Mondelez International, Inc.

Good day and welcome to the Mondelez International Third Quarter 2020 Earnings Conference Call. Today's call is scheduled to last about an hour, including remarks by Mondelez management and the question and answer session. In order to ask a question, please press the star key followed by number one on your touchtone phone at any time during the call. I'd now like to turn the call over to Mr. Shep Dunlap, Vice President, Investor Relations for Mondelez. Please go ahead, sir.

Good afternoon, and thanks for joining us. With me today are Dirk Vandeput, our Chairman and CEO, and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides, which are available on our website. MondelezInternational.com forward slash investors. During this call, we'll make forward-looking statements about the company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K, 10-Q, and 8-K filings for more details on our forward-looking statements. As we discuss our results today, unless Noted as reported, we'll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results. In addition, we provide our year-over-year growth on a constant currency basis unless otherwise noted. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within our earnings release and at the back of our slide presentation. In today's call, Dirk will provide a business update, and then Luca will take you through the financials and our outlook. We will close with Q&A. With that, I'll now turn the call over to Dirk.

Thank you, Shep, and good afternoon. We are very encouraged by our performance in the third quarter. Our execution was strong. We continued to accelerate our strategic initiatives, and all of our regions were in growth. Our teams have been resilient and focused, and we continued to prioritize safety during Q3, as we will for the remainder of the year. We continue to manage successfully through uncertainty and COVID-related challenges. And as a consequence, we are outperforming our categories, continuing to gain significant market share. While our category outperformance is in most markets around the world, there are very diverging markets and category situations, depending on how they are affected by COVID dynamics. Our largest categories, biscuits and chocolate, continue to perform well. Gum is still under significant pressure due to changes in consumer mobility and habits. And candy, while initially under pressure, also improved. Meals and powdered beverages continue to do it well. Demand remained elevated in developed markets and we saw sequential improvement in emerging markets. In developed markets, where more of our business is in the grocery channel and our gum business is also smaller, we continued with good momentum. In emerging markets, the majority of our markets grew in Q3, including key markets such as India, China, Brazil, and Russia. But conditions do vary, and some markets are still challenged. particularly where our portfolio skews towards gum and candy or where our sales are mostly in the traditional trade, which is mainly in Latin America, the Middle East, and Africa. Our long-term growth strategy remains unchanged, but during this crisis, we have accelerated certain initiatives in order to emerge stronger and build further on our advantage position. First, We are simplifying our business in order to facilitate more growth and reduce costs. Examples of this would be SKU reduction and innovation streamlining. Second, we are accelerating a number of growth initiatives in order to maintain our momentum and build on our share gains. For instance, in H2, we are increasing investment in our brands and commercial capabilities. We've also focused more on the momentum in e-commerce and the grocery channel. Third, in order to offset some of the extra COVID-related cost, we have advantaged or advanced a number of strategic cost reduction initiatives. We're also prioritizing stronger between CapEx projects. And fourth, we are rolling out changes in our ways of working and optimizing our organization structures while strengthening some new, more required capabilities. Switching now to slide five, Q3 was a strong quarter across all key metrics. We delivered organic net revenue growth of 4.4%. We are holding or gaining share in over 80% of our revenue base. We had good momentum on share coming into the pandemic, and I'm satisfied that we have sustained share gains beyond the initial phase of the crisis. demonstrates the strength of our brands and our supply chain. Our gross profit dollars grew strongly at 6%, despite the incremental COVID-related costs. And operating income grew strongly at 10.5%, despite the significant increase in our brand investments. And last, we continue to improve free cash flow generation, delivering $1.7 billion year-to-date, up 0.5 billion versus the same period last year. I'm now on slide six. As stated, we continue to believe that our growth strategy is the right one for this environment. Not only do we believe that our strategy is the right one, we have the ambition to emerge from this crisis even stronger than we were before. To do so, we are accelerating certain areas of investment and other initiatives within the current strategy in light of the current dynamics. Let me highlight a few of these areas where we are making strong progress. We are stepping up working media investments behind our brands in the second half of this year. This is possible because we decreased our investments during the second quarter when, because of all the issues arising when this crisis just started, it did not make sense to invest. We are seeing good results from this increase in investment, for example, as one proof point or market share momentum continued in Q3. Also, our ROI on this investment has increased significantly. We now rank in the top tier in our industry. And interesting to note is that we are skewing our spend to digital even more. For the first time this year, we will be spending more on digital than on TV. Another area of great progress is brand equity increases. Our marketing teams have successfully adapted our brand communication to the circumstances. Some of it is focused on purpose and human connections, others on staying playful while staying at home, or some others are about reinforcing hygiene practices. As a consequence, our brands are forging stronger connections with our consumers, really connecting through their purpose. In another area, we are on track to be 75% through our SKU reduction exercise by year end. Our teams are focused on ensuring we don't lose shelf space or incur too much waste while increasing sales, reducing inventory, and increasing line efficiency. I do want to reiterate that while 25% SKU reduction sounds like a big number, this represents a very small percentage of our revenue. A fourth highlight is that we have successfully implemented cost mitigation programs that we expect to fully offset the COVID-related costs we incur in the second half of the year. While this helps to deliver an on-algorithm year this year, it also supports our plans to continue to increase our investment in brands and capabilities again next year, while continuing to deliver against our financial algorithms. As it relates to our new ways of working, the company is functioning very well in this new reality, with most of our office associates working from home for the foreseeable future. We've also optimized our organization, shifting people to where we need them most, like e-commerce, digital, or RGM. Switching to slide seven. While the COVID crisis has been all absorbing, we are continuing to progress, even enhance our ESG agenda. In this quarter, three areas got particular attention. First of all, we are focused on and making progress against the enhanced diversity and inclusion commitments we made in September. I am particularly pleased with our recent appointment of a new Global Chief Diversity and Inclusion Officer, Robert Perkins. Robert will help us increase minority representation in our business and I advise me, my team and the broader company on how to take further action to drive an even more inclusive culture at Mondelez. As it relates to sustainability, we are continuing to invest in creating a more sustainable supply chain for cocoa. We just unveiled a new global cocoa technical center in Indonesia which will support sustainable cocoa farming practices and drive positive change for farmers and communities. And finally, we are developing the Sustainable Futures Investment Program to amplify our impact in sustainability areas. Its role is to invest in innovative sustainability and social impact solutions, mainly in our palm and cocoa growing communities. With these actions, even more so than before, we're living our purpose to empower people to snack right. With that, I hand it over to Luca.

Thank you, Dirk, and good afternoon, everyone. Our third quarter performance was strong in terms of revenue, growth, share gains, profitability, and cash flow. As we exited Q2, We were already seeing signs of improvement in those business units that had been heavily affected by lockdowns and traditional trade closures. And we were expecting a good quarter with a continuation of sustained consumption trends in developed markets, but also a return to growth of our emerging markets. We closed Q3 with overall growth of plus 4.4%. Our developed markets delivered a strong organic increase of plus 3.8%, while emerging markets returned to more normal levels, delivering plus 5.3%. To provide more color, in developed markets, as far as North America goes, we continue to see elevated consumption versus pre-COVID levels, albeit at lower rates than in Q1 and Q2. And for Europe too, we saw strong mass retail demand across all our key markets. In emerging markets, we saw good growth in 80% of the business units revenue base, including in large businesses like India, China, Russia, and Brazil, as operating restriction is enabling better mobility and access to traditional trade. Although the situation is better in the vast majority of our emerging markets, we expect some COVID restrictions and challenging economic circumstances to continue in part of Latin America and Middle East Africa and impacting disproportionately our gum and candy category. Growth this quarter included the impact of trade restocking as demand spikes in North America and European retail, as well as traditional trade closures in emerging markets. resulted in trading ventures below normal levels as we exited Q2. This contributed approximately one point of growth. Turning to slide 10, Q3 revenue growth was driven by solid volume and pricing. Mix was unfavorable due to lower world travel retail and GAM revenues. As mentioned, growth includes approximately one point of pipeline refill. In terms of categories, Biscuits continue to experience strong demand, with growth at nearly 8%, driven by North America, AMIA, and EU, with oil a key contributor and an important driver of our share gains in the category. Chocolate returned to growth at more than 5%. This was aided in part by large chocolate businesses, such as India and Brazil, returning to robust growth, but overall, All key markets, like the UK, Germany, Russia, Australia, France, and Nordics, did have a very good quarter. This result also includes nearly 2.5 points of headwinds related to world travel retail. Overall, categories doing well, and on top, we are gaining shares. Gum and candy declined double digits. primarily driven by gum, which improved from Q2 lows, but is still facing significant headwind from social distancing and less out-of-home activity, and is particularly affected in some emerging markets like Mexico and Western Andes. Turning to slide 11, I wanted to spend a moment on e-commerce, as this channel has clearly taken on more importance. E-commerce revenue grew 78% on a reported basis in Q3 and represents 5% of our revenue base. In our top four markets, we grew triple digits in the U.S., close to triple digits in the U.K., and double digits in China and France. In some of those markets, our e-commerce share is greater than our offline share, while in others, we have more hazards. We see multiple instances of significant e-commerce share gains this year, such as US Biscuit and UK Chocolate. Importantly, we believe e-commerce is driving incrementality as we look to meet and generate additional demand. This is also additive to our bottom line, with profitability comparable to our offline business. Building on our existing trends, we are making substantial investments to take this business to the next level. This includes our increased investments in more digital working media, data-driven engagement, and improved online shopping sites, ensuring we have the right packs and the right price with ePacks and bundles, and testing new platforms to explore incremental opportunities in eB2B and direct-to-consumer. Turning to category and share highlights on page 12. Our effort to drive meaningful and sustained share gains is succeeding as strong execution of our teams, trusted global and local brands, and investments in more working media with compelling ROI are continuing to yield very good results. We have held our gain share in 80% of our revenue base on a year-to-date basis. What we show in this slide is rounded to the nearest 5%, but we were down 3% when compared to the last quarter, as biscuits ticked down slightly. Biscuits and chocolate were the big drivers once again, as biscuits held or gained share in 90% of our revenue base, and chocolate held or gained in 85%. Gum and candy held or gained in 45%. Notable share gains included U.S., France, China, Russia biscuits, and U.K., Russia, and Australia chocolate. Many of these share gains, such as U.S. and China biscuits and U.K. chocolate, are quite significant in terms of their absolute size. Similar to our commentary last quarter, it is important to understand that the year-to-date category growth of plus 3.7% doesn't reflect a major channel, such as convenience and world travel retailers. It also does not include the impact of our real business, which is performing quite well. Now, let's review our profitability performance on slide 13. Overall, our profitability was strong in the third quarter. We increased gross profit due to volume leverage and productivity, as well as some promotional efficiency. Operating income dollars increased more than 10% due to over-reduction and simplification efforts, which helped offset COVID-related costs of approximately $50 million. COVID costs this year have been totaling so far about $200 million. Importantly, we continue to step up our work in media investment to further strengthen our brand, stay top of mind with consumers, and position ourselves well going forward. Moving to regional performance on slide 14, North America grew 6.3%, driven by elevated biscuit consumption and strong share gains. Ongoing investment in working media and strong DSD execution are helping us to sustain our broad-based share gains. GAM was down double digits due to limited on-the-go consumption occasions. North America operating income increased by more than 18% due to volume leverage and cost control initiatives, more than offsetting COVID-related costs and meaningful working media incremental investment. Europe revenue grew 3.4% in the quarter. We saw good category growth in chocolate, biscuits, and meals. The breadth of growth across key markets was quite impressive. with solid results in the UK, France, Germany, Russia, Benelux, and the Nordics. In terms of headwinds, world travel retail continued to trend well below last year, at circa 20% of 2019 revenue, and that as a headwind of more than two points to the EU. In terms of share performance, we drove notable share gains in the UK, France, Germany, and Russia. OI dollars returned to growth as solid increases in volumes more than offset COVID-related costs and unfavorable mix. In addition, working media increased in the quarter. AMIA posted growth of 4.2%, with growth across most markets as operating restrictions had become less onerous. China grew high single-digit, following double-digit growth in Q2, with significant share gains in this case. India returned to growth with a high single-digit increase for the quarter, driven by chocolate and significant biscuit growth and the excellent execution of the team there. Australia, New Zealand, and Japan posted low single-digit growth. Southeast Asia grew mid-single-digit in Q3, but we did see some headwinds in certain countries, such as Thailand and the Philippines, where, toward the end of the quarter, category slowdown due to more difficult economic conditions, which are expected to persist in the near term. Our Middle East and North Africa business declined low double digits as the economy there remains pressured. AMIA operating income dollars grew nearly 17% due to volume increases and cost mitigation efforts, despite meaningful increases in working media. Latin America grew 3.1% behind better results in Brazil, while Argentina grew due to inflation-driven pricing. Ex-Argentina, Latin America grew by approximately 1%. Mexico declined low double digits due to a significant decline in gum and candy, which is more than 40% of that business, as out-of-home categories remain impacted by social distancing. The biscuits business in Mexico posted robust growth. In Brazil, we posted double-digit growth in the quarter, driven by growth in powder beverages, chocolate, and biscuits. Underlying growth was mid-single digits, when taking into consideration the lapping of the supply chain-related issues last year. Gum and candy remained significantly impacted by COVID, posting double-digit declines. We feel good about the continued progress of our supply chain, in-store execution, and marketing in this country, but we know that we have more work to do. Our Western Indian countries posted a decline as COVID continues to impact traditional trade channels. Gum and candy as a category is down double digits. OI in Latin America grew 11% as pricing, cost containment measures, and improve supply chain performance, more than offset COVID-related costs. We also benefited from currency hedges that are better than current spot rates. Our expectations is that parts of Latin America will remain challenging in the near term, given the restrictions in place and the economic environment in many markets. We remain focused on execution and targeted investment to drive share gains as well as cost controls. Now turning to earning per share on slide 18. On a year-to-date basis, EPS is up 6%, driven mostly by operating gains. Tier 3 EPS was flat versus previous years, with operating gains of $0.06 and taxes offsetting them. I'll now move on to our free cash flow on slide 19. We delivered free cash flow of $1.7 billion through the first three quarters, an increase of almost $500 million versus previous year. Higher earnings, more focused capex, lower restructuring, and strong working capital management with a three-day improvement in our cash conversion cycle helped drive this result. In addition, deferred tax payments, some of which we reversed in Q4, also positively impacted this result. Moving to our outlook on slide 21, visibility still remains challenging in several markets, but we are providing an updated view of our three-year expectations based on what we know today. We expect three-year organic revenue growth of 3.5% plus. Implied Q4 would be broadly in line with Q3 when excluding the refilling of trade stocks. We expect overall good EBIT growth in Q4, but below Q3 levels, particularly as we continue stepping up working media, as we face some additional inflation in North America around transportation costs, and as in Latin America, we expect the benefit of favorable currency hedges to subside. For the full year, adjusted EPS is expected to go at 5% plus at constant forex. Free cash flow should be approximately $3 billion. EPR should be in the low to mid-20s. And adjusted interest expense is projected to be approximately $350 million. We are also planning to raise our share by debt program in the fourth quarter. Given the business is performing well, cash flow is strong, and we have further strengthened our balance sheet. It is not expected to have a significant impact on EPS this year, given proximity to year-end. Forex translation is now expected to negatively impact our reported revenue by approximately 3 percentage points and EPS by 4 cents on the year, based on current market rates. This is based on current conditions and does not factor in a significant degradation of the operating environment that could be triggered by material worsening of COVID. This also incorporates the following expectations, a continuing level of elevated demand and in-home consumption in certain developed markets, such as North America and Europe must retain, headwinds in certain emerging markets, predominantly in our Latin America region, the Middle East, North Africa countries, and parts of Southeast Asia, and of our gun business. Continued weakness in world travel details. With that, let's open it up for Q&A.

If you would like to ask an audio question, please press star 1 on your telephone keypad. Again, that's star 1 to ask an audio question.

And your first question is from the line of Andrew Lazar with Barclays. Please go ahead.

Great. Thanks so much. Good afternoon. Dirk, as you pointed out, you know, in the prepared remarks, organic sales growth was strong across all regions. Perhaps you can maybe take us through your thoughts on how trends look currently in key regions as you enter 4Q. And then as a follow-on, maybe you can extrapolate kind of 3Q results into 4Q and whatever you feel comfortable talking about now regarding 21 at this stage. because the company will obviously be lapping significant COVID costs. We'll have incremental brand investment. It'll be lapping, as well as have incremental cost saves kicking in right as you go into next year as well. Thanks so much. Okay.

Thank you, Andrew. Maybe what I can do is do a little tour, maybe through categories and regions, because the two are quite linked. And then Luca can talk about Q4 and 2021. So if you look at the categories, and categories are affected by the mobility of the consumer. So I would say that 80% of our revenue is coming from advantaged categories that are performing very well. And in those categories, we have strong Mondelez brands, and we are increasing our market share. So biscuits is the main category. driver at the moment. The demand remains very strong globally. We had high single-digit revenue growth in Q3 and we had very strong share gains. Chocolates came back in Q3. It accelerated versus Q2 largely because some of our emerging markets came back like for instance India. And the 5% growth that we're seeing in Q3 is despite the world travel retail headwind, which squeezed off two points of the growth of chocolate. And yeah, world travel retail, as you can imagine at this stage, is still lower than 20% of what it used to be. I think we do see that chocolate growth because we have a very advantageous portfolio which is skewed to at-home consumption. In the emerging markets, we have a low unit price. We have a good affordability in our chocolate and we are in the middle of the road with the right price point. But the one that remains very challenged is gum. We knew that in recessions or in moments that gum is affected, it recuperates slowly but it's probably recuperating a bit slower than we would have anticipated and that has to see everything with the consumer mobility. 75% of gum consumption is on the go and even if we're not in lockdown anymore or unfortunately about to go back to lockdown in Europe, The consumer is still not as mobile as before. And then meals and powdered beverages are doing quite well. So if you keep that in mind and then you go to the regions and you know more or less what the mix is of the regions, it gives you an idea of how we're doing. So North America, 80% biscuit. Demand of biscuits, as I said, remains very elevated. Our execution has been very strong, very strong share gains. Consumers are snacking more at home. still well above the pre-COVID level, not as high as in March and April, but still quite increased consumption. And so North America is solid. And seeing where we are with COVID and the fact that we probably will get more recommendations to stay at home, we expect this elevated consumption to continue for a while. We see the same in Europe in mass retail, but our business there is more also on the go with away from home and world travel retail is consolidated in our European number. So apart from that, Europe has very strong mass retail. And now that we go back in lockdown, we can expect that to remain like that. And we did see an improvement in the convenience channel in Europe. But as I said before, the world travel retail still remains very soft. And then in emerging markets, two-thirds of our markets, which we had already mentioned in the Q2 call, bounced back quite nicely. I'm talking about China, India, Brazil, and some of the European emerging markets like Russia. The Q2 was disrupted, but they're all coming back, all high single-digit growths. At this stage, we do not expect a repeat of the disruption that we saw at the beginning of the crisis. I think it's impossible in those countries to do the same sort of lockdowns that they did because it led to severe economic effects. So we continue to see those markets recuperating with bumps. It's not going to be one nice road upward. It depends a little bit on the local situation and what the government does. But overall, I would expect the emerging markets to gradually keep on improving. And then there is one-third of our emerging markets that are in situations where the macro effects are more pronounced. On top, unfortunately, those markets are having a high mix of gum and candy in their sales. And so they are... severely affected and those are the ones that are having more serious problems. I'm talking about Mexico, Central America, talking also about the Middle East and parts of Africa and also a few countries in Southeast Asia. So that gives you an idea where we are. I think that situation will continue in Q4 and even stretch out in the beginning of next year. I don't see a huge change taking place on the regional situations as we see them today. Maybe, Luca, you can talk a little bit about Q4 and 21.

Yeah, sure. Hi, Andrew. So, depending on what Dirk just said, we have line of sight at this point to, as we said, a full year revenue output number that is 3.5 plus percent. And importantly, as Steve just said, all the underlying trends that have been discussed so far are probably unchanged into Q4 and certainly as we start November. And that is why we see a Q4 in terms of top line that is 3% or so growth. As far as EBIT goes, Q4 should be another strong quarter. I want to reiterate that. But more in line with last year ROI growth rate, we will continue investing in working media. We see the benefit of that. You alluded to higher ROI and the share gains are there to testify the merit of continuous investment. There will be some effect, but lower than in the past in terms of COVID costs. as well as, and we are very pleased with the positive effect of the cost initiatives that we are putting in place and we have put in place as part of the Emerge Stronger. Nevertheless, we see some cost pressures, particularly in the U.S., in elevated demand, and the need we have to improve on shelter availability is causing some extra logistics costs. We have been hearing also by competitors and others that there is a pressure. We are feeling it as well. As we buy a portion of our transportation on the spot market, and as I said, inflation is quite high. In addition, we are running out of some positive forex hedges in Latin America. In other words, I would say gross profit will be more muted in terms of growth in Q4 versus the 6% you have just seen in Q3. On 2021, we are still going through the plan for next year, but based on what we know so far, we believe that 2021 should be another interview. I can give you some flavor on the building blocks of the plan. First of all, we expect to retain our share gains and to continue to invest, not only in working media, but in marketing and sales. We talked many times about the distribution opportunities we had around the world in emerging markets, as one example. Despite COVID costs subsiding into next year and the Emerge Stronger initiatives that are in our mind, will carry the benefits into 2021. We will reinvest the upside in the business to sustain the material share gains that we see and potentially to weather a more recessionary environment. Biscuits and chocolate, from what we see today, will continue to do well. But as you say, we will be lapping some elevated growth in 2020, particularly in developed markets and biscuits. But on the flip side, I think there should be recovery of the most impacted COVID categories and countries. Talking about costs, commodities and forex inflation is in both stroke aligned to what we have seen in the last few years. In some cases, for instance, in chocolate and cocoa, and in some countries, for instance, Brazil, there will be higher inflation. But overall, we are in the neighborhood of what we have seen in the last few years. The sum of all of these, again, should lead to a 2021 that should be an algorithm. We will have to stay tuned, and I'll give you more flavor and updates as we post the Q4 results. But, you know, needless to say that there are still some unknowns, like Brexit or the potential tax change in the U.S., or a material relapse of COVID. And so I think it is important that we stay agile and we talk to you more about the situation if there is evolution of what we know. Great.

Thanks, everybody.

Thank you, Andrew.

And your next question is from the line of Dora Moshinian with Morgan Stanley. Please go ahead.

Hey, guys. Hi. Hey, Dara. How are you? So the market share results have been very impressive for you guys this year in biscuits and chocolate. Obviously you had some momentum pre COVID, but it's ramped up even more during COVID. So just wanted to get your thoughts on the sustainability of Mondelez market share gains. As you look out to 2021, you know, particularly as you have to cycle these difficult COVID comps and perhaps how the higher A and C spend might play into that.

Yes. Yes. Um, So first of all, this quarter, the areas where we are gaining or holding share is at 85%. It's about three points lower than it was the previous quarter. That's minor. And so overall, I would say we've held on to our shares geographically speaking and in revenue terms very well. What's more important, which we don't report here, but which we know is that the size of the market share gains is quite significant. And it's in some of the more important areas like in China, gum, or Germany, chocolate, or biscuits in the US, China, Brazil, Germany, and so on. If we analyze what happened, in the beginning, I would say, at the beginning of the COVID crisis, It was our supply chain and our route to market that partially helped us because we saw an increase of our total distribution point. We saw a very good customer service level, seeing the circumstances and so on, and we have DSD in some parts of the world. We also know that consumers in this crisis tend to go to trusted brands. They want to feel safe, so they go to the brands they know and trust. particularly the big heritage sort of taste of the nation brands around the world. And then we are accompanying that with increased media and adapted messaging on our brands as much as we can through the COVID situation. And that all seems to play very well for us. We've done a number of very successful adaptations of our brands and we can see the equity that we have in our brands increasing. And then the third factor, I would say, is since there was more at-home snacking, our range that we have in the different categories, our range of products is better suited. We are more in the classical biscuits and crackers, I would say, which is very well suited for home consumption, and also in the tablet category of chocolate, and that's really helping us. So going forward, we're doing a number of actions to sustain those share gains. We increased our working media in the second half, but going into next year, we're continuing to do the same thing. And so, yes, as Andrew was mentioning, we lap a number of things that will be beneficial for us. We also have some cost pressures, obviously, but we are also increasing, again, our ANC investment. Our algorithm allows us to do that. And I think it's critical in a situation where there might be a recession and the consumer might still be a little bit unsure. I think we need to keep on supporting our brands. So we think that will help. We are doing a lot of work on in-store visibility, starting Christmas early, probably we'll start Easter early. We've got some very big team activations coming up for next year, some very exciting stuff. And so... I feel that we probably have the best activity plan related to our brands that we've had in a number of years coming up for next year. And then we are working very hard on our promotional strategy. We're keeping an eye on value and any value plus strategy that we need to do like multi-buys or family packs or whatever is needed for the at-home consumption. And then the last thing we're doing is that we've done a number of launches of innovations in certain countries like an expansion of the Milka spread, the launch of the Louis Biscuit brand in Germany, and so on. And based on all these things and the fact that we have the momentum and we're seeing great connection of our brands with the consumer, we are confident that on top of the elevated level of this year, we can increase our market share further next year.

Great, thanks.

Okay. Thank you, Daryl.

And your next question is from the line of Ken Goldman with JP Morgan. Please go ahead.

Hi, good evening. You have taken down your exposure to joint ventures this year. I wanted to ask a little bit about this. Derek, you previously qualified these JVs, maybe a little bit more as investments than core strategic assets. Can you update us? How do you see these investments today in respect to maybe some other opportunities you have out there? And does the sort of sale or partial sale of your equity, does that say anything about your longer term strategy, if anything? I guess I'm just trying to get at, you know, what's the plan here going forward for some of these assets, if you're willing to talk about it. Thank you.

Yeah, thank you, Ken. Maybe I'll take that. I mean, we've said many times, we remain optimistic about both assets. They have clearly a long-term potential. To start with, they compete in strong categories. They have solid fundamentals as categories. And these companies are equipped to get more traction on key trends like on-demand coffee as one example only. They are gaining share, they have a clear strategic direction, they are executing quite well, and there are strong management teams that can even enhance the advantage of the categories and of the price that both companies have. So there are all the ingredients in our mind for long-term top and bottom line and cash flow potential. We are not able, clearly, to talk specifically about JDE and the results so far, but I think you saw a strong quarter for KDP. Continued momentum, top-line bidding consensus, gain penetration, strong share momentum, EPS, and really strong outcomes across all metrics. And they continue to be leveraged and create cash flow. So we believe that the value is higher than what current stock price would say for both companies. And, you know, nothing consistent with other companies as well in the broad CPG world. We made a series of moves that, quite frankly, were more tactical than anything. And, you know, if you look at our balance sheet, we have showed the top quite well since the beginning of the year. So on KDP, we are comfortable around, you know, current levels of ownership. And if we make further trades, they will be at the right value for us. And we will try to coordinate with other major shareholders. And on JD, clearly we are a major shareholder. We own 22.9% of the company. We did welcome the IPO that is giving us an avenue for optionality. And having said that, though, we are committed for the long-term success of the company. You might expect some trades from us in the coming quarters that should improve the current limited flow, but we will remain disciplined both in JD and KDP markets. And under current circumstances, we want to retain the presence in both stocks. So what you have seen recently was more tactical than anything. We took advantage of certain stock price levels. We remain committed to these companies and we really believe in the potential. But as you said, over time, we want to replace those with snacking assets. Great, thanks so much.

Your next question is from the line of Brian Spillane with Bank of America. Please go ahead.

Hey, good afternoon, everyone. So maybe just to follow up on, Luca, the comment you made in response to Andrew's question related to algorithm next year. And More interested in, at this point, in cash flow. So I guess two questions around that. One, would you expect that free cash flow would also be, or free cash flow conversion would also be sort of on algorithm? And then maybe connected to that, part of the algorithm has been returning cash to shareholders via share repurchases and dividend increases annually. So Would we expect that that would be part of the equation again in 2021?

So the straight answer to the last part of the question is absolutely yes. We remain committed to dividends, to what we said several times about dividends growing in excess of EPS. I think the last dividend increase reflects that. Shared buybacks should continue absent acquisitions or things that at this point might happen or not. And so I would say, yes, there should be shared buybacks. And finally, on free cash flow, free cash flow, there is no reason to expect a slowdown into next year. Having said that, I think you know, we went public with JD that reset the base for tax purposes in Europe. And there is a tax component that is gonna be tracked into free cash flow next year. But I feel like at this point, it might not be going up from this year, but considering some of the tax One time is that I just talked. I think you can think about a 3, 3 plus billion dollar cash flow even for next year. That's the plan at this point. Okay, terrific. Thanks, Luca. Thank you, Brian.

And your next question is from the line of Chris Groh with Steeple. Please go ahead.

Hi, good evening. Thank you. I just had two questions if I could. Hi. The first one would just be in relation to the SKU rationalization program. I just want to get a sense of that start here in the quarter. Does that ramp up in the fourth quarter into next year? And I guess I'm also curious where you see the benefits of that coming through. So as you come behind that with more innovation, is it just better volume growth? Is there a mix improvement, that sort of thing? And then just a quick question, if I could, on inventory levels. You had some benefit this quarter from shipping inventory. Are you back to where you want retail inventories to be or your own inventories? Are there more building to go as we move in the fourth quarter and next year? Thank you.

Okay, maybe I'll do the SKUs and then Luca can do the inventory. So the SKUs, the timeline on that is gradual, largely driven in the negotiations with the trade and around the world there are certain moments you can make these changes and for instance in Europe that moment is the beginning of next year so We are preparing for it now, but the implementation will only be beginning of next year. So roughly, I would say, if you look at it around the world, we should be 75% done by year-end, and then the rest would be done in the beginning of 2021. You have to think about this as part of a broader simplification program that is meant to drive both the top line and the bottom line and cash flow. It's a simplification of SKUs, the number of innovation initiatives, and also looking at our brand portfolio. So we do not expect a negative top line impacted. They represent, 25% represent 2-3% of our revenue, but we think we will easily replace that with higher velocity on the remaining SKUs. We will get more shelf space. And then the benefits, as I already mentioned, more sales. We expect our inventories to go down because it's those SKUs that take a lot of the inventory. In manufacturing, it is less complexity, less downtime, fewer changeover, so it gives us a benefit on our costs. And then on the customer side, we give them better customer service. It's going to be easier for them to manage their shelf, and so their costs go down too. It's a support to deliver our long-term algorithm. This is not meant to be transformative from a margin perspective, but it does help us to deliver on the top and the bottom line in the cash flow of our algorithm. Luca?

Yeah, on inventory levels, there are obviously puts and takes. I would say we got to a more normalized level at the end of Q3. Overall, I think we are in a decent situation. As I said, there might be places where we need to do a little bit more, others where we are fine. I wouldn't expect a big pickup due to inventory replenishment in the quarters to come. Obviously, we want to end the year with the right level of inventory, as we have always done.

Thank you for those answers. I appreciate it. Thank you.

And your next question is from the line of Robert Moscow with Credit Suisse. Please go ahead.

Hi. Thank you. Just wanted to make sure I understood the implied sales guide for 4Q. It seems like it's below 3%. Year-to-date, you're at 3.9%. So just wanted to understand why it might be lower than year-to-date. And then also, can you be more specific about the cost reduction plans, the efficiency plans? It looks like in the quarter, they were in LATAM and they were in EMBA. And is that where most of these cost reduction plans are going to take place? And if so, does that make it more difficult to capitalize on the growth as they recover? Thanks.

We said it is 3.5% plus on the full year. So the implied growth rate, as I said, it is on about 3% for Q4. I wouldn't read too much into a different number than 3% in Q4. I also clearly said that there is one point of growth in the 4.4% that you see in Q3. So again, we are not minus as you think about Q4. Importantly, at this point, with the right level of trade inventory, and as we look into next year, again, we want to line up all the initiatives that will allow us to hit a year that is on algorithm. I think that's the simple way to think about it. In terms of cost initiatives, I would say they are pretty much across the board. The Emerge Stronger initiatives, the initiatives we have taken in terms of redesigning our cost packages in terms of pushing net revenue growth, in terms of working to reduce non-working media and increasing working media. Those are effects that you see consistently throughout the regions. Yes, there might be regions like the U.S. or North America where we did a little bit more in terms of revenue growth management, but overall, again, they are fairly consistent across the board.

Okay. Thank you.

Thank you, Robert.

And your next question is from the line of Alexia Howard. It's Bernstein. Please go ahead.

Hi there. Good evening. Can you hear me okay?

Yeah. Hi. Hi, Alexia.

Two quick questions. Firstly, on emerging markets, e-commerce, you talked about how it's somewhat open and relatively affordable to people in other areas that have to do this. And then my follow-up is around , particularly around cocoa. With the new you're talking about a new center, I believe. Are you thinking about changing or about how that strategy Thank you.

Thanks, Alexia. It was very broken up, so I had difficulties understanding what you exactly asked. There was an echo somewhere on the line and made it difficult. I think you were asking, I heard it was about e-commerce, but I don't know what the details were. Did somebody look at, maybe you can try again?

Yeah. I didn't understand the second part of the question at all. I mean, I know the first part was about e-commerce. The second part, I had no clue.

Can I try? Can you hear me? Yeah. Let's try once again. Is it clearer now?

Yes, yes.

Perfect. All right. So on e-commerce, you mentioned that you are underrepresented in some areas and overrepresented elsewhere. in e-commerce, different regions, and obviously areas where you're underrepresented relative to your brisk water sales. That might be the area where you've got more headroom. Could you just give us an idea of which regions those are where you think there are real opportunities? And then the second question was on cocoa sourcing. I'm just curious about whether you might be changing your regional approach to cocoa sourcing given that you put a new center of excellence in Indonesia. Meanwhile, there's $400 a tonne cocoa taxes going in in some parts of Africa. Are you thinking about changing your regional approach to where you're getting the cocoa from globally? Hopefully, you could hear that better.

Yes, yes, yes. Now it worked. It was not you. It was the technical side of things, Alexia. I'm just kidding. On e-commerce... Yes, first of all, we're seeing a very good growth in e-commerce as I mentioned in the prepared remarks. Roughly, you could say that our e-commerce headspace is largely in China and in the US. The two other big countries we have are the UK and France. But I would say the biggest gap we have in China, which we are catching up. We're working very hard on that. Overall, we're seeing market share gains, largely in most of the areas around the world, with the exception of France at the moment. And we've also started to enter into smaller countries. And that is going to give us some extra gain also. Overall, though, if you take globally, our shares on and offline are similar. So we have some headroom here and there, but then we are overrepresented somewhere else. So that's a little bit the situation on e-commerce. Going forward, it's about expanding our assortment to meet the channel needs. It's about recreating impulse experience. It's about developing our... our data as it relates to the consumers and getting better connections with them. It's about putting more investment in there and then experimenting with two other areas that are developing for us in e-commerce, which is e-business to business and direct to consumer. Also important to mention is that our margins are similar online and offline. That's the situation on e-commerce. If I go to We are experimenting with cocoa in other regions but at this stage we are going to continue in large part to continue to source from Ghana and Ivory Coast. We source in Latin America, we source in India, we source in Indonesia but we are one of the biggest cocoa buyers in the world and so it those regions do not offer us enough quantity to shift. And shifting, developing real cocoa sourcing takes years. So we're working on that, but it's not going to happen next year. Not with the amount of cocoa that we need to buy. On the other hand, we have already started to reflect the extra LID or the living income differential into our pricing. And so we are fully set to absorb that next year. We feel good about supporting what the government in those two countries are trying to do. We think it fits in our ESG approach. And at the same time, we want to keep on going with our own program, COCO Life, which is complementary to that. We think it's the right thing to do because we want a real sustainable future for cocoa and farmer income is really critical. And we are making sure through Cocoa Life that we can actually see that and monitor what's going on. So we are planning to have 100% of our cocoa volume by 2025 being sourced through our Cocoa Life program. So I would say that is the answer on COCO.

Perfect. Thank you very much for the caller. I'll pass it on. Thank you.

No problem. Thank you.

And your final question is from the line of David Palmer with Evercore ISI. Please go ahead.

Thanks. Good evening. Just a follow-up on emerging markets and a question on the marketing or growth reinvestments. On EM, you had nice improvement in Russia, Brazil, and some other markets. And you mentioned in a previous question that you expect emerging markets to continue to improve. I think you also said in your prepared remarks that there was some late quarter slowing in Asia outside of China. So maybe just some clarification about where you feel like the momentum is in continuing to improve across emerging markets would be helpful. And then it just in terms of your growth reinvestments that you guys don't have, you know, sort of just a windfall this year, such that you're spending a ton of money in advertising. So I expect this to be somewhat of a measured plan about what you're doing. And you said advertising or working media, as you said, it will be going up, particularly in digital. So could you talk about that growth spending, where you're spending it, where you're getting the higher ROI, and do you think that's going to continue into 21?

Thanks.

Okay. Maybe I'll take the first part and do the second part, Luca.

Yeah, for sure.

So on emerging markets, I would say the temporary headwinds in our mind do not hamper the long-term prospects. We feel that we're executing well. We have an advantage network. We have deep distribution. We have good momentum pre-crisis. We're coming out of the crisis in most of the emerging markets very fast. I'm thinking about India, Brazil. We have share gains that we see. Obviously, we can only focus on what we control, which is execution, cost management, selective investment. We remain confident about two-thirds, as I mentioned, and those are the markets where we're seeing good momentum. China, India, the European emerging markets, Brazil, a little bit of the parts of Africa. We feel that they're already... back in positive territory. We're confident that they will keep on growing. They were performing very well for us before the crisis. If anything, I think we've improved our position during the crisis and we have very strong teams on the ground. Where we are cautious and where we need to work hard because we're hampered by the local situation that's more in Latin America, thinking Mexico, thinking Wacom for us, which is the Central America and the Caribbean and Colombia and some of the Middle Eastern and the Southeast Asia countries. That's where gum and candy is big for us and the recuperation of gum and candy is going to be critical for us. So we're doing a lot of work on how to promote gum consumption in the time of COVID where people are spending more time at home and they're wearing masks and so on, which is contraindicative for gum consumption. And we are trying to make sure that for next year we see good momentum in that category. So that's the part where I would say that we are a bit more careful. Luca?

Yeah, so on A&C, David, the way you have to see it is, particularly in Q2, given the circumstances we pulled back, And so we doubled down in the second part of the year. And as we said many times, the share gains that we're seeing, they are truly broad-based. They are across multiple brands, multiple countries, with the exception, I would say, of gum. We are extremely pleased with the share gains we are seeing in biscuits and chocolate. And so we want to retain those. and that we will continue to invest into 2021. So between the fact that COVID costs will subside, between the fact that in Q2 we will be lapping lower ANC spending, I think you will see an algorithm that in terms of EBIT and EPS expansion should be in line with expectations for for next year don't expect you know uh the same material impact that uh we are having in uh in the second part of the year in terms of working media into next year as a uh we will be lapping a lower q2 and b we will have other levers into the pnl including uh comic costs that subside to be able to fund these incremental uh investments But the reality is the more we can retain those share gains, the better, even in a context where maybe categories will be slightly impacted by a potential recession. Very helpful. Thank you.

You're very welcome, David.

Thank you.

I think we've answered. No further questions?

Yes, sir. And there are no further questions at this time. I would like to turn the call back to management for closing remarks.

Okay. Thank you, Angela. Well, thank you for connecting. As you can see, we had a good, solid third quarter. We feel good about where the fourth quarter is heading and how we will close the year. We've given you a first flavor of what 21 looks like, which we also feel pretty good about. And obviously, in the next call, we will give you the guidance for the year. if that is possible, because you never know what happens in these COVID situations. Thank you for your interest, and thank you for your questions. And if there's anything else, feel free to connect Andre or Shep, and we can give you more information. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.