Hello, and welcome to the Nomad Foods Q3 2021 earnings call. I'm Taposh Bari, Head of Investor Relations, and I'm joined on the call by Stéfan Descheemaeker, our CEO, and Samy Zekhout, our CFO. On our call today, we will review our financial results for the quarter and conclude with a question and answer session. For those planning to ask a question, we ask that you do so using the Zoom raise hand feature. Before we begin, I would like to draw your attention to the disclaimer on slide two of our presentation. This conference call may make forward-looking statements that are based on our view of the company's prospects, expectations, and intentions at this time, including consideration related to the impacts of COVID-19.
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 may 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 the presentation represents adjusted figures for 2020 and 2021. All adjusted figures have been adjusted for exceptional items, acquisition related, share-based payment and related expenses, as well as non-cash foreign exchange gains or losses. In all comments from here on, we'll refer to those adjusted numbers.
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 this morning, we reported Q3 financial results and reiterated our plans to deliver double-digit adjusted EPS growth in 2021. These results built on the exceptional performance we achieved last year and are consistent with the business update that we provided a few weeks ago. As you know, the macro backdrop is quite challenging for many in the food industry between tough comps, inflation, and supply chain disruptions. While we would prefer a more competitive environment, I'm proud of how our team has responded, the fact that we are on pace to achieve another year of record results in 2021. With that, let's begin with the Q3 financial highlights. We achieved revenue growth of 4% driven by the acquisition of Findus Switzerland and favorable ForEx translation.
Organic revenues were up mid-single digits relative to the Q3 of 2019. We declined 1.4% versus the prior year to the anniversary of elevated demand and normalizing category trends. Adjusted gross margins declined 240 basis points or 200 basis points on a like-for-like basis when excluding dilution from Findus Switzerland, whose initial gross margins are below those of our base business. Adjusted EBITDA grew to EUR 113 million, representing 4% growth versus last year and a 9% CAGR versus 2019. Finally, adjusted EPS was EUR 0.35 per share, representing 17% growth versus the Q3 of 2020 and a two-year CAGR of 18%.
Our Q3 revenues, adjusted EBITDA and adjusted EPS were the highest of any Q3 in the company's history and built on the strong results we achieved last year. This performance was driven by several factors, namely improving market share trends, disciplined cost management and a creative capital allocation. These are defining attributes of our value creation model that have been key to our success and continue to fuel the performance as we navigate a challenging macro backdrop. As you know, we've been working hard on improving our service levels and capacity situation to return to market share growth. I'm happy to say that our market share expanded in Q3 and has shown consistent improvement since May. While we still have selected pockets of raw material and supply challenges, our service levels have improved across most of our business.
Taking a closer look at the broader packaged food environment in Europe, where vaccination rates are relatively high, we're seeing consumers returning back to work in a corresponding recovery in out-of-home consumption. This results in a low single-digit % decline in the frozen food category during the Q3 versus the prior year. As we navigate through this period of transition, we are directing our attention to areas where we have the most control over the outcome. This starts with market share, and we are encouraged to see a significantly improving trajectory over the past six months. The normalization of category growth has been compounded by a series of industry-wide supply chain issues, many of which have been well documented. Raw material costs are on the rise. The labor market is tight and supply chains are under stress.
Our supply chain organization has navigated this challenge well this year, resulting in stable gross margin through the first nine months of the year. We expect these macro factors to intensify in 2022 and are prepared to leverage our revenue growth management capabilities to mitigate exposure. As we deliver against our near-term financial objectives, we are also making the necessary investments to support long-term growth. Sustainability has been a key strategic priority and an area where we were quite active during the Q3. As a frozen food company anchored in fish and vegetables, we have a portfolio that is inherently advantaged in helping consumers make better choices when it comes to nutrition and sustainability. You've heard the statistics, but they're worth repeating. First, the food industry accounts for a third of greenhouse gas emissions, and 1/3 of that food goes to waste.
Supported by life cycle assessment, we know that our frozen food brands have credibility, awareness, and scale in helping consumers make an impact on climate change, starting with the reduction of food waste. Second, 90% of our base portfolio is considered a healthy meal choice, creating strong alignment with consumer trends and the strategies of our retailers who are looking to carry healthier products. We are developing a fast-growing plant protein business in Green Cuisine, a business that is on pace to nearly double in 2021 and has accumulated double-digit market share in only two years. Green Cuisine continues to be Europe's fastest-growing frozen meat-free brand and has established a diversified portfolio which now includes chicken-less and fish-less products. Finally, as of last month, 100% of our existing factories are on renewable electricity, an achievement that we are very proud of.
We took two important steps to further advance our sustainability strategy during the Q3. First, we joined the Race to Zero, announcing plans to significantly reduce our greenhouse gas emissions with approved science-based targets across our operation and our supply chain. These targets, which include a near 50% reduction in our operation per ton Scope 1, 2, and 3 emissions by 2025, are consistent with the reductions required to keep global warming to 1.5 degrees. Second, we announced a collaboration with BlueNalu to introduce cell-cultured seafood to Europe. This agreement, the first of its kind in Europe, underpins our commitment to sustainable growth and the development and scaling of emerging food technologies. BlueNalu is a leader in cell-cultured seafood and has developed breakthrough technology that aligns with our purpose of serving the world with better food.
We're excited to see what the combination of their cell-cultured technology and our brands, consumer insights, scale, and route to market can lead to in the coming years. Finally, we completed the acquisition of Fortenova's frozen food business and transaction, which is expected to result in over $2 of adjusted EPS on a combined and annualized basis in 2021 based on current ForEx rates. Fortenova is a business with significant strategic value to Nomad Foods and with multiple levers for value creation. Fortenova resembles our existing business in many ways. It has market-leading brands in Ledo and Frikom. These brands have incredible consumer awareness in their respective markets, and similar to Birds Eye, Iglo, and Findus, represent high-quality frozen food in countries like Croatia, Serbia, and many others in the Adriatic regions.
50% of the business is in frozen savory with a high concentration in fish and vegetables, similar to our portfolio. We believe we bring significant commercial and operational expertise in these categories across capabilities such as portfolio strategy, sales, insights, marketing, and revenue growth management. Fortenova also has a leading ice cream portfolio, which is highly synergistic with the savory side of the portfolio business and introduces a highly profitable and interesting category to our portfolio. While it is very early days, I can tell you that the organization is excited to join the Nomad Foods family and is looking forward to the challenge of delivering their business objectives. The acquisition of Fortenova expands our geographic footprint into a number of new central and Eastern European markets, many with market-leading share positions.
When we announced the acquisition earlier this year, we expected the business to generate approximately EUR 53 million of adjusted EBITDA. The latest plan is for this business to slightly over-deliver this plan in 2021, with revenue expected to grow mid-single digits. We have several work streams underway to ensure a timely and successful integration. Consistent with our M&A playbook, we plan to increase the level of advertising spend and providing the full suite of capabilities that have fueled our base business. From a financial perspective, Fortenova is expected to be high single digits accretive to adjusted EPS in 2022, with a mid-single-digit organic revenue growth profile and a path to EBITDA margin exceeding 20%. We are thrilled to welcome the 3,000 new employees to Nomad Foods and look forward to updating you on progress in the coming months.
It has been a year since we hosted our first-ever Investor Day last November. We held this event to provide our investors with a more detailed perspective into our business and our leadership team. We also introduced 2025 financial goals at that event, notably our goal of EUR 2.30 of adjusted EPS, which represents a CAGR of over 10%. With 2021 nearly complete and the Fortenova acquisition now closed, I am pleased to say one year later that we remain on pace to achieve our objective that we laid out by 2025, if not sooner. I will now hand the call over to Samy to review our financial results and guidance in more detail. Samy?
Thank you, Stéfan, and thank you all for your participation on the call today. Turning to slide seven, I will provide more detail on our key Q3 operating metrics, beginning with revenues, which increased 4% to EUR 599 million. Revenue growth was driven by 3.3 percentage points from the acquisition of Findus Switzerland, 2 percentage points from favorable FX translation, and a slight decline in organic revenues as we anniversaried elevated consumption. Organic revenues declined 1.4% versus 2020, but were up mid-single digits versus 2019. Frozen food category demand continued to normalize during the Q3, reflecting increased consumer mobility and a steady return to the out-of-home eating. Against this backdrop, we achieved market share expansion in our branded retail business, which includes strong year-on-year revenue growth from Green Cuisine.
Our non-branded business increased 15% as food service continued to recover from depressed year-ago levels. Gross margins were 28% during the quarter, reflecting a 240 basis points decline versus the prior year. This comprised of 200 basis points from higher raw material costs and 40 basis points of dilution from the inclusion of Findus Switzerland, whose initial gross margins are below the company average. Gross margins were effectively flat through the first nine months of the year, reflecting strong procurement execution and raw material deflation during the first six months of the year. We are currently in the middle of our 2022 planning process, and like others, expect a higher level of inflation next year. Our goal will be to mitigate inflation through all levers available. Our business is in good health.
Our brands have market-leading positions, and we have strong revenue growth management capabilities that will enable us to navigate the current environment. Moving down to the rest of the P&L. Adjusted operating expenses declined 14% year-over-year, reflecting a comparable level of A&P spend versus the prior year and a decline in indirect costs. Adjusted EBITDA increased 4% to EUR 123 million and adjusted EPS increased 17% to EUR 0.35 for the quarter. These metrics once again represent record performance and growth on growth. Turning to cash flow on slide eight, we generated nearly EUR 100 million of adjusted free cash flow through the first nine months of the year, equating to 45% cash conversion. As you know, Q3 represent a seasonal low in our working capital and cash conversion cycles.
We continue to expect significant improvement over both metrics by the end of the year. As we shared with you last quarter, we have a number of factors, notably a catch-up of inventory as a result of COVID and higher CapEx this year, that will limit our ability to achieve our long-term target of 100% adjusted free cash flow this year. With that said, we're expecting a notable improvement in our conversion rate in Q4 and remain committed to this target over the long term. With that, let's turn to slide 9 to review our 2021 guidance, which is based on foreign exchange rates as of November 2, 2021.
We are reiterating our guidance for 2021 adjusted EPS of EUR 1.50-EUR 1.55 per share, which translates to growth in the 11%-15% range and has us on a glide path to achieving our longer-term financial objectives. Our guidance now includes a seasonal operating loss from Fortenova during the fourth quarter. As a reminder, we expect this acquisition to be high single digit accretive in 2022. Had we owned Fortenova at the start of this year, our adjusted EPS would have been over $2 on a combined and annual basis. Our 2021 guidance assumes a modest decline in organic revenues for the year, with the expectation that we will continue to achieve market share expansion. That concludes our remarks. I will now turn the session over to Q&A. Thank you. Operator, back to you.
Thank you. We will now begin the question and answer session. Please use the Raise Hand feature to ask a question. Our first question will come from Andrew Lazar from Barclays. Andrew, please feel free to unmute yourself.
Great. Can you hear me?
Yeah. Good morning, Andrew.
Andrew.
Good morning. Thanks for the question. I guess first off, a few weeks ago, when you updated investors on your organic growth expectations for the year, you'd mentioned normalizing category growth rates, you know, in key markets in Europe that were reopening, and you talked a bit about that again today. I guess I'd like to get your thoughts on how this thought process squares, you know, with your belief, and really that of most other packaged food companies at this stage, that some of these new households gained, you know, during the past two years could well be sticky longer term, you know, with all the new habits and, you know, hybrid work sort of arrangements and things of that nature. I've just got a follow-up.
Well, Andrew, our thought process hasn't really changed. I think to your point, I think we see that it's a very volatile environment, but you know, people mobility is increasing, restaurants are open, people are returning back to work, but as you can see, definitely not you know, five days a week. That piece is coming to fruition. But at the same time, we can see that the level of sales remains very robust against obviously you know, tough comps. And when you compare with pre-COVID, you know, we are in very good shape. And this also, that's important to highlight this before you know, the impact on inflation, which is really going to come in 2022. Hasn't changed.
The only thing that has really changed, but that definitely should somehow help the sales as well, is the higher level of inflation.
That's helpful, that leads into my next question, which is, you know, obviously you had far less inflation this year than many of your peers in the U.S., and therefore did not have to lean in as heavily on the pricing lever. As you talked about, it would seem inflation could be a bigger headwind in 2022. So I'm trying to think how we think about the opportunity for pricing, which, you know, in Europe, I realize there are more limited windows, I guess, in terms of time frames to take it. If successful, would the timing be such that that impact of pricing might not kick in till more fully until maybe after Q1 of next year?
How does the timeframe typically work in Europe in terms of getting agreement on pricing with key customers and then when it can sort of be effective on the shelf? Thank you.
Well, it's an interesting question, Andrew, because as you know, Europe is a constellation of many different countries, so it's very much, you know, a staggered process. Definitely we already starting. I think we'll have more visibility this way, that way, I mean, during our call, our next release for Q4. We are really in the middle of these conversations. Some are well advanced, some are less well advanced. Overall, you know, that's, I think we always have, you know, I think we've executed well in terms of pricing in the past with, you know, I think we've developed, you know, very strong revenue, let's say revenue management muscles. We are going to use this muscle right now actually.
We are very determined.
Thanks very much.
Our next question will come from Robert Moskow from Credit Suisse. Robert, please feel free to unmute yourself.
Hi, thank you. I guess two follow-ups. What level of cost inflation do you expect to experience within your business in 2022? I mean, is it like high single digit? Is it double digit? It sounds like it could be quite significant. Then also, can you give a little bit more on Fortenova, like what you've seen so far as you've gotten within the four walls? You said that sales are tracking a little bit ahead of expectations. Can you talk about the consumer environment there, and maybe even some due diligence you did on inventory and the trade? You know, sometimes businesses that are acquired might load inventory before transition. Did you make sure that didn't happen?
Very good. Hi, Robert. I'm gonna take the first one, and Stéfan's gonna go on the Fortenova. On the inflation side, I would say you've seen that in 2021, we clearly experienced, I mean, a low single-digit inflation level, and we've been communicating about that, and that's actually what we've been navigating through to the year. With a gradual, if you want, step up, I mean, towards the end of the year, we expect it actually in 2022 to be higher. We will give you more detail at the time. We're gonna really give you more color on 2022. But I would say higher, but not as high as what you have seen if you're from other U.S. companies. We have a profile that's a bit different.
Energy or logistics or supply issues are quite similar across the board, but our brand portfolio is quite different versus other businesses. Net to your question specifically, I would say higher, but certainly not as high as what you have seen from others.
All right.
To your question, your double question about Fortenova, Robert, I would say we are one month in the company, so we spend a lot of time. We have a, you know, very well structured integration team working together with the team out there. So far it's really doing well. I think the energy level is very high. They're very pleased to be really part of a pure play frozen food is the thing, as opposed to a conglomerate, you know, concept. That's very important. Yes, they're trading well. Your question, which is basically, did they were they loading? Let's put it that way. That was the bulk of the that was the question.
Well, actually, it doesn't matter too much one way or the other. What we see right now is anyway, the dynamics remains good, which is good news. Second, anyway, that kind of behavior would have been captured in the working capital adjustment no matter what. I think that's been taken care of.
What do you mean by working capital adjustments?
Well, you know, if you are, let's say, at some stage, you know, you are, for example, increasing your level of inventory or the other way around, you're making sure that you're going to have a normal level of working capital across the board. There is no hiccup, you know, just before the deal, before closing. That's the kind of formula that you're using, which is fine. We haven't seen anything significant one way or another.
That's what I meant. Okay. Nothing significant, and the consumer-
No, no.
Oh, okay.
Sorry for that, Robert. Our consumers are doing fine, I think, at this stage. What we've seen is, you know, we're obviously in ice cream, which is great category, by the way, so doing fine. I think, we've seen already a beginning of an improvement this year during Q3 during the summer season with tourists coming back, which is great, but I think that they should be more next year. In terms of savory frozen, overall it's a very robust, you know, business. You know that, you know, we're very pleased with our overall market share, you know, within Nomad being more in the region, let's say, of 20%, 20%+. In Western Europe, here you're talking about 50%.
These brands are, you know. If we believe that the old brands like Iglo, Findus, Birds Eye are iconic, I can tell you in these countries, Ledo and Frikom are just fantastic brands. Overall, you know, it's a good dynamic.
Okay. It's the consumer there is getting back to normal mobility, but you're not seeing a negative impact on the category like you are in the U.K. in the frozen category?
Well, again, you know, don't forget that you have a combination of on-trade and off-trade, which is much more pronounced than the rest of our business. Let's say on-trade, which suffered a lot, or out of home, which suffered a lot, is coming back. Definitely there is a bit of a decline in terms of but very much in line with the rest of the business in off-trade, in retail. No, overall it's very much in line. Nothing significantly different compared to the rest of the business. With one significant difference, though, there is more on-trade which is good for us, but basically it was stuck during COVID, and now it's coming back up.
Got it. Thank you.
You're welcome.
As a reminder, please use the raise hand feature if you would like to ask a question.
I suppose I already know all the questions.
Shannon, are there any more questions in the queue?
It looks like not at this time.
We had a lot of answers to all the questions, but fine. We'll survive.
All right. Well, that concludes our question and answer session. I will now turn the call back to Nomad Foods CEO, Stéfan Descheemaeker, for concluding remarks.
Thank you, Shannon, and thank you for your participation on our Q3 2021 earnings call. We are navigating through a volatile macro backdrop by delivering on the long-term financial objectives and investing in the long-term health of our business. We are on pace to achieve another year of double-digit adjusted EPS growth in 2021, and are excited to integrate the recently acquired Fortenova transaction, which we expect to be high single-digit accretive next year. In summary, we remain on the glide path to achieving, if not exceeding, the 2025 financial goals that we set at last year's Investor Day, and look forward to updating you on our progress when we next report our Q4 call in early 2022.