Nomad Foods Ltd (NOMD) 2016 Q3 法說會逐字稿

Good day, everyone, and welcome to the Nomad Foods third-quarter 2016 earnings conference call. Today's conference is being recorded and, at this time, I'd like to turn the conference over to Mr. Paul Kenyon, CFO. Please go ahead, Sir.

Good morning, good afternoon, everyone. Before we start, I would draw your attention to the disclaimer on slide 2. I do not propose to read through it, but ask that you do so in your own time. With that, I will hand you over to Stefan.

Thank you and good morning, good afternoon, everyone, and thank you for joining us on our third-quarter 2016 results call. As you just heard, I'm join today right Paul Kenyon, our CFO. And I will start by saying that we continue to see some positive results of our strategy and execution. Our focus remains on mustering battles and discipline integrated of Findus and it is paying off.

As I said on the second-quarter results call, we have key priorities in 2016. Firstly, stabilizing sales by progressively slowing the rate of decline in the top line through the balance of the year. Secondly, delivering on those synergy commitments from the Findus deal, and thirdly, pursuing consolidation of the European frozen category.

Taking each of these points in turn. Firstly, I was pleased to see a further slowing of the rate of decline in sales in the third quarter. The rate of improvement is lower than what we have seen in recent quarters but it is important to remember that the oath in cabinet reset only happens at the end of the quarter from mid-September and onwards. And so the impact of the new product launches is largely limited to the selling to the trade.

Though expectations remain that we will see a slowing of the rate of decline in the fourth quarter. Although we have some headwinds in the business that mean that the rate of improvement will be smaller than the third quarter. Paul will give a more detailed perspective on this in his comments.

The oath in cabinet reset saw the first major wave of must win battle activation in terms of product launches and the following products are now on the shelves. In the UK, we launched a new premium fish finger under the inspirations range, a new gluten-free verantine or standard fish finger range and relaunched our coated fish products with the new improved crab.

In Italy, we relaunched our existing natural fish range with new [lake] products alongside introduction of new Turner and Simon products within this category. Our battered fish range was also relaunched and now includes kibbling, a product copied from our Netherlands business. In Norway, we expanded our coated fish range with the introduction of the new Fish and Crisp [the ranch], which was launched in the quarter.

I have mentioned before that one of our key learnings from the must-win battle launches so far has been the importance of 360 degree activation. That is to say, we need to have new products news, high-quality packaging, effective advertising copy and a strong promotion mechanic all in market at the same time. All teams are highly focused on delivering this 360 degree activation once the target level of distributions have been achieved for the new products.

This is a critical point as markets vary widely in terms of distribution efficiency. For example, in the UK, where the grocery channel is highly concentrated, reaching a good level of distributions can be achieved within two to three to four weeks, with target distribution taking two to three months.

In Italy, where the grocery market is still extremely fragmented, reaching the target distribution levels can take up to six months. Despite the need to time advertising to follow distribution built, we have advertising on air behind a number of must-win battles in September. For example, in our fish fingers battle, we went back on air with the iconic caption in the UK, Germany, Belgium and the Netherlands toward the end of the quarter and early indications are positive with fish fingers showing an increase of 4% for the group.

Another must-win battle is natural fish. We are also seeing the positive growth. In France, we grew by 8.3% versus quarter three last year, driven by more effective promotion activity in innovative product launches.

In Italian market, we activated peas and fish fingers, and towards the end of the quarter, natural fish (spoken in Italian). All the early indications are encouraging, as I mentioned earlier. Achieving full distribution the growth associated with this can take up to six months in Italy but we're optimistic that we have the right mechanics in place now to achieve this.

Moving onto margin performance. Adjusted EBITDA margins was 2% higher year-on-year, although I would caution that this was impacted by the release of the year-to-date accruals related to groups annual bonus scheme which will not be held this year. Cash conversion remains strong and by the end of the third-quarter, we have delivered EUR160 million of our EUR200 million pre-restructuring and non-recurring cash flow commitment. So we are well on track.

Turning to our second priority. The integration of Findus continues to be a key focus and we have delivered approximately EUR10 million in run rate synergies so far and our integration process remains on track. This equates to around EUR2.5 million in the third quarter and just over EUR5.5 million year-to-date.

This apparently flattening out of the rate of synergy delivery was expected and is due to dissynergies in our French business as the old Iglo portfolio has been destocked by certain retailers ahead of ordering the replacements Findus branded products. Paul will cover this in more detail in his comments.

Lastly, as a reminder, our overall target remains to deliver between EUR43 million and EUR48 million in 2018. Our factory rationalization initiative is proceeding in line with expectations with a [beuside] scheduled to seize operations by the end of the first half of 2017.

Regarding our third priority, we continue to see further acquisition of [body 8Es] and believe we are well-positioned to execute both. Both on synergy stick acquisitions in European frozen as well as broader strategic transaction globally as a means of delivering value for our shareholders.

With that, I will hand it over to Paul who is going to cover the financials in more detail.

Thank you, Stefan. Before turning back to the presentation, please note that the financial information represents pro forma as adjusted figures for 2015 and as adjusted figures for 2016. All figures have been adjusted for exceptional items, restructuring and transaction related items, and all of my comments from here on will refer to those as adjusted numbers.

To aid uses of our financial information, we have included within the presentation an appendix from slide 15 onward, which will enable you to reconcile non-IFRS financial information to our reported financial information. We will continue to develop the formats of these non-IFRS reconciliations as we go forward.

Turning to slide 5, we thought that it would be helpful to continue to fill in the quarter-on-quarter growth for the group that we originally published as part of the CAGNY Conference presentation. As you can see, with the 3.3% decline, the third quarter shows an improvement in the quarter-on-quarter rates of decline for the fourth successive quarter starting from the 8% decline in the trough of Q3 2015.

As Stefan noted in his comments, our expectation remains that we will see a further improvement in the rates of decline in the fourth quarter as further must-win battles are activated, although there are some offsetting headwinds that will limit the rates of progress in the fourth quarter, as I will cover later on. We have also extended the chance cover 2017 since we will not have completed all of the planned must-win battle activations until the end of the first half.

We will update our sales guidance for 2017 at our annual results presentation, but for those of you starting to think about sales trends beyond 2016, it is worth remembering that 2017 is not a leap year, so we have one less trading day in Q1 and that the Easter promotional period falls in Q2 next year, whereas it was in Q1 in 2016.

Turning to slide 6, we show the year-on-year performance for the third quarter of 2016. Revenue was down EUR32.6 million or 6.9% year-on-year. Adjusting for currency impacts on the exit from Russia, like-for-like decline was 3.3%, an improvement on the rate of decline in the first half of the year.

As has been the case in the past few quarters, the decline in sales was driven by the group's three largest markets, namely the UK, Italy, and to a lesser extent, Germany, although each of these markets again showed reduced rates of decline year-on-year compared to the prior quarter. The group also saw a drop in sales in France as retailers destocked Iglo products ahead of ordering the new Findus branded SKUs. I will cover this in more detail shortly.

Gross profits declined by EUR11.7 million driven primarily by lower sales volumes. Gross margin declined by 0.5 percentage points, driven by the impact of reduced efficiencies in the factories due to the lower harvest yields. A&P investment was EUR1.7 million lower, but the group held back investment over July and August, increasing in September, as we upwaited spend for the remainder of the year.

Indirect costs were EUR14.3 million lower year-on-year due to the releases of year-to-date accruals related to the group's annual bonus scheme, synergy realization and the benefits from the group's lean reorganization program. Resulting Q3 2016 as adjusted EBITDA was EUR85.1 million, representing 19.4% of revenues.

In Q3, the effective tax rate was 23%, consistent with earlier quarters and with Q3 2015 as adjusted earnings per share increased by EUR0.01 year-on-year due to the increase in as adjusted profit period. Slide 7 contains the comments that I have just made so I will not repeat them now.

Turning to slide 8, I will give a little more color on the sales performance. Adjusting for exit markets and the weakening in the sterling rate gives a like-for-like sales comparator of EUR454.2 million. As I said a moment ago, the majority of the decline is concentrated in the UK, Germany, Italy and France, so I will focus my comments on those markets.

The UK business declined 4.6% on a like-for-like basis in the quarter, an improved performance year-on-year compared with the declines in both Q1 and Q2 of this year. The overall UK grocery market remains extremely challenging, with the frozen sector in decline. The top four retailers remain highly focused on price to regain the loyalty of value seeking consumers for whom the hard discounters represent a very real alternative, with both Alvy and Little continuing to show strong growth.

The UK business has taken active steps to enter new channels to reduce its reliance on the top four, which now account for 67% of the UK business down from 69% in 2015, and to take a more balanced approach to in-store information. The UK team have reset base pricing on the core portfolio to align with retailer strategies and this has been well received by our trade partners.

These initiatives have led to short-term value share growth in two of our must-win battles. Garden peas up 190 basis points and fish fingers up 280 basis points based on Nielsen 12-week data for September 10. In addition, the UK team has also won new business with one of our top four trade partners in another of our key must-win battles, coated fish.

In Q4, the UK business will benefit from large must-win battle media activations for fish fingers, peas and Inspirations. We've said before, the UK remains the most difficult knot, given the structural changes underway in the grocery channel and therefore remains extremely challenging.

In Italy overall sales continued to declined by 7.4% in Q3 but this is a lower rate of decline when compared to Q1 and Q2 2016. As I've commented before, the economy and consumer confidence remain extremely fragile in Italy resulting in a decline of 1.9% in the frozen food market in the quarter, whilst private label grew by 1.5% in the same period.

We continue to have an ongoing issue with hake fillets which were impacted earlier in the year by industrywide raw material shortage. Although the products impacted by the shortage were relaunch at the end of the quarter, our business has continued to suffer from lower levels of promotions for these products in the short-term, although recovery is expected in Q4.

In addition, promotional share also declined across the Capitano fish fingers and coated fish ranges due to raw material price inflation, which we have now taken steps to resolve. Excluding the impact of the hake shortage in Capitano product ranges, the must-win battles platforms are showing encouraging growth rates of 1%, and within that, we have seen good development in peas which will relaunched and are performing of plus 2.2% year-on-year in Q3.

Germany declined by 2.7% in the quarter, a further improvement versus the declines of 9.2% in Q1 and 3.9% in Q2. The must-win battles identified for Germany are showing encouraging signs with fish fingers up 14.1% driven by 360 degree activation, which has seen growth in both base and promoted sales on the back of Captain advertising which will continue into Q4.

Our vegetables business in Germany continues to be impacted by competition from private label where the level of differentiation is lower, but we're planning a complete overhaul of the assortment in Q4, though we have plans in place to mitigate this impact. Having resolved our discounts with a key customer, we started shipments again in Q3 after a significant change in our way of collaboration and the level of discounts being offered.

Inevitably, this has resulted in a net sales impact versus last year due to a lower level of commercial intensity. We do now have a smaller, more focused range in store with improved profitability.

France declined by 5.7% in Q3 in a market that has declined by 3.1%. As I have mentioned in previous calls, we're in the process of merging our smaller Iglo business in France with our larger Findus brand. As part of that process, we are managing the delisting of the old Iglo portfolio in customers and restocking them with Findus branded replacement products after moving to a single trading entity.

The delisting process starting Q3 slightly earlier than expected, whilst the ordering a Findus branded replacement products did not start until Q4 and this accounts for the decline in the quarter. Different retailers are moving through this process at different speeds, so we expect to see some volatility in the French sales performance over the next three quarters until all retailers are fully stocked with the Findus branded replacement portfolio.

This dissynergy impact is the reason that the over level of synergy delivery has leveled out in Q3 and, as noted above, it will be a headwind to the overall level of synergy delivery until the second half of next year. Excluding this impact, we continue to see excellent performance in our French vegetables and natural fish sectors, which have grown 16.5%, and 8.2% respectively.

The last bar shows the net impact of the remaining countries totaling EUR0.7 million. This includes growth in Sweden of 0.5% driven by new contracts in our export and food service channels and Norway, which grew by 3.2% in the quarter, driven by good performance in all channels, especially retail due to more effective promotional activities on coated fish and fish gratins. This was partly offset by the Netherlands where aggressive pricing of private label continues and Austria where the bankruptcy of the customer at the end of 2015 continues to impact overall volumes.

Turning to the margin performance on slide 9, we analyzed the gross profit movement year-over-year by key driver. Excluding the impact of exit markets and FX rates, our like-for-like gross profit comparator is EUR133.7 million. Working across the page from this gross profit comparison, volumes were down slightly less than net sales on a like-for-like basis, driving a reduction in gross profit of EUR9.7 million.

The business saw positive mix in the quarter, which impacted gross profit by EUR0.8 million. This was driven by a shift in product mix in our Norwegian business toward shipped fish products, such as coated fish and gratins at our Swedish business as we focused heavily on her cod product range. As the rollout of our new strategy progresses, we are also seeing declines in those sectors we've identified as non-priority areas for the group, which typically attract lower margins.

Pricing and promotional spend was EUR8.2 million better year-on-year driven by the effective implementing price increases to offset raw material inflation. Performance was also boosted by lower promotional spend, in part due to the group's net revenue program, but also impacted by specific issues in Sweden as promotional levels have still not fully recovered from the product supply issues experienced earlier this year, Germany as a result of the customer-specific issues, and Italy due to the residual impact of the sort of hake.

Cost of goods inflation reduced gross profit by EUR5 million driven by the impact of the weaker euro against US dollar coupled with the impact of lower harvest yields and consequent lower factory recoveries. This was in part offset by lower distribution costs and favorable buying prices across the portfolio.

Moving on to the EBITDA bridge on slide 10, the like-for-like EBITDA growth was primarily driven by the release of the year-to-date accruals related to the group's bonus scheme which won't pay out this year, offset by the impact of lower gross profit for the reasons I have just highlighted. On a like-for-like basis, A&P spend is slightly lower than last year driven by lower levels of spent in July and August. In contract, again, pea spend in September increased 58% year-on-year.

In terms of EBITDA margin performance, the business saw a 2 percentage point improvement year-on-year driven by the release of the bonus accruals and the delayed phasing of advertising I have just discussed.

Turning to slide 11, we show the year-on-year performance for the first nine months of 2016. Net revenue was down EUR88.4 million or 5.8% year-on-year. Adjusting for currency impacts, the exit from Russia, an additional trading day in Q1 2016 due to the leap year, and the business acquisition of La Cocinera in Spain, the like-for-like decline was 4.5%.

As has been the case in the past few quarters, the decline in sales was driven by the group's three largest markets, namely the UK, Italy and Germany, although each of these markets showed a reduced rate of decline year-on-year compared to the second half of 2015. Gross profit declined by EUR31.7 million driven primarily by lower sales volumes.

Gross margin declined by 0.3 percentage points, driven by an adverse mix, the impact of the lower harvest volumes and the dilutive effect of the La Cocinera acquisition in Q1 partly offset by pricing year-on-year, lower trade terms investment and a reduction in input costs. A&P investment was EUR16.8 million lower as the group re-phased advertising spend to align with the anticipated launch of the must-win battles in the final four months of the year.

Indirect costs were EUR18 million lower year-on-year due to synergy realization, the benefits from the group's lean reorganization program and the year-on-year impact of accruing for the group's bonus scheme last year. Resulting year-to-date 2016 as adjusted EBITDA was EUR262.8 million representing 18.2% of revenues.

The effective tax rate for the first half of the year was 23% consistent with year-to-date 2015, as adjusted earnings per share increased by EUR0.01 in the period driven by the increase in adjusted profit. Slide 12 contains the comments that I have just made so I will not repeat them now.

Slide 13 shows the pro forma as adjusted cash flow. The key drivers in the operating cash flow performance aside from the EBITDA movement are working capital, which showed an outflow of EUR28 million primarily due to the intake of the annual agricultural harvests. This was higher than last year despite the lower harvest levels due to little creditor balances driven by the advertising phasing change year-on-year.

Capital expenditure continued to run at around EUR6 million per quarter as the group maintained tight control invest levels following the conclusion of the manufacturing footprint review. EUR2.4 million of that spend relates to Findus IT integration and hence is nonrecurring nature.

As a reminder, capital expenditure levels typically spike up in the fourth quarter due to the Christmas factory shutdowns when major projects are carried out. Tax paid was around EUR8 million, significantly lower than the prior-year due to refunds of tax in Germany and Italy of EUR3 million and EUR2 million respectively. We also have lower phasing of payments in the first three quarters of 2016 versus 2015.

Our expectation for cash taxes in 2016 is now between EUR20 million and EUR30 million, equivalent to an effective cash tax rate of 10% to 15%. Restructuring and nonrecurring cash flows of EUR41 million were larger driven by costs associated with the integration of the Findus group, the implementation of the Nomad strategy and the restructuring programs in a number of the group's factories.

The operating cash flow conversion year-over-year for the first nine months was 81.5% which was ahead of the prior year. The free cash flow pre-restructuring and nonrecurring costs delivery of EUR160 million is consistent with our EUR200 million annual target.

I also mentioned on the second quarter results call this unpredictable weather in 2016 had adversely impacted both our spinach and pea harvests resulting in lower harvest yields. We're confident that we have enough peas and spinach in stock to minimize the impact of this on our customers, but will see some excess costs in the region of EUR10 million hitting our P&L this year, of which EUR6 million have already hit over the last two quarters.

Our net leverage ratio remained at 3.6 times which is 0.4 times lower than the December 2015 ratio of 4 times, driven mainly by an FX translation driven decrease in gross debt of EUR23 million and an increase in net cash of EUR82.7 million. In terms of our cash guidance of EUR200 million pre-restructuring and nonrecurring, as Stefan noted in his comments, we remain on track to deliver against that commitment.

In terms of the restructuring and nonrecurring cash flows, as previously highlighted, the re-phasing of the product transfers from the Bjuv site will delay the restructuring cash flows associate that project into 2017. Having finalized the product transfer program, we now expect to incur costs of around EUR10 million in 2016, with the balance of the projected EUR50 million costs being occurred in 2017. So in total, our guidance for restructuring and nonrecurring cash flows for 2016 is now around EUR80 million.

With regard to the rest of our guidance, it remains unchanged from last quarter. We still expect to see a progressive improvement in the rate of sales decline in Q4 although there are some offsetting headwinds that will hold back the rate of progress in the fourth quarter, notably in Sweden where our natural fish business has been impacted by delisting following price increases to recover input cost inflation coupled with some product shortages following the poor harvests.

Norway is also impacted by pricing on natural fish as has been the case so far this year and the exits of a large low-margin private label potatoes deal. As noted earlier, trading in France will also be impacted by the transition of the old Iglo portfolio to the Findus brand as we expect further retailers to start the conversion process in Q4.

Lastly, there has been a reasonable amount of press coverage regarding a number of consumer goods manufacturers' intentions to raise prices in the UK, ourselves included, following the currency depreciation experienced in the wake of the Brexit vote.

We remain in discussions with our customers in the UK and it would therefore be premature to comment on the progress of these negotiations. We will provide a further update in conjunction with our full-year results. We still expect adjusted EBITDA for the full year to be broadly flat versus 2015.

I will now hand you back to Stefan.

Thank you, Paul. So in summary, while the commercial market environment has remained challenging in Q3, we believe more than ever that we have the right actions in place to stabilize the business. We are starting to see some encouraging signs from the small number of must-win battles that have been fully activated and we expect to continue the progress improvement that we have now seen for four successive quarters since in the bottom in Q3 of last year, all the way to the lower rate that we have just reported for Q3 due to the headwinds that Paul has highlighted.

We continue to make steady progress on synergy and delivery and the capability of the business on the cost and cash disciplines remains strong. The Nomad team is totally focused on flawless execution of our strategy as we move into an intensive period of must-win battle activation between now and the end of the second quarter of next year and I have no doubt that we have the right team in place to deliver on that.

And with that, I will turn the session over to Q&A. Operator, back to you.

Thank you.

(Operator Instructions)

Steve Strycula, UBS.

Great. First question. I'm actually going to have like three quick questions, but the first one is going to be on sales. For sales, can you give us, Paul, any kind of cadence help as to how the quarter progressed month by month. You launched a lot of key initiatives in September. Was that the strongest month in the quarter and how should we kind of think about that through, as we go to 4Q?

And then also can you quantify the drag from what's going on in France right now with the transition issues that you're experiencing and the de-listing in Sweden? Just so everyone here on the line can understand the duration and the scope of, call it, that revenue drag that we're experiencing right now. And then I'll have a margin question afterwards.

Okay. In terms of, I will take France and Sweden first, and then I will come back to the phasing of sales through the quarter. In France, the portfolio transition explained all of the movements that we showed for the French market on slide 8. So the EUR2.3 million in France was all explained by portfolio transition. The business underlying was broadly flat in the declining market.

In terms of Sweden, the salmon shortage will hit across (inaudible) de-listing as a result of the price activity. It's across Q4. We have not clarified that or quantified that, to be honest. So we don't put a number to that. In terms of the sales profile through the quarter, September was not a bad month. So we did see a bit of a lift in September.

As I was saying at the Q2 results, July and August are always slightly strange months for us in terms of obviously the cabinets particularly in the southern Europe are focused on ice cream and we can be quite weather dependent. So if there is a real heat wave in Europe, we can see lower sales as people eat lighter food and tend to dine outside and therefore not use the ovens. And a lot of our products are oven prepared. So July and August can always be a bit bouncy for us but September was a solid performance for us year on year.

I would even add, in September, to give a bit more color, for example, UK was starting to really see reach progress again with the activation of the must-win battles.

Can you provide any kind of anecdotes as to how the UK environment is improving, specifically as you mentioned in September? Are these new monies that you're putting back into the business whether it's product enhancement, advertising, all of these initiatives in the marketplace? Is it moving the needle with your retailers?

Can you give us any kind of anecdotal example or Nielsen numbers? And then how do you think about the pricing as we go forward? Because your peers in private label also have to take up pricing, but how do you balance that out once you see what happened in Sweden in the past quarter?

Let me start with some of the anecdotes, at least actions that we are taking in the UK from September and onward and definitely in October. What we're doing right now, actually we have three advertising on air. One is the Captain. Actually, what we did with the Captain was we just re-adapted to the German copy. And I can tell you, it delivers really well. So that's pretty good.

That's very inexpensive and you know you can see that have very lasting results, which by the way, says something about the value of the icon in the UK. We haven't seen the Captain for 10 years and it's back on track and everybody remembers the Captain and it delivers.

Second, we also said that we need to do something with our peas, which was losing some sort of relevance with the private label because we had not invested in the past behind peas, so again, we have a new copy on air and again, very, very early results delivers really well.

And third, something which was also going down as we have a new copy for our Inspiration range. Again, too early to say, but at least what you've seen is interesting. This again, back to what Paul said about the 360 activation. We come in with a 360 activation for these ranges so it's coming with obviously price promotion and also new packaging. So we said repeatedly that packaging needs to be re-adapted and we are moving that way.

Re-adapted means, again, the brand on the side, back to high-quality pictures. The food is obviously the center of the whole thing. And again I would invite you once you're back in the UK to see the freezers. It's really a major difference. What we see is these are separate anecdotes but peas to really strategy in action and we're very pleased with the result so far.

Back to the question of price. It's obviously a very volatile environment right now in the UK. To your point, Steve, everybody is hit obviously by devaluation. Even more so the product label producers because of we see they are starting from a much lower margin.

And so the key question is obviously, who is going to do something first? So it's not so much the if, it's much more the when. We've started the process so that's why Paul mentioned it's volatile right now. It's difficult to predict. We're in the middle of these negotiation so that's why we prefer to be cautious.

Just to give you some color on the UK from the Nielsen data, Steve, we have seen a lower share loss in the last four weeks than the lost 12 weeks and a lower share loss in last 12 weeks than the MAT, or moving annual total. And our volume share, we've actually seen volume growth in the last 4 weeks and 12 weeks and a small lost on an MAT basis.

And so the lead indicators are that what we're doing in the UK is working. We always knew in the UK it would be volume first, then value. We're working hard on the value, as you know, from the pricing actions we are taking. But we're starting to see some encouraging signs in the UK.

Great. And then I have one last question, I will pass it along. So then how should investors think about necessarily the next point or inflection where the sales trends should really start to improve in the business? Obviously, you have a little bit of ongoing headwinds continuing in the fourth quarter, but should we expect some kind of continuous step function higher in the first half of next year?

And then related to EBITDA, Paul you did comment that the EUR330 million is still a reasonable forecast for this current year. How should we think about the building blocks for next year? Not necessarily guidance but you had a poor pea harvest this year. You had the bonus accrual situation as well. What should be the larger building blocks as we think about margins for next year? Thanks.

Let me start with sales. As Paul told you, we're not going to comment at this stage with guidance for 2017. We're going to take, obviously, we're going to mention that at the appropriate time, which is later next year. But at the same time, nothing has really changed. As we said, we have listed a series of must-win battles that need to be activated the 360 way.

We said that it's probably, the full activation of all of the must-win battles which together represent 75% to 80% of our business, is going to be in full motion by end of Q2 and then, which means that, yes, we have no reasons to believe that the strategy is wrong and we're very confident that we are going to keep it that way.

In terms of building blocks for next year on EBITDA, now obviously, you have on the positive side, synergies coming through. We also obviously are expecting to see a lower rate of decline in sales as we head through the year.

So we will have a stronger commercial base and as we evolve the portfolio through the must-win battle activations, we will see tail portfolio disappear. So as we progress through the year incrementally, small step by small step, we should see more of our product range manufactured in our in-plants because of our must-win battles tend to be manufactured in our in-plants so we capture the efficiencies of that.

So we do have some positive tailwinds that we're generating through our own cost management programs. Offsetting that, obviously, are the inflationary headwinds so we are seeing some input cost inflation in some categories or at least that's the forecast as we see it at the moment and we will certainly have some FX-based inflation as a result of the movements of sterling and the euro and the Swedish krona and Norwegian krona against the dollar, particularly in regard to our fish purchases.

The poorer harvests also require [you to] price because obviously the price per kilo off harvest has risen. So all of that means we are having to price in an environment is challenging to pricing, not impossible, but challenging.

So we have that to absorb and then obviously we will be looking to reinstate some bonus scheme in the business although that would obviously only payout if we achieve our targets. So yes there will potentially be a headwind from reinstating the bonus scheme but only if we achieve our targets.

In the meantime, obviously, we will keep the business on a tight leash more than ever in terms of indirect. That's a fact. And our net revenue management program is also starting to expand across the organization. That's going to obviously help to finance these rebuilds between must-win battles, bonus and also to some extent, also some additional quality investment that we are making.

Jon Tanwanteng, CJS Securities

Can you give us a little more detail about how you're managing through the existing currency climate? I know you don't want to talk about pricing just yet, but what further steps have you taken on the supply chain in the manufacturing side, if any?

As we said last quarter, we have hedging in place through to the end of the year and our hedges continue to roll forward. As we sit here today, we're probably about 40% to 50% hedged for 2017 and that will continue to build as we move through the balance of this year into next year.

In terms of how we look at managing that cost and clearly we endeavor to pass on the inflationary trends to customers and consumers and we have a reasonable track record of doing that, so although as I said just now, it's a fairly challenging environment to pass on price rises, but we are, as you will have seen from the press coverage, engaged with the retail trade particularly in the UK, which has seen the sharpest depreciation in currency. So we are actively pursuing that.

We obviously also have net revenue programs aimed at optimizing our promotional spend which is a big line for us. We have a very experienced supply chain team who are very focused on the efficient cost to manufacture.

And we continue to run programs to take cost out of our supply chain base as well and, lastly, we have the lien program on the indirect. We also continue to work very hard on our advertising line to make sure that we squeeze the maximum number of gross rating points out of our millions of euros of investment.

So as you know, we changed media buying agency this year to Zenith and we have reaped additional benefits which has allowed us to get more GRPs per euro on the working media spend and we obviously challenge everything we can on non-working to maximize the amount of work on media we have. So every line of the P&L subject to challenge. That goes for the cash flow statement as well. We work very hard to maximize the cash delivery from the business as well as I think you can see from our cash statement for Q3.

Okay, great. And mentioning the marketing, you've pushed out your A&P spending for a couple of quarters now. I know you've started to ramp that in September. How much advertising spend should we expect to see in Q4 and how does that compare to the Q4 of 2015? And maybe just to follow, will that increased rate continue into 2017 as well?

So we think we have about the right number of euros. As I've just said, we aim to squeeze more gross rating points out of that number of euros that we have in the past. In terms of the phasing this year, it's going to be backend weighted because we decided to hold off until we had the 360 degree activation launches ready to go in September.

As I commented in the script, September's A&P was up 58% year on year so that gives you some idea of the weight of advertising we're putting into Q4 and that we expect to continue, not necessarily at 58% increases, but we expect to see significant increases through the end of the year and our expectation is that the total spend for the year will be broadly the same as 2015.

We might not quite get to the 2015 number because obviously we have a fairly short amount of time left to spend the money, but that's our ambition. Going forward into 2017, a bit early to be giving guidance, but I mean, I think we will, we have the right amount of money to spend behind the must-win battles.

We will, obviously, because will be launching them through the first half of the year, even out-phasing. So I think you'll see backend phase, backend loaded phasing this year. I think we'll see more even-phasing next year, but we don't necessarily feel we need more money next year at this point. Clearly, if we see a significant response to our advertising, and there's a good case to be made for investing more, we will always look at that. But right now, I think we're comfortable with the current levels of advertising.

So what you really to remember is it's not savings, it's phasing more than anything else. That's very important. We said that for the start from this year. It makes a lot of sense. Second, it's going to be even more focused next year behind the must-win battles, if possible. And third, we still are going to work further on the efficiency between working money and non-working money. We still believe that we have some way to go, which is good news.

Great. That's helpful. Paul, can you just forgot how much impact the reversal of the bonus accruals had in the quarter?

Yes. In the quarter, we had about EUR7 million of releases. So in the quarterly statements of that, I think it was 17 -- of the EUR14 million about EUR7 million is releases. Year to date, obviously, because you accrue at different rates in the two different years year to date, about EUR3 million. So we had full accruals through to the end of the first half 2016, which we've released in Q3 2016.

In 2015, we fell out of bonus achievement earlier, so we had a relative -- we actually didn't have a release in Q3 last year. But we were still carrying accruals from the first half of about EUR3 million so the difference in the year-to-date terms is about EUR3 million in the quarter, about EUR7 million.

And then finally, Stefan, I'm not exactly asking for 2017 guidance, but do you think we might see year-over-year revenue growth sometime in 2017 once you activate all your must-win battles, I believe, by the end of Q2?

Thank you for not asking for guidance because it really looks like a guidance question, frankly. I am not going to come to that debate at this stage. We will come in due time with the right level of guidance. The only thing you need to remember is we're pleased with the results we have achieved so far with the must-win battles.

When you think back again something like 12 months ago, we knew we had the right strategy, but we had, quite frankly, we didn't know exactly how fast the must-win battles would activate and how efficiently and what you've seen so far is we have been everything but disappointed.

Great. Thank you very much. I appreciate the commentary.

Brian Holland, Consumer Edge Research.

Thanks. Just some housekeeping here to start. What did A&P spend look like relative to your expectation prior to the quarter? Did you make a decision intra-quarter to change the way that you spent A&P this quarter? And if that's the case, just any color around how you thought about that.

Not really. We did, I guess as we looked back at the spend levels, we did in a couple of markets, trial advertising over the summer period last year. So we tried advertising in Italy, for example. Which we don't normally do because, obviously, your base sales are lower and you tend to try and advertise against higher base sales periods because you got a bigger uplift. But last year, we had some advertising running through July/August.

This year, we pretty much pulled back to barely maintenance levels to preserve fire power in September, which is why you see such a big hike in September. So year on year, the phasing was different. But that wasn't out of line with our expectations as we headed into the quarter.

Great, thank you.

Activation is the real criteria reference.

Sure. So to clarify on synergy delivery, you're expecting the level seen in Q3 to sort of persist through the first half of next year and then how do we think about the cadence from there? Should synergies start move higher again sequentially in the back half of 2017?

Yes, I mean, as the French portfolio finishes its transition, you will have that break taken off. You'll also start to see benefits of the closure of the Bjuv site come through in the second half of next year. And as we progressively roll through contract negotiation, you'll see some procurement benefits coming through as well.

To Paul's point, we're not changing our guidance in terms of the synergies, which is EUR43 million to EUR48 million by the end of 2018, so yes, definitely. It will reaccelerate.

Thank you. Most of my questions have been answered. So just, in closing, can you refresh for us how you're approaching M&A? I guess, thinking about your balance sheet, ongoing strategic initiatives and integration on your core portfolio.

Do you feel you're in a position to do a deal today? Second, what are kind of, if you could just sort of reset for us what the ideal parameters you're targeting with respect to size, temperature, class, geography, dilation, et cetera?

Sure, Brian. The answer is we're very well positioned to deal deals today. We have a reasonably significant amount of cash on the balance sheet due to the inherent cash generative nature of the business. And we continue to scan the horizon for deals.

I think my ideal deal would be a business that came with probably no factories that we could drop the volumes into our own factories and get significant scale economies from whilst being able to sell and market it without taking on a single extra person. There aren't many of those businesses around, to be honest. But I think --

It's a niche category.

Yes. So we remain focused on highly synergistic deals. So that would be ideally deals in fish, vegetables, poultry or meals. In either our current geographies or adjacent geographies, where we have caps in our portfolio and the Barclays conference had that slide with the 13 markets, 4 key categories, 52 potential leadership positions, of which we have leadership in 35, I think it was.

So coloring that chart, Nomad blue remains our ambition. We'd also look at adjacent geographies. So if there are good quality markets that we're not currently present in where we'd get the opportunity to buy a market-leading position, we would certainly look at that as well. And again, if it comes with or without a factory, it just changes the level of synergies and the level of one-time costs you invest as part of the deal.

And then on the other extreme, you have obviously, a factory with doing products labels only, which was obviously, something like the other extreme of the things we don't want. And then you have a lot of situations in between. Obviously, the closer we get to with the ideal picture described by Paul, the better we are.

As a follow on that, or to clarify, looking for top one, two or three market position in the respective categories, is that's an important parameter?

Yes, we believe that there is a strong correlation between return and market position. So we're obviously number one in European frozen by a factor of 2.8 times and our margins, I think, reflect that kind of position.

Within the markets we operate in, we do tend to see a difference in margin between clear number one and where we are number two or number three. So we do believe that there is value for investors in establishing ideally strong number one positions in each category in each market.

Failing that, a decent number two position can still create a lot of value for our shareholders, particularly if it's part of the business that is number one overall in the market and it's a simple question of scale with customers. So if you're number in our four key categories, it's very easy to position yourself as a category captain with retailers. And if we built in fish, vegetables, poultry and meals, it allows us to extract scale economies, which again, benefit our investors.

The correlation between margin and market share obviously is a very important one and from that, you can immediately see the kind of obvious synergies between a midsized player in one category and our footprint.

Thanks, gentlemen. Appreciate the color. Best of luck.

Thank you. And there are no further questions at this time. I would like to turn the call back to Mr. Stefan Descheemaeker for any additional or closing remarks.

Very good pronunciation by the way. Fantastic. Thank you. Let me finish by thanking you all for attending the call today.

While I take encouragement from the progress made on implementing our strategies so far, there is still much to do and we remain focused on our key objectives for the year. Firstly, to stabilize the top line. Secondly, to deliver the product of synergies, and thirdly, pursuing the highly synergistic deal in European frozen as well as broader strategy transactions globally as a means of delivering value for our shareholders. With that, I wish you a good day and I hand back to the operator.

Thank you. That does conclude today's presentation. Thank you for your participation. You may now disconnect.