Nomad Foods Ltd
NYSE:NOMD
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Nomad Foods Ltd
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Good day, and welcome to the Nomad Foods Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Taposh Bari, Head of Investor Relations. Please go ahead.
Thanks, Matt. And thank you all for joining us to review our fourth quarter 2019 earnings results. With me on the call today are Chief Executive Officer, Stéfan Descheemaeker; and Chief Financial Officer, Samy Zekhout.
Before we get -- before we begin, I would like to draw your attention to the disclaimer here on Slide 2 of our presentation. This conference call may make forward-looking statements which are based on our view of the company's prospects at this time. Actual results may differ due to risks and uncertainties which are discussed in our press release, our filings with the SEC and this slide in our investor presentation which includes cautionary language.
We'll also be discussing non-IFRS financial measures during the call today. These non-IFRS financial measures should not be considered a replacement for and should be read together with IFRS results. Users can find the IFRS to non-IFRS reconciliations within our earnings release and in the appendices at the end of the slide presentation available on our website. Please note that certain financial information within this presentation represents adjusted figures for 2018 and 2019. All adjusted figures have been adjusted for exceptional, acquisition-related, share-based payment and related expenses as well as noncash foreign exchange gains or losses. And all comments from hereon will refer to those adjusted numbers. Finally, users should be aware that 2019 figures have been presented in accordance with IFRS 16, which is the new standard for leases. As such, certain financial metrics may not be directly comparable to 2018 figures. However, we have disclosed the impact of this change in the press release where the impact on comparability has been deemed material.
And with that, I will hand the call over to Stéfan.
Thank you, Taposh. And thank you all for joining us on the call today. Earlier today, we reported fourth quarter and full year 2019 earnings results, which exceeded the high end of our prior guidance range. These results are consistent with the commentary that we provided at CAGNY last week and reinforce the strength and sustainability of our business model.
Financial highlights from the fourth quarter include organic revenue growth of 1.7% driven by a 3.2% increase from price, offset by 1.5% decline in volume and mix; adjusted gross margin of 29.9%, which was unchanged versus last year; adjusted EBITDA of EUR 116 million represent growth -- representing growth of 15%; and adjusted EPS of EUR 0.32 per share. Overall, we're pleased to have delivered a 12th consecutive quarter of organic revenue growth while laying the groundwork for Pan-European expansion of Green Cuisine and maintaining our gross margins despite elevated raw material inflation.
Turning to the details of the fourth quarter. Organic revenue growth of 1.7% was broad-based with 9 of our 13 core markets growing during the fourth quarter. Growth was led by Germany, Italy and France while the U.K. and Sweden declined. Our strategy continues to generate low single-digit organic revenue growth with growth in our core, which represents 70% of our sales outperforming the average. The remaining 30% continues to decline in a controlled manner with the objective of managing this segment of our portfolio for margin and cash flow.
Taking a closer look at our country performance. We experienced a few variations that I would like to comment further on, starting with Germany which achieved organic revenue growth of 9% in the fourth quarter and 8% for the year. This robust performance was driven by solid execution of core categories and the strategic expansion of our Iglo products into Aldi.
Moving on to the U.K., where organic revenues declined 1% during the quarter and increased 2% for the year. The decline was driven by a decision to prioritize gross margins, which led to some tactical volume loss which we consider to be transient in nature. The impact of this decision was most acute within our Aunt Bessie's brand, which has a strong seasonal bias towards Q4 and to a lesser extent Q1. Looking out, we expect the U.K. to decline again in the first quarter before resuming its growth trajectory in Q2 once we begin to recover lost volumes at Aunt Bessie's and begin to activate our exciting plans for the coming year, including the expansion of the Green Cuisine range.
Finally Sweden, which declined 15% during the fourth quarter and 7% for the year. This is our most challenging market and one where I firmly believe our issues are executional in nature. Sweden has not only the highest per capita consumption of frozen food in Europe, but it's also one of the fastest growing frozen food markets. Our Findus brand has #1 market share despite the challenges and is very much aligned with the consumer movement towards high-quality food, which is great tasting, convenient and sustainable. Going back to execution, this is a market where we have frankly lacked focus and discipline and as a result have yet to successfully replicate the Nomad Food growth model that have served us very well in many of our other European countries.
With that said, we have an action plan in place and believe the future for Sweden is full of promise. I have appointed a new management team at the beginning of this year and I have a series of actions to not only stabilize the business but to return it to profitable growth year in and year out. This will start with a rigorous focus on the retail partners and our consumers as well as leveraging our strong heritage of distinctive assets and our capabilities within the broader Nomad Foods organization. We believe that the turnaround in Sweden will require hard work and, as a result, take more time. With that being said, the EBITDA implications are likely to be relatively contained given the low margin profile of this country today.
Turning to gross margins. We're happy to have maintained our Q4 gross margins versus the prior year, which we're somewhat ahead of our latest expectations. We successfully navigated raw material inflation in 2019, delivering in both low single-digit organic revenue growth and slight gross margin expansion before the effect of M&A. I'm proud of the way our entire organization took on the challenge of inflation in 2019.
As anticipated, our cash generation was strong during the fourth quarter. We generated over EUR 200 million of free cash flow during the year, bringing our net leverage down to mid-2s and our cash on hand to over EUR 800 million. We entered 2020 in a position of financial strength and remain on the offensive on acquisitions. We remain actively engaged and look forward to sharing news at the appropriate time. As you heard us describe at the CAGNY Conference last week, our near-term priority and focus are on midsize European frozen food assets where we believe we can create value for our shareholders. Our balance sheet and cash flow outlook provide us ample capacity to pursue these types of deals.
And finally, we further developed Green Cuisine, our plant protein sub-brand with strong end-market performance in the U.K. and preparations to launch the range across Continental Europe in 2020. In less than 12 months on shelf, Green Cuisine has already become the #3 selling frozen plant protein brand in the U.K., putting it ahead of some very notable brands. Our products and advertising campaign have been very well received by consumers and retailers, paving the way for an even broader assortment in shelf space for this range in 2020. We mentioned at CAGNY that we plan to expand Green Cuisine beyond the U.K. and Ireland, which first launched the range in spring 2019. We have an ambitious launch calendar for the coming year, including the expansion to at least 6 new countries in the first half of 2020. I'm pleased to share that Green Cuisine went live in Germany in January and is scheduled to enter France next week. We are excited to have created a uniquely positioned brand built on the principle of taste, convenience and sustainability, which we believe will translate across the frozen food aisle in Europe. We know we have a strong right to win in this dynamic subcategory of frozen and look forward to watching this exciting business develop over the coming year. To repeat what we said at CAGNY last week, we expect Green Cuisine to generate over EUR 100 million in revenues by 2022.
Before turning the call over to Samy, I would like to provide you with some high-level thoughts on our plans for 2020, which called for a fourth quarter consecutive year of organic revenue growth and adjusted EBITDA of EUR 400 million to EUR 445 million (sic) [ EUR 440 million to EUR 445 million ]. We have a strong pipeline of new product launches, media activations and promotion plans to support our top line plans. Revenue growth is expected to be more balanced between price and volume versus what we experienced in 2019.
I mentioned Green Cuisine as a growth engine. We also expect our existing base business to grow as we look for our flywheel to spin even faster. Green Cuisine is a gross margin accretive business for us and one with significant headroom for growth longer term. Given our ambition to build a sustainable business here, you will see us reinvesting nearly all of our gross profit from Green Cuisine into SG&A in year 1 and to a lesser extent in year 2. We expect to face a second year of above-average inflation in 2020 due to a combination of some continued raw material inflation and ForEx. With that said, we're seeing signs of stabilization on the inflationary front particularly on fish prices. In sum, we expect that our gross margin will be relatively unchanged versus last year, that our adjusted EBITDA will grow 2% to 3% in 2020. This is somewhat below our long-term algorithm of mid-single-digit EBITDA growth with an outcome that will result in profitable growth and will enable momentum to continue into 2021 and beyond. As we stated last week, we remain confident in our ability to deliver against our algorithm and view this year as an outlier.
In summary, we're pleased with the results and excited for the year ahead. We have a full slate of strategic initiatives in place, which will fuel another year of organic revenue and EBITDA growth. Our balance sheet remains a strong competitive advantage which we expect, in due course, will translate into a strong source of earnings and cash flow to complement our base business.
With that, I will hand the call over to Samy to discuss the financials and guidance in more details. Samy?
Thank you, Stéfan, and thank you all for your participation on the call today.
Turning to Slide 6. I will provide more detail on our key fourth quarter operating metrics beginning with revenues, which increased 2% to EUR 628 million driven by 1.7% organic revenue growth. Growth was led by Germany, France and Italy and partly benefited from early deliveries related to January promotional activity. Fourth quarter adjusted gross margin was 29.9% slightly ahead of plans and unchanged versus the prior year. Gross margins benefited from pricing and promotional activity, which offset cost of goods inflation.
Moving down to the rest of the P&L. Adjusted operating expenses decreased 6% year-over-year, reflecting phasing shift which we had planned for. Within operating expenses, A&P declined 11% and indirect declined 3%. Adjusted EBITDA was EUR 116 million and, as expected, included a EUR 4 million benefit related to IFRS 16, the new standard on lease accounting effective this year. Excluding this benefit, adjusted EBITDA grew 11% versus the prior year. Adjusted EPS was EUR 0.32 for the quarter, increasing 10%. IFRS 16 did not have a material impact on EPS during the fourth quarter.
Turning to Slide 7. I would like to review the P&L highlights for the full year 2019 results. Revenue increased 7% driven by 2.1% organic revenue growth and 4.9 percentage points from acquisitions. We are very pleased to have delivered the third consecutive year of organic revenue growth in line with our long-term growth algorithm in the low single-digit range. Adjusted gross margin was 30% in 2019, down 30 basis points versus the prior year. The negative effect from M&A mix had a 50 basis point impact resulting in like-for-like gross margin improvement of 20 basis points.
Rounding out the rest of the P&L. Operating expenses increased 2% for the year driven by a 3% increase in indirect, while A&P down marginally year-on-year. Adjusted EBITDA increased 15% to EUR 432 million with IFRS 16 representing an EUR 8 million benefit. Excluding this benefit, adjusted EBITDA grew 10% versus the prior year. Adjusted EPS was EUR 1.23 for the year, increasing 3%. IFRS 16 did not have a material impact on full year EPS.
Turning to cash flow on Slide 8. We generated EUR 228 million of adjusted free cash flow in 2019 compared to EUR 286 million in 2019. Factors contributing to adjusted free cash flow performance included adjusted EBITDA of EUR 432 million, a 15% year-on-year increase; a working capital outflow of EUR 44 million; CapEx of EUR 47 million, representing 2% of sales; cash taxes of EUR 46 million, representing a cash tax rate of 15%; and interest and others of EUR 67 million due primarily to the reallocation of lease payment from operating cash flow to financing cash flow as a result of IFRS 16. We converted 97% of our adjusted EBITDA into adjusted free cash flow, marking a significant improvement versus where we were as of quarter 3.
With that, let's turn to Slide 9 to review our 2020 guidance which is based on foreign exchange rates as of February 25, 2020. For the full year 2020, we expect to achieve adjusted EBITDA of approximately EUR 440 million to EUR 445 million and adjusted EPS of EUR 1.19 to EUR 1.21. Full year guidance assumes organic revenue growth at the low single-digit percentage rate and a share count of 204 million. The guidance does not reflect the potential accretion from any acquisition that we announce in 2020. As a reminder, we have over EUR 800 million cash on our balance sheet and are actively engaged on a number of prospective deals.
A few other modeling points for you to consider. In terms of phasing, we expect adjusted EBITDA to decline double-digit percent year-on-year in Q1, stabilize in Q2, and grow in Q3 and Q4. This is due to both gross margin phasing and the timing of A&P, which will be front-loaded in 2020 in advance of our Green Cuisine launch across Continental Europe. Aside from expenses, Q1 is also expected to be impacted by relatively flat organic sales due to a combination of some shipment timing from Q4 and our expectation for the U.K. and Sweden to decline. However, given our plans for the U.K. to soon return to growth, we do expect stronger organic revenue performance for the remainder -- the remaining 3 quarters of the year beginning in Q2. Finally, gross margins are expected to be roughly flat versus 2019 with year-on-year performance expected to improve throughout the year.
That concludes our remarks. I will now turn the session over to Q&A. Thank you. Matt, back to you.
[Operator Instructions] Our first question will come from Andrew Lazar with Barclays.
Two questions from me. I guess first, at CAGNY last week and then again this morning, you discussed the expected cadence for the year on both organic sales and in EBITDA. On the top line, it sounds as though the softness is more specific to 1Q EBITDA, as you said a little more second half weighted. I was hoping you could provide a bit more color maybe with whatever specifics you have that sort of add to your visibility to the drivers for each of these. And I've got a follow-up.
Okay. So let me start with the sales side and Samy will go with the EBITDA more specifically. It's a series of elements that makes us confident for Q2, Andrew. The first thing is you're always starting with the trade negotiations, and the trade negotiations have gone well and so we do expect to reset -- to repair some of the key relationships this year and we had some disruption last year. And so the negotiations are complete in some of our larger countries. So that's why we -- it makes us obviously more confident. The second piece is something which was already known last week actually at CAGNY. It's Green Cuisine. So we will enter at least 6 new countries in H1, probably more, with the bulk of that activity really starting in Q2. That will coincide with the multichannel market campaign as we will launch really around the spring time frame. So that's the second piece. And the third piece, which was -- it is more factual even as that's -- in Q1, the big overrank was really during the month of January where we saw unexpected decline. The business -- as we turn to growth in February and we expect that's going to continue for the reasons I mentioned. So this is a bit the trajectory between Q1 and Q2 in terms of sales.
And the third one again was -- the third one was what again? I just want to make sure I misheard you. The third one, the factual one...
Well, it's just January was unexpected. Progress was -- went into decline. And then what we've seen is February as we turn to growth, and we expect that trend will continue in March. So that's more factual in the numbers we see.
Got it.
Okay. And Andrew, maybe I'll just give you one, let's say, short sentence on the EBITDA perspective because I mean the point is effectively this imbalance. I would say the reality is that SG&A is planned to be front-loaded in particular in Q1, ahead of our launch in Green Cuisine, as we establish the brand ahead of the commercial exploitation in store. Gross margin trend will show a steady progress throughout the year based on the timing of inflation, as we discussed last week, mixed benefit as well from Green Cuisine, and supply chain savings that are going to come gradually stronger throughout the end of the year.
Got it. Okay. And then I know Nomad's first priority for cash on the balance sheet is acquisitions. And that being said, I guess with the equity trading below sort of 10x EBIT to EBITDA, why not use, I guess, a portion maybe to buy back some of your own shares as I would think the company certainly has the flexibility to do both buybacks and deals particularly as it seems the sorts of deals being considered are likely more bolt-on or medium-sized in nature. So I guess I'm just asking if the 2 need to be mutually exclusive.
Well, as you know, Andrew, nothing is taboo in -- within the past. It's obviously something that we're always evaluating at the Board level. In the meantime, we are firmly engaged in this M&A process and we think that in the mid -- the near term, things that we see ahead of us are obviously the kind of target that will add more value than a buyback at this stage.
And our next question will come from Steve Strycula with UBS.
Stéfan, I'd like to ask an operational question about -- digging into Sweden and the U.K. a little bit more. It sounds like we're dragging along the bottom and maybe there's some opportunity to improve each of these businesses given some of the leadership changes that are underway. Can you spend a little bit more time explaining to us what exactly happened with Aunt Bessie's in the U.K.? What was the strategic decision that was made and then ultimately how it corrects by, call it, Q2? And the same exercise through Sweden, I think, would be helpful just so we understand what's really kind of going on here. And what is, Samy, the profitability implications if these 2 businesses are fixed? Or does it move the needle?
Okay. Let me -- before starting -- going to the specifics, Steve, let me clearly make a difference between U.K. and Sweden. U.K. overall, the business is doing well. We had a more difficult year last year probably partly because we had to integrate 3 business into 1 and that took a lot of energy, but overall the business is doing well. What we had -- what happened with Aunt Bessie's is at some stage, we were confronted with a very high level of promotion from some of our competitors and we decided from -- in terms of gross profit that we needed to pass at this stage. We're confident that for what is really strategic for us in terms of Aunt Bessie's, we will be back at some stage in the course of the year as for all the categories in the U.K. So I can see the -- when we're talking about U.K. coming back to growth in Q2, that's exactly what we mean, and we're very confident with the team. The team is doing an excellent job and, as you know, in terms -- and in terms of sales and in terms of gross profit and in terms of EBITDA. This is one of our biggest obviously operation and an operation that we like. Can we always do better? Absolutely. So there's definitely, after these 1 or 2 disruptions we had, obviously, the company, the team obviously went to some sort of what can we do better, what can we improve and I think what I've seen is I'm very pleased with the plans we have ahead of us in 2020.
Sweden is a bit different, Steve, and let me first quantify what Sweden is all about in terms of -- sales is one thing. It's really -- it's not negligible. In terms of EBITDA, it's today around 2%. So that's what it is. So definitely we need to turn that around and it's -- as I said, it's a very much operational in nature. I think we lost a bit the focus and I think it's starting with me, by the way. I think, as you know, I could have done better from that standpoint. And the -- we have reacted in the meantime very -- I would say in a very handsome way. So we've changed the team. The team that we now have in place is very strong. It is now obviously also overseen by Wayne Hudson, who is now in charge of the U.K., Ireland and the Nordics. And I'm very confident that with very hands-on approach, he will make a big difference.
The thing is the difference with -- between U.K. and Sweden is we have a very clear plan to go back to growth in the course of Q2 with the U.K., staggered way, however, because it's going to take sometimes retailer by retailer and we know what it is. I think it's going to take more time in Sweden. One big learning is they need to be -- Sweden, they need to be closer to the strategic approach we have taken with Nomad since the beginning, which has paid off very well. I think that we also need to make sure that they have access to all the -- let's say, the learnings and the skill developed by the central team in -- here in the U.K. and obviously, the people are ready to go for it.
So we've been through a turnaround in the past. Let me give you now 2 examples. One is a big one. That's the one obviously of Nomad in 2015, 2016, and the -- and earlier in something like last year, for example, we were going nowhere in Spain. We've changed a lot of things including, by the way, some of the key players. And I can tell you I'm very pleased with what Spain is doing. So we're expecting the same kind of, let's say, action in Sweden. And in terms of portfolio, in terms of pricing, trade relationship is absolutely key. It's one of the key things that we're missing at this stage and innovation as well. At the same time, it's only 2% of our EBITDA but it could be much more. That's really what the opportunity is for us because the market as such is -- volume-wise and sales-wise, it's a good market. So again, I think we have no excuse but to succeed.
Okay. And then a very quick question for Samy. You had EUR 235 million of free cash flow this year. How should we think about that trending directionally? Does it get a little bit better in 2020? Any kind of puts and takes and then I'll pass it along.
We'll -- thanks, Steve. We'll be -- we're still committed to deliver about 100% of free cash flow productivity and that's clearly the goal. We are putting in place action to continue to deliver that kind of cash performance.
Our next question will come from Rob Dickerson with Jefferies.
Stéfan, just a question around Green Cuisine and I guess plant-based alternative meat in general entering 6 new countries, faster growth expectations, obviously, for the brand and the category. It looks like based on your estimates, depending on the cadence of that EUR 100 million over 3 years, it could, let's say, add even 1% to the top line per year. So if we think about that category relative to the core kind of where frozen is now, I mean, do you view the plant-based piece and the Green Cuisine piece obviously as incremental relative to the distribution opportunity with the retailers but then also to the top line and then also just the category growth?
So the answer is yes to make it simple. It's a new category. The -- we expect the cannibalization that will be reasonably low. I think it will take probably some market share away from, let's say -- that's the purpose, by the way. One of the purpose is to take market share away from meat as such and -- which comes very handy for us. In terms of gross margin, as we mentioned already in the CAGNY that the gross margins would be accretive to the average of our business, which is great news. So yes, I think we can only see good things with Green Cuisine. And the level -- very important as well. And so the kind of things you don't see obviously in the numbers, Rob, is the level of intentionality at the country level is really very, very high.
So people really are excited. They're ready to go for it. And importantly, it is also -- it's not like an innovation, once -- one shot and then it's over. I think if you want to be successful in innovation, you have to be ready to invest year in, year out. That's key. Otherwise, it's just -- it's a nice number in your total sales for 1 year and then it's going down. We don't expect to do good that way. We have -- we want to really further invest. So and it's -- I don't have to obviously refer back to Andrew and what he mentioned about Green Cuisine -- about plant protein, but it's really something where we see a win-win between ourselves, the retailer and the consumers.
Okay. Perfect. And then just quickly, in terms of acquisition focus, I've heard you and Mr. Franklin and others discussed different areas you could go over time. I've heard looking at different countries, broadening the scope. I've now also heard you, let's say, feel like more specifically in the past 6 months or so, it definitely be -- you're definitely saying we're focused more on that kind of midsize frozen core within Western Europe or within Europe. So I'm just curious kind of given some detail or more detail you've given in the past, if there's any more color that you can provide with respect to category focus. I mean is it still, "We like -- yes, we would love to be in frozen pizza, ice cream would be interesting," or is it more broadly, "Hey, we're just looking for opportunities?"
Well, I think you can -- you have to see that in layers. The -- the mid to -- the short to mid-term priority is definitely to finish, to complete the game in frozen food in Europe. We are the undisputed leader and then we have to see country by country, category by category and channel by channel where we can go. I think we have not changed our plans. In other words, we're going to invest and acquire where we think we can make a difference, where we can lead. And then -- and that's definitely the good starting point is our current positioning in frozen food in Europe. So that's why we -- I think it's very consistent with what we said.
Our next question will come from John Baumgartner with Wells Fargo.
As we kind of think about the evolution towards that long-term EBITDA margin target and in terms of net revenue management, in 2019, I think 4 of the 5 levers that drive improvement there attained advanced status by your definition. I'm assuming that progress doesn't just hit a wall thereafter. So is there a way to think about how the -- even the advanced levers continue to improve in the second generation or a third generation and so on? And of those 5 NRM levers, which do you think will prove most impactful for that program going forward?
That is -- this is a process that needs constant intervention, John. I think you're hitting on a very important point on that one because at the end of the day, it's an ongoing program. And the advanced element that you see there in the classification that we have on the different lever really correspond to the capability we have been building and the impact of the business. We have to reinvent ourselves in many ways in terms of -- the CapEx is changing. And effectively, we have to apply judgment when it comes to pricing. PPA, in some situation, become effectively an opportunity for driving incremental sales one way or the other. We have to really master the different elements relating to what the consumer can bear with and what the retailer can bear with. Big opportunity for us to remain effectively on the [ whole trader ] side, okay?
So at this stage, it's not an element which is about less, but it's about clearly investing more to get a better return on that. That's the skill set probably that we need to further grow in, let's say, managing overall NRM but view that as an opportunity for us to constantly reinvent ourselves, reflecting the learning from the past. If we optimize promotions one year, we will have to optimize them the next year because we will get new learning given the fact that competition doesn't stand still on that. So we still view that as a big lever for accelerating our growth overall. However, as you have heard from us, I mean 2020 marks as well a point where we would want to balance the growth between effectively the pricing side and volume in many ways. So I think that's the thing which we will be taking into account as we move forward.
Great. And then just to follow up in terms of Green Cuisine, I'm wondering if you could provide a bit more context there in terms of how the plant-based ramp comes together. Because it sounds like there's not going to be a lot of CapEx on your end. And look at Nestlé, they've jumped in pretty quickly with some partnerships with operators further up the supply chain. So how do you assess the role of third parties here, whether it's R&D or manufacturing, as you kind of build this up? And how much is the win on outsiders going forward do you think?
Well, you're right. In terms of CapEx at this stage, it's reasonably limited. We have very strong partnership with suppliers. These are very strategic partnership and we're very pleased with what we have at this stage with these guys, which is fine. That's one thing. Second thing is we also have a strong R&D department that's really going from obviously what is provided by the suppliers, how can we make sure that we find this sweet spot between, let's say, taste, health and sustainability. And that's basically -- that's where we spend most of our time, of energy, to find exactly the sweet spot. It's not CapEx but I can tell you it's time. It's P&L as such. It's not easy. I think the initial product quite frankly between us, John, was we're great from the sustainability standpoint, we're great from the health standpoint, and we're terribly boring. And we were not pleased with that and so we have improved over time and we found something which we believe is really [ going in space ]. I would never say spot on because we can always improve, but it's really a nice, sweet spot between all these things.
So that's that at this stage. Should we, at some stage, go to further vertical? Maybe, but at this stage, we don't think it makes a lot of sense because what we see is we have all the fundamentals already. The product is great. We are -- frozen food is -- it's really all category. We have the go-to-markets so we don't need to invest behind go-to-market. That's also fundamental. And we're coming with something which creates value in terms of gross margin and further. So that's that at this stage. So at this stage, quite frankly, there is no real need to further invest. CapEx is, let's say -- we have the capacity. We know what we can do. And if really it goes way, way, way beyond our expectations, I can tell you we will be very, very pleased to spend the CapEx that is necessary and you know that our balance sheet is ready for that.
Next question will come from Jon Tanwanteng with CJS Securities.
My first one is for Samy, just for Samy. How much revenue did you pull into Q4? And how much expense did you push out into Q1 or beyond? I just want to get those numbers if you could.
About 1%.
1% of sales?
1% of sales, yes.
Okay. And then on the expense side?
About -- no...
No change.
Nothing.
Okay. Got it. Second, just because someone has to ask it, how are you positioning for potential coronavirus impact? Maybe we'll start with Italy and your exposure there but also across the continent and then further. Do you guys actually benefit from people staying home buying frozen food? Or does it go the other way for you?
Well, it's a good question, Jon. Let me handle that. First, about the numbers, you're right. Italy is a big market for us. It's around 17% of our business. So it's big and quite frankly a nice margin. So it's an important one. So that would be the context today, but to your point, it could go to -- it could go beyond. And obviously what we're doing right now is we're preparing ourselves in Italy. Whether we like it or not, it's an interesting test and learn for the rest of the organization if that happens.
But the priority #1 is we don't talk enough about it. The priority #1 is to ensure the safety of our employees. So we have plans. We have, let's say, global incident management team, which is ready. It's centralized. It's starting from different countries. And obviously, we follow very, very carefully all the WHO guidelines. And then as you can -- as you know, it is very much a very fluid process. It is changing sometimes by the hour. So that's one thing and that's our priority #1.
From the commercial standpoint, it's interesting to see that in Italy, you have -- which is to be expected. You have a lot of consumers, I mean, doing obviously -- over-expanding, spending a lot behind frozen food. Frozen food from that standpoint is -- I would say from my experience in the U.S., it's a bit like -- it's like a bit of a storm when the people are rushing into the stores before the storm. So it's -- there is a bit of that. By the way, which sometimes -- to some extent, I think it was yesterday and the day before, created some options for us in terms of coping with demand, not limited to Italy by the way but [ product ] produced only in Italy [ and in ] other countries. So we're making sure that we have the appropriate inventory, safety stock. So if needed, obviously, we will push the production even further, which is something we're doing already to some extent.
And beyond that, if you're going a bit further into the supply chain, we have a reasonably -- relatively small supply exposure to China mostly in fish. And again, we have strong contingency plans in place to work through the situation. We have already found some alternatives in other countries, which is fine. So we feel safe. So we're planning, obviously, as all of us. We're -- obviously, we're planning for the worst and then it's a very split situation and we're hoping for the best but short -- at this stage even in Italy, it's -- the situation is really under control. So that -- and yes, I forgot to mention as well. We have a local planning in Italy that's a competitive advantage.
Okay. Great. Finally, just on the meat-free and Green Cuisine side, is that EUR 100 million in revenue a run rate exiting 2020? Or is it realized? And also, does getting to that EUR 100 million require more investment than you usually make maybe outside of your standard NPD or promotion budget?
It's realized. That's one thing. Second, in terms of investment -- and to your point, you're right, not to mention necessary CapEx or whatever. In terms of SG&A, in terms of A&P, it would require a lot. So as you know, that's something we mentioned last time -- last week in CAGNY, that we're going to reinvest most of our gross profit for year 1, obviously, year 1, behind the A&P. So that's an important investment and we're not going to limit it to year 1. Don't get me wrong. I think it's going to go down as obviously the sales will go up, the proportion will go down, but definitely it's an important investment year after year. So the worst mistake in innovation is to come with a big push year 1 and then not to have the patience year 2 because you have another round of innovation that seem to be more exciting and all these things. So that's not what we want to do. We know it is strategic for us with innovation. It's strategic. It's a white space and we have what it takes to win. And by the way, I forgot to mention as well as -- that the gross margin in average is very nice. So it's accretive for us in terms of gross margin, and it gives us space obviously to further invest.
Great. I can't wait for you guys to send some over here so we can try it.
We will. We will. And I don't -- a series of new products are coming. I don't think it's a sensitive information but it's never ending. So it's good.
Our next question will come from Bill Chappell with SunTrust Robinson Humphrey.
Just going back to the kind of the U.K. and particularly Aunt Bessie's and Goodfella's. One on Aunt Bessie's, I was not aware that there was that much competition for frozen Yorkshire puddings around the world. So maybe you could help me understand how you're seeing promotional efforts there. And then, two, with regards to that, how does -- what you're seeing now with kind of organic sales declines with Aunt Bessie's and it sounds like Goodfella's is doing fine. How does that change your outlook as you're looking at these midsize acquisitions?
Well, it's -- just to clarify Aunt Bessie's, there is no real strong competition in Yorkshire pudding as such, which is the bulk of our Must Win Battles, by the way. That's one thing. But Aunt Bessie's is not limited to Yorkshire pudding. It's -- there is also potatoes. And in potatoes, you have to make it simple. You have 2 big pieces. One is roast potatoes, which is also part of our Must Win Battles, together, by the way, with the Yorkshire pudding. I mean I'm getting too into the technicalities here. And you have chips. Chips is not a must-win battle for us. It's really today dominated by McCain, and so that's where the competition is built. And that's where, to some extent, we lost in terms of distribution at this stage and that's where -- definitely in the potato arena that we want to get back in. So that's the objective.
So the learning, I would put it that way. Again, overall, with both, we're pleased with Goodfella's and with Aunt Bessie's. Some went better. Some went worse, but again, I think the top line is -- I'm not -- I don't have any reason to believe that we -- that the top line is not going to go the right way. So that should be -- that should go back but probably something we slightly underestimated learning is obviously the level of reaction of some of the competitors once they see the #1 in frozen coming in if you have obviously a big competitor. That's a learning and that's obviously something that we're going to put into -- to include in our future acquisitions.
Got it. And again, on that same line, I mean what are you expecting for Green Cuisine in terms of competition because, I mean, I think you're the only -- or certainly the largest player kind of pushing it out at your price points. Most of the rest of your competition is at higher price point. So are you expecting a competitive response? And when we're modeling, are we assuming that most of the investment is coming in advertising and marketing? Or are there going to be some trade promotions to try to have even more of a price gap to drive trial?
I think you need to make a difference between U.K., which is already a market that is reasonably well penetrated and the -- we mentioned that we're #3 player, which means that you have a #1 and #2. The #1 is Quorn. So it's a big competitor and it's a traditional competitor that is going to work and compete with the same kind of weapons we do have today, combination of innovation, A&P, distribution, the normal FMCG tools. In other countries, it is much, much more fragmented. It's much more small players and then the game is different for us and we think we obviously -- we're going to gain faster probably, a very strong position. That's where I think -- that's how we're going to compete. So U.K., one thing, and the others, another way. This being said, what we've seen in the U.K. is the customers and the consumers, by the way, are very pleased with our products. We plan to expand the range very much like the Germans. They're not limiting themselves to 3 SKUs. They're going much further, which is probably going to be the approach for most of the countries.
Once again, we will hear from Steve Strycula with UBS.
Just one quick follow-up question. On Italy, appreciate the context of how much sales exposure it is. But Stéfan, can you just clarify, had there been any supply chain disruption issues to date? That would be part one. And then part two, have there been any commercial sales disruptions within Italy, meaning it's consumer takeaway in the stores that positively impacted from pantry loading, negatively impacted? Any type of clarification on [ this item ] would be appreciated.
The answer is no at this stage. We haven't seen any supply disruption all the way through, by the way, so obviously from us being supplied in terms of commodities and raw material to us supplying the retailers. What we've seen is -- as I told you, is we've seen -- in some cities, we have seen some obviously especially in the traditional trade. I'm going very micro here, in the traditional trade, small mom and pops. We've seen some people going out of stock at this stage, and we're working together with them to find some solution obviously to be supplied. So that's not that easy in these "11" cities that we're mentioning because you have to -- it's quarantined. So that's -- it's a bit more complicated. But we're ready and with all the other big guys, the Esselunga, the Conad of the world, the Carrefour of the world in Italy, it's normal. It's a normal supply process at this stage, and as I said, sales are strong.
And our next question will come from Robert Moskow with Credit Suisse.
This is Jake Nivasch on for Rob. Just a quick one here, so just to clarify what happened with price negotiations with retailers. At CAGNY, it sounded like you were saying that you couldn't fully raise price to offset the fish inflation. Have you fully offset that? Have you fully raised priced to offset the cost?
The point on that is we -- I don't think we necessarily said what you said. I think what we said is that if we're in the middle of the negotiation, I mean ending in some countries and others. And at that stage, we have a pretty good return on the conversation we had on executing our price increase. What we did say is that we made some strategic choices on pricing wherever there was a change in the competitive environment. The one thing that we are focused at is making sure that we don't let share go away and that we have to defend our business and therefore whatever that made sense, we leveraged the totality of the mix and the portfolio in order to execute the pricing in totality and not necessary to applying category by category the pricing required to cover inflation.
Got it. And just one follow-up here. You might have mentioned it but just another clarification. Did the supply chain productivity fall below your expectations in 2019? And if not, are you building off this momentum heading into 2020?
The answer is no. You may remember that we -- I was not pleased with the performance in 2018, but I also said that we've made a lot of progress in 2019. And I can tell you what I see is -- it's going to continue. So they keep raising the bar.
We are planting the seeds for a strong program, as we had mentioned, of, let's say, year-on-year productivity that would be a substantial contributor to our growth. And that goes through a very well-structured plan, plant by plant and product by product, to make sure that we generate this productivity to enable us to grow the business, bottom line and as well -- we invest as well in the category that are delivering great returns.
And we will now hear from Donald McLee with Berenberg.
Donald?
Donald? Yes?
All right. Operator, why don't we try the next question, please?
Then we put Donald in the queue -- in the line.
I think we have no further questions at this time. I will turn the call back over to Stéfan Descheemaeker with any additional or closing remarks.
Okay. Thank you very much. So thank you for participating on our fourth quarter earnings call. We're pleased to have delivered the third consecutive year of profitable organic revenue growth and have an exciting set of plans in 2020, including the Pan-European launch of our meat-free range, Green Cuisine. Our balance sheet is strong, providing us significant capacity to consider acquisitions in the coming months, quarters and years. Thank you for your time and we look forward to updating you on our progress when we report Q1 earnings in early May.
That does conclude our call for today. Thank you for your participation. You may now disconnect.