and thank you all for your participation on the call today.

Turning to Slide 6, I will provide more detail in our key first quarter operating metrics beginning with revenues, which increased 15% to EUR 618 million driven by 0.9% organic revenue growth and 13 percentage points -- 13.8 percentage points from the acquisition of our business of Goodfella's. Gross margin was 30.9%, declining 90 basis points year-on-year.

Base business gross margin expanded 60 basis points, driven by volume mix and price and promotions, which more than offset COGS inflation. Acquisition mix negatively impacted gross margin by 150 basis points.

As we had anticipated, first quarter base business gross margin was affected by 2 timing factors unique to Q1 versus the rest of the year. First, we realized the full benefit of price increases but only a partial impact from raw material inflation in the first quarter. This will normalize beginning in Q2.

Second, the shift of Easter and related promotion moved from Q1 into Q2, given the timing of the holiday versus the prior year.

Moving down to the rest of the P&L. Adjusted operating expenses increased 9% year-over-year primarily due to the inclusion of acquisitions. As a percentage of revenue, adjusted operating expenses improved to 13.8% from 14.5% in the prior year, reflecting acquisition synergies, expense discipline and phasing. First quarter adjusted operating expenses were approximately EUR 5 million lower than we originally expected due to the timing of some media activities moving into subsequent quarters.

Within operating expenses, A&P increased 6%, and indirect expenses increased 11%. Adjusted EBITDA was EUR 122 million and as expected, included the EUR 4 million benefit related to IFRS 16, the new standard on lease accounting effective this year. Excluding these benefits, adjusted EBITDA grew a healthy 14% versus the prior year. Adjusted EPS was EUR 0.40 for the quarter, an increase of 14%, reflecting underlying EBITDA growth, higher finance costs and lower effective tax rate and the higher share count as the result of the equity offering. IFRS 16 did not have a material impact on EPS during the first quarter.

Turning to cash flow on Slide 7. We generated EUR 93 million of adjusted free cash flow during the quarter, an increase versus the EUR 82 million generated in the same period last year. In an effort to increase our organizational focus and accountability on cash, we have made the decision to refine our cash KPI with a priority now on free cash flow as both an absolute metric and relative to adjusted profits.

Factors contributing to first quarter adjusted free cash flow included adjusted EBITDA of EUR 122 million, a working capital outflow of EUR 11 million, CapEx of EUR 6 million, cash taxes worth EUR 4 million lower than the EUR 11 million adjusted P&L tax due to the timing of tax payments and finally, cash interest and other was EUR 8 million, also lower than P&L finance cost, due primarily to the noncash impact of IFRS 16 on the P&L. We are pleased with the amount of cash that we generated in Q1.

As you know, we also raised EUR 343 million of equity in a transaction that closed on March 22. Accordingly, we ended the first quarter with EUR 753 million of cash on hand and net leverage in the high 2s. We believe this level of leverage provide us with the necessary resources and flexibility to pursue our strategy growth ambition, which includes organic growth as well as the acquisition of food companies where we can unlock value.

With that, let's now turn to Slide 8 to review our 2019 guidance, which is based on foreign exchanges rate -- foreign exchange rates as of May 7, 2019. For the full year 2019, we are reiterating adjusted EBITDA guidance of approximately EUR 420 million to EUR 430 million which assumes organic revenue growth at a low single-digit percentage rates.

Given the recent equity offering, which resulted in the company raising EUR 343 million in capital and issuing 20 million new shares, we now expect adjusted EPS to be in the range of EUR 1.18 to EUR 1.22 per share. These assume a weighted average share count of 192 million for the year. This compares to our prior guidance of EUR 1.28 to EUR 1.32, which assumed 176 million shares outstanding. To help you with your model, there are also some quarterly movements in the remaining periods of the year that I would like to highlight.

Starting with revenues, as you know, Easter fell 3 weeks later this year versus last, resulting in approximately 1.5 points of revenue growth moving out of Q1 and into Q2.

As a result, we expect Q2 organic revenue growth to be higher than in Q1. We expect some incremental contribution of revenues in Q2 from Goodfella's and Aunt Bessie's albeit significantly less than we expressed in Q1 as we begin to anniversary the Goodfella's acquisition, which closed during Q2 of last year. As a reminder, Aunt Bessie's closed on July 2 last year.

Moving on to gross margins. With the shift in Easter timing I've mentioned earlier, it's important to note that the Easter period tends to carry a higher level of promotion, which now shift into Q2 versus Q1 and which will have an adverse impact on Q2 gross margins. Further, keep in mind that we face an uneven gross margin comparison in quarter 2 and 3 of this year. Recall that we scale back promotion during the second quarter of last year, given an unseasonably hot start to the summer. And as you may recall, Q3 gross margin was negatively impacted by a poor harvest. As a result, we expect gross margin to decline year-on-year in Q2 and increase year-on-year in Q3. Finally, there was approximately EUR 5 million of A&P spent, which shifted out of Q1 into the rest of the year, mostly into Q2.

Taking all of these factors into consideration, we expect Q2 adjusted EBITDA to be relatively unchanged versus the prior year followed by a double-digit growth in quarter 3 and quarter 4. That concludes our remarks.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Jon Tanwanteng with CJS Securities.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [2]

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Excellent quarter. Could you tell us if the guidance that you've provided in the EBITDA includes all the IFRS benefits this quarter moving forward?

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Samy Zekhout, Nomad Foods Limited - CFO & Director [3]

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Yes, it does.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [4]

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And how much is that expects to be over the next several quarters?

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Stéfan Descheemaeker, Nomad Foods Limited - CEO & Director [5]

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It's EUR 15 million for the year.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [6]

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Okay. Great. And then can you give us an update on the use of proceeds from your recent equity raise? Is it purely for M&A? Or are there other uses and investments that you're planning? Any color there would be helpful.

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Samy Zekhout, Nomad Foods Limited - CFO & Director [7]

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We may be -- we -- I mean -- been raising, I mean, the equity I mean and now sitting on EUR 753 million in cash, and we intend to use that to, let's say, invest in deals to come. And we will be selecting those deals on the basis of the financial return that they will deliver.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [8]

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And could you also just comment on the IPO of [Beyond burger] here in the U.S.? And if your pea protein products and capitalize on the same trends and the consumers that are driving beyond an impossible and similar vegan products,.

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Stéfan Descheemaeker, Nomad Foods Limited - CEO & Director [9]

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Jon, it's an excellent question. It was not less than noticed, obviously. EUR 88 million of revenue with the EUR 3.8 billion, which is close to our market cap by the way, so that's interesting note. Aside from that, I think with what we see in the fundamentals of plant protein, and the plant protein is definitely is there to stay, to grow, and we want to be part of this, and we're starting with 2 very interesting launches. One is PEASE in the Nordics, and we're doing very well. Great feedback from the consumers and from the retailers, and we're just launching right now Green Cuisine in the U.K., so we're very well accepted by the trade. Obviously, more to come in terms of -- or obviously the [tide] in the summer and more fundamentally, more to come also in terms of SKUs. So we're starting obviously with the limited assortments and then as time goes by, we will obviously expand the range. It's absolutely -- it's very important category for us and not limited to the Nordics and to the U.K. It's going to grow way beyond. Then time will tell how it's going to impact our market cap but at least, business-wise, it makes a lot of sense.

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Operator [10]

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We'll take our next question from Robert Moskow with Crédit Suisse.

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Robert Bain Moskow, Crédit Suisse AG, Research Division - Research Analyst [11]

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A few questions. Can you give a little more detail on why the EUR 5 million in media shifted into second quarter? I thought on the last call, you were pretty specific about the timing of it, and I just want to know the circumstances. Second, we use Nielsen to track your market share data. That's probably not perfect and last year, you had some pretty significant gains versus private label across several categories. Those market share gains seem to slow in first quarter. I think in your commentary you said that you're growing, the category is growing, but can you talk a little bit about your market share in first quarter?

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Samy Zekhout, Nomad Foods Limited - CFO & Director [12]

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Yes, Robert, actually, the first question on media, the EUR 5 million. So it's partly driven by the fact that we have been seeing some shifts in campaigns, which is primarily driven by the fact that Goodfella's has moved from the affiliate March to early April, and that has been contributing to mostly to the shift from Q1 into Q2.

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Robert Bain Moskow, Crédit Suisse AG, Research Division - Research Analyst [13]

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And the market share?

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Stéfan Descheemaeker, Nomad Foods Limited - CEO & Director [14]

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The market share at this stage is flat. So I expect that's why -- within a good industry at this stage, it's flat and as we know obviously, it's -- we've been through a major price increase, which is fundamental and then as we said, we're going to see -- we -- at this stage, we're moving according to plan, so that's well expected. In the coming weeks and months, we will see whether it's moving as I expect -- as we said, in terms of price elasticity, so far so good. As we also know that it takes some time to be fully reflected and understood by the consumers. But at this stage, with that kind of price increase we think that's the -- a flat performance is a good performance.

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Robert Bain Moskow, Crédit Suisse AG, Research Division - Research Analyst [15]

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Is the intention to now start increasing on vegetables as well as fish or not? And how would that affect your pricing kind of ramp-up for the year?

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Stéfan Descheemaeker, Nomad Foods Limited - CEO & Director [16]

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What if -- let's put it that way, Robert. In the -- fish was -- I mean we've been through a very, very significant cost increase that we've been able to -- that we really understood, let's say, starting, let's say, H2 last year and so we've organized ourselves, I think, very well. I think the countries have taken the challenge very well. And ultimately, it's been -- obviously it's already difficult but it's been visibly well received by the trade.

In the veggies, it's a bit different. We don't see the same thing, and it's more category by category. I would put it that way. PEASE, for example, what we've seen is we see that all PEASE are declining for the first quarter for a very simpler reason, we had a very poor harvest, and so why would we promote, for example? It doesn't make any sense when you are supply constrained, and so we did -- we made the right things, we did the right thing with PEASE. So in terms of price increase for the future, again, fish is -- was, I would say, unprecedented, but it was big, and we don't see the same thing happening in veg at this stage.

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Robert Bain Moskow, Crédit Suisse AG, Research Division - Research Analyst [17]

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Last question. On Goodfella's, you said you shifted the media by a month. I thought I had picked up that there was some reconfiguration of Goodfella's product line. I don't know if it's packaging or product or what. Is there anything to that? Or is -- is Goodfella's just kind of on track?

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Stéfan Descheemaeker, Nomad Foods Limited - CEO & Director [18]

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Goodfella's is absolutely on track. I don't think you should read too much into 1 month, which was March as a combination of many different things, but we're not changing our flywheel. In other words, what we said from the start with the Goodfella's, we're going to first improve the quality. We're going to improve the packaging. We're coming with a new campaign, that's exactly what I mentioned with The Godmother and obviously Made with Respect, and it's really starting now. So sometimes it switch by one -- by a few weeks which is anyway, if we're not ready, we're not ready. I think we're very pleased with what we're seeing right now, and PEASE for us is doing well.

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Operator [19]

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(Operator Instructions) We'll take our next question from Bill Chappell with SunTrust.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [20]

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I may have missed it. Did you quantify what the Easter shift was? And I mean is that expected to be fully picked back up in this next quarter?

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Samy Zekhout, Nomad Foods Limited - CFO & Director [21]

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Yes. We did mention the fact that it was going to be around 1.5%.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [22]

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And that's what you expected kind of all along?

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Samy Zekhout, Nomad Foods Limited - CFO & Director [23]

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Yes. The shift between Q1 and Q2 in sales growth.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [24]

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And then in terms of just the overall category, I mean, you say it's healthy, it's growing. Is there any way to kind of quantify it's accelerating over the past 2, 3 quarters? And are there others driving that growth? Is it consumers driving that growth? Or is it just really you and kind of being back and innovating and advertising behind that, that's driving that growth?

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Stéfan Descheemaeker, Nomad Foods Limited - CEO & Director [25]

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Well, at this stage, I wouldn't say that there's an acceleration. I think it's been very consistent in terms of low single digits of growth and that's by the way, that's the algorithm as we said obviously, it's our job to invest further in the category and then that's our ambition obviously in the long term to see this algorithm improving in terms of quality and quantity, but that's going to take a bit of time.

And back to market share by the way, I forgot to mention that on a MAT basis, we are increasing our share. So that's a combination. No surprise in terms of summary, it is no surprise in terms of category; and second, a flat short term but also on MAT basis, you'll increase market share despite price increases.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [26]

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Got it. But you're seeing volumes continue to improve, I guess, not just on pricing?

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Stéfan Descheemaeker, Nomad Foods Limited - CEO & Director [27]

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Well, as we said, the first quarter, which was expected, we've seen obviously some volume reduction, which is a combination of PPA and obviously, of initial reaction from the consumer in terms of price, but we see that obviously going down over time and very fast. And we obviously -- I forgot to mention which is also a big thing which is the famous 1.5% coming from Easter.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [28]

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And then last one for me, we've actually heard from -- bigger companies, from Coke and Pepsi and others that there was some inventory management around the Brexit noise. I know it's not a huge -- there's a lot of local market manufacturing, but was there any kind of impact to your business interquarter from that?

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Samy Zekhout, Nomad Foods Limited - CFO & Director [29]

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No. We had mentioned the fact that we are going to be prepared for the [last 29], the line originally, so we just had about a EUR 15 million impact from an inventory standpoint, and that we are going to decrease over the months to come.

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Stéfan Descheemaeker, Nomad Foods Limited - CEO & Director [30]

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And obviously, we see what October tells us. At some stage we may have to come up with the ramp-up again. So that's -- life is full of surprises.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [31]

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Yes. It keeps it interesting.

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Operator [32]

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At this time, there are no further questions. I'd like to turn the conference back over to CEO, Stéfan, for any additional or closing remarks.

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Stéfan Descheemaeker, Nomad Foods Limited - CEO & Director [33]

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Okay. Thank you, operator, and thank you for joining us on the call today to review our first quarter results. The year is off to a good, strong start with Q1 representing our ninth consecutive quarter of organic revenue growth despite the Easter shift. We're very much on pace to deliver another year of growth against our algorithm and to have a well-capitalized balance sheet ready to be deployed.

With that, thank you for your participation, and I look forward to updating you on our progress where we next report second quarter results in August.

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Operator [34]

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This concludes today's call. Thank you for your participation. You may now disconnect.