Earnings Call Transcript - NOMD Q3 2022

Operator, Operator

Ladies and gentlemen, good morning and welcome to the Nomad Foods Q3 Earnings Call. Please note that this event is being recorded. I would now like to turn the conference over to Anthony Bucalo. Please go ahead.

Anthony Bucalo, Head of Investor Relations

Hello and welcome to the Nomad Foods Third Quarter 2022 Earnings Call. I am Anthony Bucalo, Head of Investor Relations, and I am joined on the call by Stefan Descheemaeker, our CEO, and Samy Zekhout, our CFO. Before we begin, I would like to draw your attention to the disclaimer on Slide 2 of our presentation. This conference call may include forward-looking statements that are based on our view of the company's prospects, expectations, and intentions at this time. Actual results may differ due to risks and uncertainties which are discussed in our press release, our filings with the SEC, and this slide in our investor presentation which includes cautionary language. We will also discuss non-IFRS financial measures during the call today. These non-IFRS financial measures should not be considered a replacement for and should be read together with our IFRS results. You 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 2021 and 2022. All adjusted figures have been adjusted for exceptional items, acquisition-related, share-based payment and related expenses, as well as non-cash FX gains or losses. Unless otherwise noted, all comments from here on will refer to those adjusted numbers. With that, I will hand you over to Stefan.

Stefan Descheemaeker, CEO

Good afternoon everyone and thank you for joining us on the call today. We are pleased to review our results for the quarter. Nomad had a very strong performance in the first quarter. We were boosted by solid commercial and supply chain execution as well as price increases across the business. I’m especially pleased with the performance of the great people across Nomad for their leadership, focus, hard work, and creativity. In Q3, our reported revenues grew 27%. Our organic sales increased 7.2%, driven by double-digit net price increases, which offset much of the cost inflation we experienced in the first half. There is still work to do, and we remain committed to a journey of growth, acceleration, and value creation. The Adriatic region posted another very good performance, boosted by strong sales of our ice cream brands. Our leading plant protein brand, Green Cuisine, is winning in the market, and they had another good quarter. Green Cuisine is growing sales at a high single digit and reached its highest ever four-week market share at 16.8%. This was a 140 basis point improvement versus the same period last year across Europe. This further fortifies our number two position in the plant protein category. Overall, Nomad lost a small degree of value share; however, we believe this is temporary in nature, and we will regain share over the medium and long term driven by consistent innovation in our core portfolio. We know that our consumers are under pressure, and we are preparing initiatives to help keep them with Nomad brands in partnership with our retailers. Within the portfolio, we are developing value innovations to offer tasty, healthy, and sustainable meal solutions at lower price points. We believe we are well positioned within our supply chain structure to drive growth through effective cost management, winning innovation, and strong service execution. In the first nine months of the year, we improved our service level by 90 basis points, rising to 96.7%. Additionally, we fully covered our cost of goods sold for 2022 and made great progress in securing supply at competitive cost for 2023. We are also on the path to extending our debt maturity profile to 2028 and 2029 through a refinancing of our $916 million principal terminal loan due in 2024 with approximately $830 million in term loan due in 2029. Looking ahead to the fourth quarter, we are still working to adjust our prices to recover our input cost inflation. This will enable us to maintain a proper level of investment in our business, as well as the frozen food category on hold. We've made great progress in this area and as we head into 2023, we expect our business performance to continue improving. We expect full year net pricing to offset volume mix declines, leading to low single-digit organic sales growth for the year. As we further offset input cost increases, we expect gross margins to improve over time. Nomad is navigating a challenging consumer environment, which includes high energy prices, rising inflation, and political disruption. However, we are executing well through this period of uncertainty. We believe the steps we've taken should allow us to enter 2023 in a position of strength. With that, I'd like to recap our third quarter key financial metrics, beginning with reported revenues of €760 million, which increased 27% year-on-year. The increase in reported sales was driven by the inclusion of our recent acquisition and good growth in our organic revenues. Organic revenue grew by 7.2%, driven primarily by double-digit net price increases in the quarter. Q3 represents a sequential quarter of improvement, and our best performance since Q4 of 2020. Our volumes and mix were down 3.4%, driven by elasticity impacts, but offset by a positive mix. We delivered an adjusted gross margin of 29.1%, 110 basis points higher year-on-year, reflecting the benefits of new pricing and the inclusion of the Adriatic region, which has peak margins during the summer. Adjusted EBITDA of €153 million represents a 35% increase compared to last year, as higher input costs were more than offset by higher pricing, energy, and SG&A phasing. And finally, adjusted EPS was €0.52 per share, up nearly 50% year-on-year. Turning to Slide 4, our revenues benefited from a return to organic growth in our base business. We have successfully landed our pricing initiatives throughout the year, realizing a 10.6% net price increase in the third quarter. This price increase offset a 3.4% decline in volume and mix. In October, we maintained our sales momentum with mid-single digit sales growth. We remain on track for low single-digit organic sales performance for the year. In the first quarter, we substantially narrowed the gap between input cost and price, which has opened in the second quarter. There is always a time lag between linear cost increases and staggered price increases to the retailers. We have nearly caught up to that lag. Additionally, our dialogue remains active with retailers regarding further changes to pricing, allowing more adjustments over time as we rebuild our gross margins. We have good visibility on cost, as we're effectively covered for the balance of 2022, and we are on schedule for covering costs for 2023. In a dynamic pricing environment, our overall market share was slightly down for the entire business in critical battles in Q3. Year-to-date average share is down slightly and is flat in must-win battles. We believe this market share loss is short-term in nature. We're making significant progress in extending our debt maturity profile. This will be through refinancing our $960 million Term Loan B due mid-2024 with approximately $830 million Term Loan B due 2029. With this extension, our entire debt portfolio would be fully covered in 2028 and 2029 at an attractive interest cost. The deal has been priced and will close this Thursday. This will enable us to focus our attention on accelerating growth and winning with the consumer in a highly volatile environment. With the successful execution of our pricing strategy and coverage on costs for this year, we are affirming our adjusted EPS guidance range for 2022 at €1.65 to €1.71. This represents high single-digit growth versus a year ago. Longer-term, we are pleased with our business trajectory and remain confident that we will deliver our 2025 adjusted EPS target of €2.30. Turning to Slide 5, Nomad has successfully adapted to difficult challenges many times throughout our history, and this year is no different. The war in Ukraine has required us to react quickly to changes in the market. We can report progress on three focus areas which have all strengthened our business. First, we fully executed our planned price increase in the quarter, and we see this as a testament to the strength of our brands and strategies. We believe we will be in good shape to enter 2023 with the margins and cash flow needed to invest in our brands. Second, our fish diversification strategy has moved into a new stage. We have good news of a growing investment in high-quality farmed fish. We are happy to announce that we secured supply in October with major producers, all of whom are ASC compliant. Currently, 98% of our fish comes from sustainable fishing or responsible farming. We believe we are on track for that to be 100% by 2025. These new sources not only diversify our species and geographical sources but are also an additional driver of our sustainability goals. We expect to see the initial benefits of new supply early in 2023, with the potential for rapid growth in capacity expected over the next three years. This investment in farm fish also provides us with an additional platform for innovation. We have plans in place for new high-quality fish products in the coming years across many key Nomad markets. Finally, we are proud to report that our successful integration of the Adriatic region is ahead of schedule and ahead of our expectations. We had a strong summer selling season as tourists returned to the seaside, helped by good weather during most of the summer. We saw a strong recovery in the on-trade channel and gained market share as well. The region is ahead of our plan on sales and EBITDA year-to-date, and we expect this region will be an important source of growth in the future. As a note, the Fortenova transaction was finalized at the end of September 2021 and is now fully integrated into organic numbers going forward. And with that, I will turn the remarks over to Samy.

Samy Zekhout, CFO

Thank you, Stefan. And thank you all for your participation on the call today. Turning to Slide 6, I will provide more detail on our key third quarter operating highlights. We reported revenues of €760 million in the third quarter, a growth of 27% year-on-year, driven primarily by price increases in our base business, as well as our new acquisition. There was a small benefit from favorable effects as well. Organic revenues were boosted by 10.6% net pricing, which offset a 3.4% decline in volume and mix. Gross margins were 29.1% during the second quarter, reflecting a 110 basis points increase versus last year. Price increases helped drive margin improvement. Moving to the rest of the P&L. Third quarter cost of goods sold increased 24.7%, an increase of €107 million versus last year. Our adjusted gross profit grew 32% to €221 million. Adjusted operating expenses of €91 million were up 27% year-over-year. This rising operating expense was due to the first-time inclusion of our new acquisition. However, as a percentage of sales, operating expense was flat at 11.9% versus last year. Our EBITDA and EPS performances were positively impacted by higher pricing in our core business. Third quarter adjusted EBITDA of €153 million was up 35% versus last year. Adjusted EBITDA margins landed at 20.2%, an improvement of 130 basis points. Our Adjusted EPS of €0.52 was up 49%. Turning to cash flow on Slide 7, we generated €24 million of adjusted free cash flow in the first nine months of the year. As you know, raw material markets have been volatile throughout 2022. In response, we successfully protected our business by building raw material inventories to head off any shortages. We believe this was the right step, and our customers and consumers received an uninterrupted supply of our product throughout the year. We improved our service levels, showing our commitment to serving the market. As conditions stabilized, we have begun releasing working capital and will continue doing so into 2023. CapEx of €55 million was up slightly versus last year. And as we flagged in our Q2 earnings report, we do expect slightly higher CapEx this year, as we support strategic investment decisions and incorporate our recent acquisition into our broader spending plan. Changes in cash tax have decreased by €90 million to €44 million, while cash interest was up at €69 million due to the comparison with last year's refinancing period and other smaller factors. As mentioned in our prior release, our free cash flow generation will be weighted towards the final quarter of the year. Stepped-up CapEx and higher raw material and packaging inventories will leave us short of our usual 90% to 100% long-term conversion target this year. However, we expect Q4 cash flow to be consistent with our historical performance and expect conversion rates more in line with our long-term targets in 2023. With that, let's turn to our final slide, Slide 8, to review our 2022 guidance, which we are reiterating from our Q2 earnings report in August. Our guidance on sales and EPS is based on our best projection of cost inflation and other factors for the fourth quarter of 2022. As Stefan mentioned in his remarks, we expect to recover cost inflation through additional price increases in Q4 and expect progress on our gross margin profile for Q4 and the full year. We expect organic revenue growth in the low single-digit range for the full year in 2022. This will be bolstered by additional price increases in Q4. As we noted in our Q2 earnings report, we expect a significant spread between price and volume. But we also expect net pricing to fully offset volume declines. We expect the Adriatic region contribution to drive reported revenue guidance of a high single digit for the full year. When modeling Q4, please keep in mind that we did see some, albeit minor, forward buying in Q3 ahead of our Q4 price increase, but we are keeping our full year expectations intact. On capital allocation this year so far, it has been our top priority to use our cash to support operations. We did not repurchase shares in either Q2 or Q3 after moderate repurchases in Q1. However, we believe share buyback is central to driving shareholder value. A $500 million share buyback program remains in place until August 2024. For the balance of 2022, with our pricing strategy taking hold and full visibility on cost, we are holding to our adjusted EPS guidance of €1.65 to €1.71, establishing our Q2 earnings report. Finally, we remain on track to reach our 2025 adjusted EPS target of €2.30. That concludes our remarks. I will now turn the session over to Q&A. Thank you, operator, back to you.

Operator, Operator

Thank you very much. The first question comes from Andrew Lazar from Barclays. Please go ahead.

Andrew Lazar, Analyst

Great, thanks very much, everybody. Maybe to start off, you mentioned some of the 4Q pricing actions you're in the process of taking should set Nomad up for a strong start to 2023. So, I guess, two questions on this. First, does this mean that this incremental pricing move has been fully negotiated and agreed upon at this stage with retail customers? Or is there still work to do on that front? And does that suggest that you'd hope to be in a position to start the year, I guess, to continue on with the margin recovery that we started to see in the third quarter? And then I've got a follow-up.

Stefan Descheemaeker, CEO

Thank you, Andrew. Well, it's very simple. I think we've made a lot of progress already, but you still have some negotiations. As you can imagine, these are not necessarily easy negotiations. I think they are very fact-based negotiations. But overall, yes, we've made a lot of progress, but there is still some work to do. And the objective, which we definitely believe is receivable, is to really start the year in a very good position for next year and to start with a strong position. I don't know if you want to add anything else, Samy?

Samy Zekhout, CFO

No. I think to the second part of your question, Andrew, we are effectively going to position us for a strong margin recovery part, as we had already mentioned to you, as we execute the price. And we see how we are managing inflation across the board with our customers and end consumers.

Stefan Descheemaeker, CEO

But it's really a partnership with the retailers, making sure that we're pricing for inflation.

Andrew Lazar, Analyst

And then second, I know that, I think it was last quarter, you talked about at least at that stage, and maybe even more recently, that private label has sort of yet to move price points on the shelf. Have you seen any movement on that front? And if not, you talked a lot about market share; have price gaps reached a point where that's more concerning or have you seen any movement on private label price points at this stage? Thank you.

Stefan Descheemaeker, CEO

Well, you can imagine, Andrew, number one is Europe. So it's a lot of countries. So you have different positions in different countries. But overall, if you're taking a view, it's a moving target. So we think we are price leaders. So far we've priced around 13% compared to private labels. If you take the aggregate of private label or more in the region, competitors have increased their price by around 10%. So you see there is a price gap. At some stage, who knows when another one will get to say when they have to increase the price; it'll be another decision. But it's very clear that we are going through the same kind of competitive framework with the right frame, the same inflation in terms of commodities. So I would assume at some stage it’s going to happen. But in the meantime, we are taking our decisions.

Andrew Lazar, Analyst

Thank you very much.

Stefan Descheemaeker, CEO

You're welcome. Thank you.

Operator, Operator

Thank you. The next question comes from Jason English from Goldman Sachs. Please go ahead.

Jason English, Analyst

Hey, good morning, folks. Thanks for taking me in. A couple of quick questions. So volume mix came in well ahead of what we had initially expected just tracking the Nielsen data. You guys mentioned you saw some minor pull forward of buying, which it sounds like that does explain all of it. Maybe you could unpack that a little bit more for us. Where is there just outsized growth in non-mature channels, and measured countries, or something unique with mix? Any incremental color you can provide on that front would be much appreciated.

Stefan Descheemaeker, CEO

Very good. Jason, I mean, overall, effectively, I mean, you recall the conversation we had at the time of the Q2; there was some cost mark relating to the effectiveness of our pricing. In Q3, we were clearly demonstrating that the strategies are executed and are delivering what we wanted to see, with a significant contribution from pricing of about 10.6%. What you ended up with from an organic standpoint is 7.2%, and the volume and mix there was minus 3.4%. That breaks down into effectively a negative volume impact coming from elasticity, very much in line with what we had planned for in the high single-digit level. And at the same time, a positive mix that we have experienced coming from virtually country, category and products. So overall, effectively, what's really important for us is to see the impact of pricing. And at the same time, we got some help from mix, and the volume negative impact was exactly about in line with our expectation.

Jason English, Analyst

Got it. So the overall mix is beneficial. That's good to know. Quickly shifting to the recent acquisition, the results this year have been really impressive. Regarding weather, can you compare this year's performance to next year's expectations? Can we anticipate growth from this business? Additionally, you mentioned this is the fifth consecutive acquisition that has exceeded your expectations. How do you reconcile your desire to increase stock buybacks with the success you've had in mergers and acquisitions? And I assume there is an ambition to continue this trend.

Stefan Descheemaeker, CEO

Well, thanks for the comment, by the way, Jason. Yes, we're quite proud of our results right now in terms of acquisitions. We've been through five and six, including Findus. I think it's been a very good track record. I think we've been very consistent. We've been very rigorous. I think the integration, I think every time we're improving the playbook in terms of integration. I think this year, for example, with the geographics, we've really invested heavily in terms of people, in terms of tools to make it work the right way, and it's paying off. So I think, over time, we're getting better and better with that, which means that we are in a very good position. Obviously, when opportunities arise, also to make the right decision, there will be buybacks, and there will be acquisitions. And obviously, with the same objective to increase shareholder value. Obviously, that way. But what's really fundamental also and you may remember, Jason, back in 2015, 2016, we didn't do anything because we were really focused on turning around the company. And quite frankly it would have been a distraction. This year, for example, 2022, we had a few things to do first. And I think we are in the right position with our core business to resume the situation. In the meantime, you would agree with me that the market has not been very active.

Jason English, Analyst

Thanks a lot, guys. That’s all.

Stefan Descheemaeker, CEO

Thank you.

Operator, Operator

Thank you. The next question comes from Cody Ross from UBS. Please go ahead.

Cody Ross, Analyst

Good morning folks, thank you for taking our question. Looking at your 2022 outlook based on what you've just reported, it seems like your fourth quarter is a bit conservative. So I'm just curious what would cause Nomad to come in at the high end of the range for the full year and then what would need to happen to hit the low end of your range?

Samy Zekhout, CFO

Cody, thanks for the question. I think as you recall last quarter when we reported on this, we effectively recognized the fact that there was a level of uncertainty, which led us to effectively adjust our outlook. I mean, at this stage, we have made tremendous progress on the pricing. That's very clear, as Stefan was highlighting, but there are still some elements of uncertainty there. And this is why, effectively, we're maintaining the guidance despite the very good performance that we had over Q3. Just a matter of, frankly, maintaining the fact that we are well along on some of the negotiations in some of the markets, but we have not yet still closed a few markets. That's the prime reason.

Cody Ross, Analyst

Thank you for that. And then one of the biggest concerns we hear from investors right now is just on potentially your retail partners carrying less inventory this winter, just given the rise in inflation and costs that they're seeing. What are you seeing from an inventory perspective with the retailers? Have they given you any indication that they might pull back as we go into the winter? Any color here would be appreciated. Thank you.

Samy Zekhout, CFO

Yes. At this stage, to be fair, we haven't heard any of this. I think there has been more conversation around 2022 primary pricing at this stage. And if anything, we benefited from prioritization at their end as we have seen effectively how we clearly be had in the third quarter and then we see the fourth quarter moving forward. There is a clear trend there towards potent, which has really become a category of focus in a context where inflation is hitting many people there. So far we have heard the same thing, but I have to say nothing may change in the future, but I have to say at this very stage, we haven't heard any of these minor from our retailer.

Cody Ross, Analyst

Thank you. I’ll pass it on.

Samy Zekhout, CFO

Thank you.

Operator, Operator

Thank you. The next question comes from John Baumgartner from Mizuho. Please go ahead.

John Baumgartner, Analyst

Good morning. Thanks for the question.

Samy Zekhout, CFO

Good morning, John.

John Baumgartner, Analyst

Maybe first off for Samy, I was wondering if you could discuss the enterprise-wide transformation program. I mean, there was a pretty big step up in Q3 in those related expenses. And I think you're now somewhere around €45 million expense in early 2021. Can you just talk a little bit to what you've accomplished with that program thus far, the next steps in the evolution there? And then just given the magnitude of expenses, I imagine you don't want to quantify savings benefits, but can you comment qualitatively at least in terms of the benefit structurally? And when we can expect those benefits to sort of ramp from here?

Samy Zekhout, CFO

Yes, we have started this transformation program now about roughly nine months ago, gradually stepping up the teams. The intent is really to take the company to a different stage from a digitalization standpoint and really leveraging our scale and to enable us primarily, frankly, to enable us to make better and faster decisions with higher quality information on all fronts, whether it's supply chain, whether it is customer, whether it's about the consumer and our commercial operations, and so on. So we're getting right now is really moving phase by phase on the project. We've completed a significant phase right now, which is called the design phase before we move into a more production mode in terms of executing the plan. So the savings are really going to be twofold there. One is purely cost efficiencies as we really create scale by standardizing and simplifying our operations. And the second element of savings will be effective acceleration of revenues through, if you want, at the same time, revenue growth acceleration by identifying better sources of growth or potentially, frankly, winning stronger with the retailer by effectively getting much more granular on where we can make a difference in store on the different product lines and so on. I mean, we are in the middle of the start of the implementation. The impact of the savings will be at a much later stage, probably, if you know, in the next two years, probably 2025 onwards. But at this very stage, it is really within the implementation of the entire project that you're seeing this expense being incurred.

John Baumgartner, Analyst

Okay. Great. And then just a follow-up. As we consider 2025, you are keeping the EPS target at €2.30. Referring back to Jason's question about M&A, given the increasing rates and political risks in Europe, if the M&A opportunities do not develop significantly, how confident are you in reaching €2.30 through organic growth and share buybacks? What is your level of confidence regarding this?

Stefan Descheemaeker, CEO

The confidence level remains unchanged. We have a robust business model and are leading in a significant category. This year, for example, we've gained valuable insights regarding pricing. The company is in a much better position than before. We've also made significant advancements in our supply chain, particularly in our fish operations, which highlights the progress we've achieved. In 2023, we're still focused on learning and adapting. We're consistently emerging stronger from various challenges. Organically, with our category leadership, branded products, and dedicated team, we are well-equipped for success. Share buybacks will definitely be a part of our strategy. Regarding M&A, we will maintain our disciplined approach; it’s not an easy process, and our focus remains on value creation. We believe we are well-positioned to be the preferred acquirer in our category, especially during times of market dislocation, when opportunities arise. It’s crucial for us to be present and ready to act wisely. I am confident that while the specifics may vary among our core business, buybacks, and M&A, all these elements will contribute significantly between now and 2025. This reinforces my confidence in our €2.30 EPS guidance.

Samy Zekhout, CFO

And John, if I may add, I mean, to Stefan's point, the name of the game is going to be cash flow. And on that one, the focus has not changed at all. And you've seen the step up, if you want improvement you will see that in the fourth quarter as we go. And it is going to be through that we will have the flexibility to, frankly, allocate our resources in the best way in order to get to that number. And if you ask me why confidence, it is because the cash machine is fully intact. We continue to focus on generating cash flow. And even if we had to make some priority calls this year rightfully to support the operation as we go, we will continue to generate the amount of cash that we have generated in the past.

Stefan Descheemaeker, CEO

And no maturities, by the way, have been extended to 2028 or 2029, which I really believe is a big plus during these very volatile times.

John Baumgartner, Analyst

Okay, thanks very much.

Stefan Descheemaeker, CEO

You're welcome.

Operator, Operator

Thank you. The next question comes from Peter Saleh from BTIG. Please go ahead.

Peter Saleh, Analyst

Thanks for the question. I wanted to revisit the topic of costs. You mentioned that you're fully covered for 2022 and made good progress on 2023. Can you provide an update on your progress in covering costs for 2023? In a typical year, where do you stand this year? Are you on track, slightly behind, or ahead? I'm trying to understand your approach regarding contracts for 2023 at this stage.

Samy Zekhout, CFO

Yes, we are well ahead, actually, versus the prior years. And clearly, the intent for us was twofold. One is to secure supply and the best we can. And the second one was to give the best possible visibility to our sales organization. But equally important, if you enter the retailers, to make sure that we have clearly a substantial part of the year well covered next year. So there are some elements where we are well ahead for the next year. I mean, the fish or energy, and there are others that are clearly more difficult if you want to cover from an availability stand along the year because usually there are no longer-term contracts for dairy, poultry and so on. But all-in-all, if you benchmark us versus a year ago or the prior years, we are well ahead versus where we are. The intent is frankly to clearly go beyond the 50% coverage by the end of the year, so that we have a significant portion of the year covered. But I think we should be well ahead of that as we enter into 2023.

Peter Saleh, Analyst

Okay. That's very helpful. And then just lastly, are there any signs that inflation is moderating or just tapping out? Anything you guys can see from what you're looking at at this point that suggests we could see some more moderate inflation or going into '23?

Samy Zekhout, CFO

We see moderation actually, softer increases in many ingredients, primarily if not on commodity. But our portfolio of products is quite complex. We have some commodities, but we have effectively living protein; we have fish, poultry, dairy, edible oil, and so on, which are clearly varying in a different element there. So all-in-all, we see effectively an overall softening of the inflation, but still inflation is there with some categories continuing to be strong, I mean energy, of course, but some others are clearly softening down as we see, which is a good sign. Now as this very said, it's too early to tell you to give you a number. But effectively, at least, there are some moderating signs on some parts of the portfolio, which is quite encouraging.

Peter Saleh, Analyst

Thank you very much.

Samy Zekhout, CFO

You’re welcome.

Operator, Operator

Thank you. The next question comes from Robert Moskow from Crédit Suisse. Please go ahead.

Robert Moskow, Analyst

Hi, thank you. I just wanted to ensure I have my pricing model correct for the fourth quarter. I understand there may be another increase of about 10% to 15% this quarter, and there are likely some pricing actions from the third quarter that haven't fully impacted the market yet. So, I have you over 20% for pricing in my model. Is that accurate? And I have a quick follow-up.

Stefan Descheemaeker, CEO

A bit lower because, actually, what we've done is that, as we discussed, one of the things we have done in order to reflect the element of uncertainty or realization of the pricing was to apply a judgment call on timing of execution. Some of the markets are on time. Some others are a bit later, and as well on the depth of the execution when we need some time to execute some of the pricing with an increased promotional support to stay competitive during the transition time. So it's going to be a bit lower than the number that you have.

Robert Moskow, Analyst

Could you clarify what this means for gross margin? Last year, your gross margin was 26.5%, and I believe you experienced the full impact of the acquisition. Can you tell me if the acquisition affects gross margin negatively in the fourth quarter due to seasonality? Also, considering your gross margin for the fourth quarter this year, do you believe you can exceed last year's performance, especially since the acquisition seems to be performing better than you anticipated?

Samy Zekhout, CFO

Well, the reality in the fourth quarter is effectively cyclical, with Q2 and Q3 being very strong in the Adriatic and Q1 and Q4 being a bit lower. So I think Q4 is probably the lowest of the quarters in the historical cycle. So there is an element of dilution. But if your question is versus a year ago, actually, there has been improvement. If you want, on the gross margin overall, I mean, from the Adriatic business. Now it's going to be part of the total as you know, when we get into Q4 because it's going to be part of the organic forecast as we look forward. But there is effectively an improvement that we will see overall.

Robert Moskow, Analyst

Do you think the company will show improvement compared to a year ago?

Samy Zekhout, CFO

Yes. Because don't forget that effect by Q4, the Adriatic will be part of the base. I mean, will be included now. We have completed the fourth quarter, and it will be included in the base, I mean, over there. So year-over-year, in total, if you want, from a margin standpoint, given the fact that there is a good trend in front on the base and the positive trend as well on the Adriatic overall is improving.

Robert Moskow, Analyst

Great. Okay, thanks.

Operator, Operator

Thank you. The next question comes from Jon Tanwanteng from CJS Securities. Please go ahead.

Jonathan Tanwanteng, Analyst

Hi good morning and thanks for taking my question. Great quarter. Stefan, you brought up the prospect of regaining share, but I think you mentioned that with the price increases, your value share has been flat to down. I was wondering, when does that trend bottom out? What are the catalysts for that to happen? And does that depend really on competition raising the prices to catch up? Or is something else going on there?

Stefan Descheemaeker, CEO

No, I don't think there is anything else to add at this stage. It is quite clear. You heard me mention a 10% share for competitors and 13% for us, which has a significant impact, and that’s expected. We need to maintain our discipline and we won’t change our approach. We are price leaders when it comes to inflation. Eventually, others will be under the same conditions as us and will need to adjust their pricing accordingly. When that will happen is uncertain, but it is a temporary situation. The second point is regarding elasticity; overall, it has been less negative than we anticipated, likely due to widespread increases in the food industry. Lastly, although it will take more time, we are working on initiatives beyond just pricing. We are developing a robust toolkit for revenue growth management, including new SKUs with appealing price points for consumers. We are also creating a new range of value SKUs, which could include fish and other items, maintaining high quality while making them more affordable. This is to ensure that consumers who are most affected by the crisis continue to choose us. It’s a mix of short-term adjustments driven by competitors and also distinct actions within our control moving forward. This strategy is a key part of our role as a leader, and it’s what we will focus on.

Jonathan Tanwanteng, Analyst

Okay. Great, thank you. And Samy, a question for you. What are your interest expense expectations heading to 2023 with the new term loan and assuming rates continue to climb? With that backdrop, are you expecting debt pay down to take more priority here or how should we think about that?

Samy Zekhout, CFO

Yes. We'll be closing tomorrow, the loans. So we give all of the details by then. But directionally, effectively, we will see a slight increase, I mean, overall, on an average basis, I mean, year-on-year, but clearly manageable within the overall performance that we have and the commitment we have to decrease our leverage over time. The very important thing for us was really around securing the financing. And then from an interest standpoint, effectively, we will see a slight increase, but we have other levers, I mean, cash management that will enable us to continue on the way to deliver the cash flow performance we want.

Jonathan Tanwanteng, Analyst

Got it. Thank you. If I could slip another one in there. Just you mentioned the release of working capital and conversion rates of EBITDA closer to historical norms. Wouldn't that raise the process you could do better than that if you're releasing working capital? Or is there something else that's taking that cash?

Samy Zekhout, CFO

No. I think the same strategies, if you want, are being applied. They've been very successful in the past. I mean, focusing on different elements. We have had a number of, let's say, decisions to be made this year, and some extent even the decision was to support the operations, which has translated into effective cash take, as you have seen over the past. And at the same time, we had some change in, let's say, directive relating government directly relating to the management of our payables, which is called the UTP, as we talked in the earnings. All of that is getting gradually behind us. The Q4 performance from a cash flow in Q4 will be consistent with what we have seen in the past. And so with all of the levers fully in operation there to get us back on to the performance that we want from the cash flow performance.

Jonathan Tanwanteng, Analyst

Understood. Thank you.

Samy Zekhout, CFO

You’re welcome.

Operator, Operator

Thank you. The next question comes from HBS. Please go ahead.