Nomad Foods Ltd
NYSE:NOMD
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Nomad Foods Ltd
Earnings Call Analysis
Q3-2023 Analysis
Nomad Foods Ltd
Nomad Foods finished the third quarter of 2023 in strong form, offering reassurances to investors on the earnings call with notable steps forward. They reassured stakeholders that despite challenging global events including inflation, they have managed not only to stabilize but also to grow. They've refined pricing to offset volume losses from inflationary pressures and set their sights on positive volume growth as a critical objective going forward.
To achieve their strategic growth objectves, Nomad Foods activated an aggressive marketing and promotional plan across Europe, leveraging iconic branding and a dynamic advertising push. They also capitalized on their supply chain efficiencies and cost savings to invest further in marketing to stimulate consumer demand, expecting this strategy to catalyze volume and market share recoveries in the next financial year.
Nomad Foods has navigated the market effectively, delivering a modest revenue growth and an organic sales increase, signaling impressive resilience. Adjusted EBITDA and adjusted earnings per share both were ahead of market expectations, giving investors reasons for optimism about the company's financial health.
In a profitable move, Nomad Foods is boosting their EPS forecast to €1.57 to €1.60 per share, propelled in part by a successful share repurchase strategy. They've announced a new $500 million share repurchase program, demonstrating a sound capital allocation strategy aimed at building long-term shareholder value.
Adding to its investor-friendly policies, Nomad Foods is planning to introduce a regular quarterly dividend, subject to board approval, highlighting a commitment to reliable shareholder returns.
Nomad Foods gave particular emphasis to the successful promotion and launch of products in various regions, including record ice cream sales in the Adriatic. Their plant-based product line, Green Cuisine, is also bolstering growth, exemplifying the company's strategic focus on diversifying and strengthening its brand portfolio.
The company has achieved a significant free cash flow, credited to working capital improvements and EBITDA growth, and reconfirms its commitment to meet the annual adjusted cash flow guidance of around €250 million, aiming for a cash conversion ratio of 90% to 95%.
Management expressed certainty in regaining market share and volume growth in the coming year, buoying investor sentiment about Nomad Foods' competitive positioning and growth trajectory.
The company's gross margin has remained steady despite an array of external pressures, attributed to strategic productivity investments, cost savings initiatives, and a sharp focus on their core brands and categories, which they anticipate will start showing benefits in the next financial year.
After grappling with heavy inflation, the company is witnessing signs of relief with some categories experiencing price declines, indicating a potentially favorable cost environment ahead for Nomad Foods, allowing room for value creation and reinvestment in the business.
Nomad Foods is devoted to ensuring shareholder value through effective capital allocation. Focused efforts in working capital areas, such as invoice collections and inventory management, have freed up cash, hence exceeding their free cash flow conversion target, and they plan to maintain this approach in future years.
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Greeting. Welcome to the Nomad Foods Third Quarter 2023 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.
I will now turn the conference over to your host, Anthony Bucalo, Head of Investor Relations. You may begin.
Hello, and welcome to the Nomad Foods Third Quarter 2023 Earnings Call. I am Anthony Bucalo, Head of Investor Relations, and I am joined on the call by Stefan Descheemaeker, our CEO; and Samy Zekhout, our CFO.
Before we begin, I would like to draw your attention to the disclaimer on Slide 2 of our presentation. This conference call may include forward-looking statements that are based on our view of the company's prospects, expectations and intentions at this time. Actual results may differ due to risks and uncertainties, which are discussed in our press release, our filings with the SEC and this slide in our investor presentation, which includes cautionary language.
We will also discuss non-IFRS financial measures during the call today. These non-IFRS financial measures should not be considered a replacement for and should be read together with IFRS results. Users can find the IFRS to non-IFRS reconciliations within our earnings release and in the appendices at the end of the slide presentation available on our website.
Please note that certain financial information within this presentation represents adjusted figures for 2022 and 2023. All adjusted figures have been adjusted for exceptional items, acquisition-related costs, share-based payments and related expenses as well as noncash FX gains or losses. Unless otherwise noted, comments from here on will refer to those adjusted numbers.
With that, I will hand you over to Stefan.
Thank you, Tony, and thank you for joining us on the call today. Nomad posted a solid top and bottom line performance in the third quarter, following our excellent results from the first half of the year.
Sales grew organically by 1.6%, our fifth consecutive quarter of organic sales expansion. Additionally, we generated strong adjusted free cash flow, successfully refinanced USD 700 million of our debt to lower interest charges and bought back EUR 66 million for own shares at attractive prices. We have borrowed back more than 4% of our shares in the first 9 months of the year.
Our teams accomplished this while deploying new strategic commercial investments to drive growth and bring us back to positive volumes. Boosted by our share repurchases, we are again raising our annual adjusted EPS guidance. We're closely watching the development of weight loss drugs globally and the possible impact on food industry volumes. The long-term impact of these treatments is still under examination. However, in any scenario, we believe Nomad is in excellent position due to our unique portfolio of products, which are on target for consumers looking to eat healthy.
Nomad is a highly resilient company, and over the past several years, we have effectively managed through several crisis. Through those challenges, we have protected our cost and margin structures to ensure that we maintain the right level of investment in our business. In reaction to historic inflation last year, we adjusted our price in 2022 and 2023, knowing that we would lose volumes. We've lost volumes, but this was a necessary decision to safeguard the integrity and strength of our business.
Now that we have stabilized our business, returning to volume growth is our most important strategic objective. We made progress in the third quarter. We also made some difficult but necessary decisions with the [ fuel ] for retail partners across several markets. This resulted in some volume losses that were outside of our [ original ] plan. Absent these dislocations, our volume progress would have been consistent with our sequential volume improvement plan.
The majority of these discussions have been addressed and we expect that these losses will reverse in the fourth quarter and in the first quarter of next year, bringing us back on track. Consistent with our objective to return to share and volume growth, we activated our A&P investment plan, raising our A&P spend in September to 5% of sales from 3.5% of sales last year. Utilizing these resources, we launched new advertising across Europe, and we have strengthened our media profile, leveraging the iconic captain in our advertising for Nomad's leading fish brands across our key markets.
Additionally, we've stepped up our in-store execution with new and exciting promotional activity across Europe, placing our leading brands directly in shoppers line of sight. This [ heightened ] visibility is compounding the effectiveness of our advertising and driving demand. The initial result of our dynamic A&P program are highly promising. We expect our volume and share trends to improve in the fourth quarter, ultimately returning to growth in 2024 and beyond.
While our A&P program will be crucial to driving growth, we also remain laser focused on our other strategic plans. We are harvesting our supply chain cost savings to redeploy in marketing. Additionally, we continue to expand our revenue growth management capabilities. We have made significant progress on both initiatives and this is helping drive pull from consumers leading to volume and market share recovery.
Looking ahead to the end of the year and next year, we are excited about our growth prospects. We expect to see an improvement in performance in Q4, which should carry well into 2024 and beyond.
With that, I'd like to recap our third quarter key financial metrics, beginning with revenues. Our reported sales grew 1% and grew 1.6% on an organic basis. This result was ahead of our original expectations. Gross margin was 28.4% with cost pressure offset by our pricing initiatives and cost control programs.
Adjusted EBITDA was EUR 140 million, while adjusted EPS came in at EUR 0.43 per share, both ahead of market expectations. At current dollar spot rates, our Q3 adjusted EPS was USD 0.45 per share. In Q3, sales grew by 1.6% on an organic basis with strong pricing offsetting volume and mix declines consistent with our expectations.
For the first 9 months of the year, we grew organic sales 6%, and we remain on track to deliver our guidance of mid-single-digit growth for the full year. Our supply chain delivered excellent results. and we remain in a positive cycle of customer service and cost management. This efficiency is helping support our new A&P investments. Our service levels rose to 98.6%, up 160 basis points.
The hard work we've done on supply chain transformation is paying dividends at a crucial time. As volume demand picks up and commodity prices stabilize, our efficient supply chain execution will be critical in filling new customer and consumer needs. We have benefited throughout the year from a strategy of selectively assessing the risk profile of each individual raw material category we buy, making or buying more efficient.
Looking ahead, we have begun the process of covering for next year, and we have good visibility on key commodity trends heading into 2024. Our value share was down about 1% in the quarter consistent with our expectations. However, our new A&P investments were rolled out towards the end of Q3. We expect an improving trend moving forward.
With our business performance on track with our expectations and our share repurchase, we are raising our adjusted 2023 EPS guidance to EUR 1.57 to EUR 1.60 per share from our previous range of EUR 1.54 to EUR 1.57 per share. This represents an adjusted EPS range of $1.66 to $1.69 per share at current spot rates. This guidance excludes the impact of any potential future capital allocation.
While on the topic of capital allocation, we are pleased to share significant developments in our capital allocation strategy. Accretive capital allocation is crucial to our long-term goals at Nomad. We deployed EUR 66 million to repurchase our shares in Q3. In the first 9 months of the year, we have invested a total of EUR 118 million, reducing our share count by more than 7.6 million. As you may recall, in August of 2021, we announced a $500 million share repurchase program, which was successfully utilized and is set to expire at the end of this year.
Proceeding with our share repurchase efforts, our Board of Directors has approved a new $500 million share repurchase program, which will expire by the end of 2026. In addition to our share repurchase program and subject to approval by our Board of Directors, we intend to initiate in early 2024, a regular quarterly dividend which we expect will be a key means of delivering reliable value to shareholders going forward. We will share further details early in 2024.
This enhanced framework for shareholder return bolstered by our strong free cash flow profile underscores our commitment to maximizing shareholder returns. Since 2022, it has been our plan to raise our media and promotion spending in the second half of this year to drive volume and share momentum. This quarter, we launched many new initiatives to reignite growth, such as our back-to-school Birds Eye campaign in U.K., our television sponsorship with [indiscernible] in France and our Captain Adventures TV and digital activation in Italy.
We launched new fish shapes in Austria, Netherlands and Belgium, reincreasing chicken and cheese nuggets in Germany, in a wave of modern meal solutions in vegetables across Europe. We debuted new advertising with the Captain across our markets, connecting even more with our consumers and bringing attention to a delicious fish products. Fish makes up just under 40% of our sales, and we are the leader across most of our markets.
To win at the point of sale, we've stepped up our promotion in supermarket eyes, bringing consumer attention to a high-quality branded products. With the new promotion plans in place, the price gaps with our private label competitors have stabilized. Frozen food is a resilient category, and there are plenty of green shoots across Europe. Frozen is back in volume and value growth.
September trailing 12-week data shows 1.5% volume growth in the category. And there is growth in 12 out of the 16 markets tracked. Additionally, the category is performing ahead of total food in volume terms across several key markets. Consumer behavior is showing signs of improvement as well. In the U.K., for example, we see consumers putting more frozen food products on their plate, for instance, adding peas to fish fingers.
For Nomad, the quarter is still in early stages, but we are seeing improving value share and volume trends in some of our biggest markets, U.K. and Italy, especially. There were many great commercial developments at Nomad during the quarter. In the U.K. We launched a back-to-school master brand campaign with Birds Eye to capture the attention of family settling back into the school year after summer breaks. We reached more than 90% of households with our Birds Eye brand advertising during the period.
In the Adriatic region, we posted record ice cream sales driven by our [indiscernible] portfolio. and supported by good weather, high service level and an acceleration in our point of sales program. We benefited from our investment in supply chain, marketing and innovation. We also launched fish fingers in the region, and the initial results are highly promising. Following the sixth anniversary of Findus in Italy, we are now celebrating the 25th birthday of [ Carletto ], a brand icon Camilion for Sofficini of [ Belof ] pancake product. We celebrated with the introduction of a short movie, About His Life, as a prestigious film festival for kids creating significant media coverage from national newspapers and TV.
Finally, Green Cuisine remains our plant-based pillar for iglo and keeps growing value share. In Germany, one of our core markets for the brand our value share was up 7% in Q3. This was driven by focused activation behind the new campaign as well as product innovation. We've gotten many questions from investors and analysts about how the retail trade looks with our new promotion plant now in full swing.
We've got some great examples here of in-store execution in 4 of our top markets. In the U.K. We are combining our best-selling and most lost products in a high [indiscernible] ice freezers to give consumers combined mild. This provides a great takeaway experience at an affordable price. We've lined up our fish fingers with Green Cuisine with [indiscernible]. We also have our famous potato waffles in the mix.
In France and Spain, we've ramped up [indiscernible] distribution in recent months. In France, we've got a good example here of how we are catching the consumers' attention for what is a new brand in the country. Note is the high visibility of the display, giving details on the project for new consumers first learning the benefits of this great brand.
Since acquiring our Adriatic business, the addition of ice cream to our portfolio has been a great success. In Croatia, we have an example of our King ice cream promotions, especially our highly profitable single-serve versions. In Germany, we are on offense with our fish fingers and vegetables. In this ice freezer, we have got our key spinach products on promotion next to our [indiscernible] fish fingers, both must win battles in that market.
We have many more examples across our business, and I'm happy to report that the reaction from these programs have been strong so far. With this in-store execution driving sales along with our new media, I'm highly optimistic about the outlook for the rest of the year and beyond.
With that, I will now hand the call over to Samy to review our financial results and guidance in more detail. Samy?
Thank you, Stefan, and thank you all for your participation on the call today. Turning to Slide 9. I will provide more detail on our key third quarter operating metrics, beginning with reported revenues, which increased roughly 1% to EUR 764 million. Sales grew organically 1.6%. Third quarter revenues were negatively impacted by 1.1% of unfavorable FX. We delivered gross margin of 28.4% supported by pricing and cost control. This result was ahead of our plan.
As previously discussed, Q3 was the most challenging quarter for gross margins for the year due to the comparison from the third quarter of 2022. Looking out to Q4, we remain on track to deliver stable gross margin for the year. This will be supported by an improving volume trend, pricing, strong cost discipline and robust RGM execution.
Moving down to the rest of the P&L. Our gross profit came at EUR 217 million in the third quarter. Cost of goods sold increased to EUR 547 million, an increase of 2%, up EUR 8 million versus last year. Adjusted operating expense of EUR 100 million was up 11% year-over-year, reflecting stepped-up A&P investment. As a result, adjusted EBITDA was EUR 140 million with adjusted EBITDA margin at 18.3%. Finally, we posted adjusted EPS of EUR 0.43 per share in Q3. This translates to USD 0.45 per share at current spot rates.
Turning to cash flow on Slide 10. We delivered strong cash flow in the first 9 months of the year, driven primarily by working capital improvements and EBITDA growth. Additionally, we've been highly focused on effective inventory management and cash collection helping our working capital performance. We are well on track for annual adjusted cash flow guidance target of EUR 250 million at a conversion rate of 90% to 95%. Maintaining this high level of conversion is paramount as we consider our capital allocation strategies for the year and beyond.
In the first 9 months, we generated EUR 125 [ million ] of adjusted free cash flow for a conversion ratio of 56%, our highest first 9-month conversion rate since 2020. Working capital decreased EUR 151 million to EUR 68 million, more than offsetting a EUR 44 million increase in cash interest driven by our refinancing and repricing activities. CapEx of EUR 59 million was up EUR 4 million versus last year as we remain highly disciplined on supporting long-term strategic investments within our business. Changes in cash tax increased EUR 9 million to EUR 53 million, while cash interest was up EUR 44 million to EUR 130 million, driven by last year's refinancing.
With that, let's turn to Slide 11 to review our 2023 guidance, which we are updating today. This guidance is based on foreign exchange rates as of November 1, 2023. First, we are again maintaining our organic revenue projection of mid-single-digit growth for 2023 with our pricing more than offsetting volume declines.
As our current A&P investment takes hold in the market and we approach 2024, our expectation is that we will develop a more balanced mix of price and volume. We expect to see the beginning of volume recovery in Q4 rolling into 2024. We are keeping our adjusted free cash flow guidance of approximately EUR 250 million. We expect our cash conversion ratio to be in the range of 90% to 95%, consistent with historical averages.
As Stefan spoke to earlier in the presentation, with our underlying business performance in line with our expectations, and our share repurchase across the first 9 months of the year, we are raising our 2023 adjusted EPS guidance last updated in August. We now expect adjusted EPS in the range of EUR 1.57 to EUR 1.60 per share or $1.56 to $1.59 per share at current spot rates. This excludes any additional impact of potential future capital allocation.
I will now turn the session over to Q&A. Operator, back to you.
[Operator Instructions] Our first question comes from the line of Jason English with Goldman Sachs.
Great news on the dividend. I look forward to more details to come in terms of payout ratio, magnitude, et cetera, early in the new year. On the quarter itself, I was surprised by retail disputes, a strange time of year to see retail disputes. And looking at your P&L, price growth accelerated on a 2 and 3-year stack basis. So is it fair to assume that you've implemented new price increases in the quarter. Those are the cause of the disputes? And if so, can you give us a sense of order of magnitude?
Thanks, Jason. Thanks for the question. Well, I think the world has changed a bit. In the past, in Europe, we had one negotiation per year at the beginning of the year, and then we have these volatile times with inflation going up. And you remember last year, we increased price 3 to 4x. So instead of one negotiation, you had the 2 to 3 to 4 negotiations.
So this year is a bit the other way around. Obviously, inflation is coming down, which is great for all of us, but still a volatile time. So I'm not surprised that we have this conversation -- healthy conversation instead of conflict because we never stopped the dialogue with these guys. So I think it's absolutely unavoidable and to some extent, sometimes necessary to make sure that we have the integrity in terms of pricing.
I think the key piece for us is how can I say, is we've decided to do this way because we want to protect the long-term integrity of the business. And sometimes, it's obviously not easy because we are listed and we had a quarter coming in that should not prevent us from making the right decision in terms of negotiation. And that's absolutely fundamental for us and for the future and for our retailers. So that's what we had.
In terms of what it did in Q3, in Q3 in terms of revenues, around 2% plus of revenues were "lost" with these negotiations. I think most of these negotiations are over. We still have a bit of left ahead of us. Q4, you will have obviously the remaining, it's going obviously during the first month. But then definitely, it's going to positively impact Q4 and definitely more -- even more so for Q1 with the right level of margin. So that's that. So that's -- the world is changing, Jason. And I think probably it's going to be a bit more stable in the future. But the number of negotiations have increased.
Okay. One thing that's also changed in the last year or so is the private label was no longer following you as closely or as quickly as they had been in the past with price increases. And you note in the slides that private label price gaps remain stable. So I assume that they still; a, still haven't followed on sort of your last rounds. And now if you're putting through more -- are you seeing them kind of would suggest in the slide that you're seeing them follow if price gaps are stable. But can you confirm that's the case?
And then the second part of it, you're talking about a lot more merchandising activity on the forward, which makes a lot of sense, as you look to improve volume. But between that and rectifying some of the disputes of retailers, has there been any sort of price -- net price that you're effectively having to give back to fund that [ merch ] or rectify the tension with the retailers?
Jason -- sorry for my voice, I've a bit voice extension, but I'll try to answer your question. On the private label point, I think what's very important is that we have [indiscernible] stabilization, but with a gap that is now, frankly, reaching a point where we think we can still operate while effectively leveraging all of the other aspects of our and mainly promotion in order for us to stay competitive versus them and reignite growth from that basis.
So if you recall, the price gap was double digit, and it can double-digit increase versus the prior gap, then it started to go down and it has reached a level, let's say, of 5-plus percent. And within that, really what we are taking -- what the actual we are taking right now is effectively acting at the promotion level beefing up our A&P and at the same time as well, taking into consideration the change in the inflation dynamics that we see for the future. And this is where the negotiation and the compensation all to play there.
We clearly want to reorganize share growth. We want to revert the volume trend, which it has stabilized, I mean, at this stage and on its way back to effective recovery by Q1 and Q4, we'll see an improvement. In Q1, we'll see effectively a turnaround at that point in time.
Our next question comes from the line of John Baumgartner with Mizuho Securities.
Stefan, it looks as though in this latest run of Nielsen data, Nomad has seen some market shares improve across a number of countries, but Italy is still soft I think that's where the pricing -- the relative pricing has been more troublesome. How do you think about the time required once you're in market for consumers to shop the eye or become aware of the promo and take advantage of it. I mean, I guess, what's sort of the natural purchase cycle for your categories? Is it 4 weeks? Is it 6 weeks? Just trying to better understand the willingness and ability for consumers to take advantage of promo once it's in market?
But to your point, I think frozen aisle is obviously is more something like your destination as such. And the average country by country, but let's say, give or take, is around 4 to 5x per year. So you can imagine between at the moment you're starting with your promotion and the impact it has in the market, it takes a bit of time, so what we see in Italy, we see some green shoots. It's very much in line with what we were expecting. And then basically, the last thing we need to do is to change course.
So we've taken that's the [indiscernible] where we've started our RGM program, the, let's say, the fastest, let's say, with the very deep, especially in fish and what we're starting to see some green shoots, but definitely it's going to be complemented by A&P on top.
So take that on top of the 4 to 5x also with a stabilization of COGS, stabilization of obviously, labor cost is starting to increase. But to some extent, in terms of cost of living is good progress as well, especially in the country like Italy. And then we see that they definitely end of this quarter -- end of Q4 this quarter and definitely next year, with the A&P, we are very confident that Italy will reverse the trends, which is what they're starting to do, especially in fish.
Okay. And then thinking more about the macro into 2024 and the persistent inflation in Europe and the impact on consumers' budgets and shifts in food spending, when you're lining up these brand investments? How are you thinking about -- I guess the competition just alternatives for consumers. Are you mostly focused on winning in-store against other frozen or fresh categories? Is there also an angle here to try and capture some food spend from outside the home? I guess what are your expectations for how or where you'll source that incremental volume from going forward?
Well, the first thing is we've lost some market share. And so definitely, there is a piece of that we want to regain. That's the first thing. That's within the area and that we think that with the programs we have, we can do this, but also, we believe that we have this program of the [ Western ] battle, they're supposed to grow in a disproportionate way compared to the others. That's what we've been doing.
One more thing you will see as well is we're going to start in a very selective way to work on new categories on a country by country, very far from what happened something like 10 years ago, which was a bit of everything. But definitely, where we think that in a country, this category could be poultry in some countries could be pleasing and other. We have the right to win. We're going to do it. so there's going to be a long-term investment. So that's a combination of different things.
When you think about poultry or you think about pizza, for example, definitely, you have a contest and competition with not only with frozen but also with [ chills], so that's going to be the framework for us. So definitely focused on the almost in battles with RGM with obviously A&P, and with that, we think that within this frame, we are going to gain market share. And then on top of that, we're starting something which is, again, very focused behind new categories, and that will impact the frozen food, but definitely also above and beyond frozen food, which in and of itself, by the way, is doing well compared to many other categories.
Our next question comes from the line of Rob Dickerson with Jefferies.
Stefan, maybe just to kind of follow up on what you just said. I think in the prepared remarks, you'd stated volume growth was kind of back for the broader frozen category in 12 out of 16 markets. I mean clearly, I guess, a few things going on in Q3 that you're not posting the volume growth, but then also it sounds like there is some incremental pricing that's gone through the market. So like as we get through Q4, as you say, you think the volume trajectory improves, I mean, are you into Q1? Like should we be thinking that hopefully, as you get toward the end of the quarter, that you start to see volumes stabilize, and therefore, there could actually be volume growth next year despite the pricing because of ongoing higher A&P, must win battles?
Well, to your point, I think we have -- the programs we have with the combination of, let's say, more stable macros, definitely, we believe that we're going to come back to the previous [ algos ], which was based on, obviously, volume growth, then you obviously higher sales than obviously definitely higher EBITDA than double-digit EPS. So that's definitely what we want to come back with the combination as we said A&P, RGM, which is really something that we have -- we've however, invested a lot and milder, let's say, macro. That's the idea.
The concept of -- do we believe that we're going to gain market share and get back to volume growth next year, absolutely. Where are they going to happen in which week, I can't tell you that right now. But definitely, we're very confident that we're going to gain market share and we're going to gain volume next year.
All right. Super. And then, I guess, Samy, just on the gross margin, I think you had said Q4 gross margin kind of in line have gross margin essentially flat for the year. I think that kind of implies Q4 gross margins essentially flat. But at the same time, I'm hearing some stuff about pricing and RGM initiatives and sure there's productivity. So I'm just curious kind of with some pricing coming through, it sounds like maybe that is clearly offsetting some higher costs. Otherwise, I kind of would think gross margin would be up.
You have -- I mean, you had a bit of an effect as well of mix because we had ice cream in Q3, and then we don't have ice cream in Q4. When you look at the trends, if you on the first 3 quarters to the fourth quarter, but versus a year ago, you started to see some improvement there, which is going to comfort the projection of, let's say, flat gross margin, I would say, for the year. So technically, the cycle has been that the first 3 quarters were slightly above 28%. And then effectively in Q4, it's going to be slightly lower than that. But for an average of the year, that's going to be flat versus a year ago.
So it's clearly definitely the investment we are making in terms of productivity, in terms of investment behind our core brand and particularly on mix on our core category. And most in [indiscernible] going to start to pay off. We see effectively the trajectory starting to improve into the next year. But for this year, we definitely maintain our flat gross margin for the year.
Our next question comes from the line of Steve Powers with Deutsche Bank.
On the gross margin, actually, while we're here, you mentioned that 3Q came in ahead. Is that -- what was the source of the upside? Was it better ice cream sales? Or were there other drivers of the upside versus your expectations?
Well, this is expectation. I think we've been slightly higher, as you know, because effectively we had a bit of a better performance on the top line if you really look at [indiscernible] expectation. And yes, ice cream has been doing really well there. There's a mix factor there and the continuation effectively of the return that we are put in, we're getting behind all of the cost savings and productivity initiatives. I mean, as you know, we're putting a lot of focus and a lot of effort in [indiscernible], in particular. But it's a combination of elements, I see. I mean that it's not only just the saving in itself, but you really have a go combo on focusing on must-win battle, stepping up effectively the mix by invested behind the must-win battle. RGM starts to get in motion on that, which is giving us a bit of a breathing space there, which we expect to continue to maintain and again, securing our hypothesis and our projects for the year at about flat gross margin.
Yes. Okay. Very good. And you mentioned 100% coverage and strong visibility on costs into '24. Is there anything you can offer us in terms of an overall cost outlook? Or any color on expected kind of timing of the cost curve into the next year?
Yes, we -- at the time we give the guidance there because frankly, I have to say, I mean, so far, of course, we indeed have covered, I mean, for the year, that's obviously because we are now, frankly, at the level where we are. But getting into the nature, we're starting effective to lock some of the deals available in the market, there is effectively some deflation on fish, some slight inflation on some of the veggies, I mean some of them more than others.
And we are really trying to look at the market dynamics to frankly, make sure that we remain competitive versus the other players in the market. And frankly, we have a COGS structure that enabled us to adjust the price as necessary through promotion as we move forward to stay competitive there. But definitely, after 2 years of heavy inflation, we are seeing effectively a flattening and a decline in some of the categories. I mean, fish as n example, and a bit of an increase on the rent. So rest assured we'll keep you up to date, I mean, at this stage, but we are maintaining the strategy of trying to grasp as much as we can from the market in order to really help create value to invest in business.
Okay. That's very helpful. And last question, if I could. The -- I think everyone is trying to kind of get a pulse and try to track your progress on volume recovery and market share improvement as you make good on the investments that you're currently making. As we do that from the outside, is track channel data a good barometer of your progress? Or is there a reason to believe that tracked channel performance will either lead or lag total portfolio performance?
Well, directionally, it's okay, absolutely. But then they have some puts and takes when obviously, you have the difference between sell in and sell out. You also have the food service, the piece. Then some countries are not covered as well. But directionally, it's okay. And then definitely with Tony, we can obviously help you to be a bit further -- I mean, more precise with the difference between, let's say, the numbers as such that are publicly available and then how to get to the final number. But directionally, it's okay.
[Operator Instructions] Our next question comes from the line of Jon Tanwanteng with CJS Securities.
It's Peter Lukas for Jon. You guys covered most of the stuff here in the prepared remarks and Q&A, but if you could just kind of maybe summarize the biggest puts and takes you're seeing in regards to working capital and cash flow expectations going forward.
Yes. I think as we have mentioned [indiscernible] absolutely an essential critical measure for us because it drives a tiny lot of the commitment we have to driving shareholder value and through effective capital allocation. So we clearly have been investing a lot of efforts in order to step up our performance in all of the areas of working capital. I mean let me get them one by one. If you want, I mean on receivables is clearly something where we have to clearly get the perfect match between the overall receivable and the collection.
And honestly, at this stage, we're really making a very good progress and have set of our performance, I mean, from that end, not necessarily in the change itself, but in the efficiency of collecting effectively money beyond our receivable. On inventory in payables, the point there was, as you recall, a year ago, we have stepped up our inventory, I mean, because of all of the conditions we have with the disruption in supply, with war and with specific supply issue, I mean, relating to some of the ingredients and we have taken the journey of the supply chain team has done an extraordinary work there to really drive down our inventory in order to support our business requirement. And you see that in a customer service level that are very good.
And at the same time, you've seen a step change in improvement in our inventory that has been down together with our receivable and have now integrated if you the one-off effect of the past, particularly the unfair trade practice that has dragged an impact on the overall payables. So net-net, if you want receivable, clearly, huge focus on a per market basis to make sure we perform in line with expectations. Inventory on a journey of taking the overall inventory level down while making sure that we maintain top performance in the area of customer service and the totality of all of that is really enabling to free up an amount of cash that is enabling our performance.
So from a cash flow standpoint, we just reiterate the point that this business is designed to deliver 90% to 95% of free care flow conversion, which, I mean, amounts to EUR 250 million for this year, and we intend to continue to do that and to do each and every effort to even generate more cash beyond -- on top and beyond that in this and out years.
Very helpful. And then just last one for me. What is your expected net interest expense following the repricing.
In the repricing, we'll get back to you, let me tell you the interest expense with the overall for the year, we'd be expecting probably around [ EUR 118 million ], EUR 110 million, EUR 150 million, I mean overall for [ 2023 ].
And we have reached the end of the question-and-answer session. And I'll now turn the call back over to Stefan Descheemaeker for closing remarks.
Thank you for your participation on today's call. After the unique challenges of 2022, we continue to deliver organic sales growth while protecting our margins and investing in the long-term health of the business. Our A&P program is poised to drive growth. Our supply chain is in great shape and our RGM capabilities are expanding with each new quarter.
We are already looking forward to an exciting 2024 of volume and market share recovery. Once again, we are on track to deliver our ambitious financial objective for 2023 and beyond. Thank you all. Operator, back to you.
Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.