Mondelez International Inc (MDLZ) — Q3 2020 Earnings Call Transcript

Good afternoon, and thanks for joining us. With me today are Dirk Van de Put, 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/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 then Luca will take you through the financials and our outlook. We will then 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 continue 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 that are very diverging markets in 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 pressures due to changes in consumer mobility and habits. And Candy, while initially under pressure, also improved. Meals and powdered beverages continue to do as 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 continue to have good momentum. In emerging markets, the majority of our markets grew in Q3, including key markets such as India, China, Brazil, and Russia. However, conditions do vary, and some markets are still challenged, particularly where our portfolio skews toward 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 advantageous 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 momentum in e-commerce and the grocery channel. Third, in order to offset some of the extra COVID-related costs, we have advanced a number of strategic cost reduction initiatives. We are also prioritizing stronger 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. 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. This demonstrates the strength of our brands and our supply chain. Our gross profit dollars grew strongly at 6%, despite the incremental COVID-related costs. An 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. 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 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, our market share momentum continued in Q3. Also, our ROI on these investments has increased significantly. We now rank in the top tier in our industry. An interesting note is that we are skewing our spend 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 team has 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, and some others are about reinforcing hygiene practices. As a consequence, our brands are forging stronger connections with our consumers, truly 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 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. The 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 algorithm. 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 revenue growth management. While the COVID crisis has been all absorbing, we are continuing to progress and even enhance our ESG agenda. 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 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're 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 are 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 grocers. We were expecting a good quarter with a combination of sustained consumption in developed markets, but also a return to growth in 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 unit revenue base, including in large businesses like India, China, Russia, and Brazil, as operating restrictions are 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 parts of Latin America and the Middle East and Africa, impacting disproportionately our gum and candy category. Growth this quarter included impacts of trade restocking, as demand spikes in North America and European retail, along with traditional trade closures in emerging markets, resulting in trade imbalances below normal levels as we exited Q2. Turning to Q3 revenue growth was driven by solid volume and pricing, with mix being unfavorable due to world travel retail and gum revenues. As mentioned, growth includes approximately one point of pipeline refill. In terms of categories, biscuits continued to experience strong demand, growing at nearly 8%, driven by North America, EMEA, and EU, with oil being a key contributor and an important driver of our share gains in the category. Chocolate returned to grow at more than 5%. This was aided in part by large chocolate businesses such as India and Brazil returning to robust growth. All key markets like the UK, Germany, Russia, Australia, France, and Nordics had a very good quarter. This result also includes nearly 2.5 points of headwinds related to world travel retail. Overall, categories are doing well, and on top, we are gaining share. Gum and candy declined double digits, primarily driven by gum, which improved from Q2 lows, but we still face significant headwinds from social distancing and less out-of-home activity, which are particularly affected in some emerging markets like Mexico and Western Andean. 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 UK, 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 headroom. We see multiple instances of significant e-commerce share gains this year, such as biscuits 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, we did packs and bundles, and testing new platforms to explore incremental opportunities in e-business-to-business and direct-to-consumer. Turning to category and share highlights. Our efforts to drive meaningful and sustained share gains are succeeding, thanks to the strong execution of our trusted global and local teams. Investments in more working media and competitive ROIs are continuing to yield very good results. We have added or gained share in 80% of our revenue base on a year-to-date basis. What we've shown on this slide is rounded to the nearest 5%. We were down 3% when compared to the last quarter, as biscuits tick down slightly, but biscuits and chocolate were the big drivers again, with biscuits gaining share in 90% of our revenue base and chocolate gaining in 85%. Gum and candy had gained 45%, with notable share gains including the U.S., France, China, Russia biscuits, and UK, Russia, and Australia chocolate. Many of the share gains, such as biscuits in China and UK 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 3.7% does not reflect our major channels, such as convenience and world travel retail. It also does not include the impact of our real business, which is performing quite well. Now let's review our profitability performance. Overall, our profitability was strong in the third quarter. We increased gross profit due to volume leverage and productivity, as well as some promotional efficiencies. Operating income dollars increased more than 10% due to overhead reductions and simplification efforts, which helped offset COVID-related costs of approximately $60 million. COVID costs this year have totaled about $200 million. Importantly, we continue to step up our working media investments to further strengthen our brand and stay top of mind of consumers, positioning ourselves well going forward. Moving to regional performance, North America grew 6.3%, driven by elevated biscuit consumption and strong share gains. Ongoing investment in working media and strong executions are helping us to sustain our growth and share gains. Gum 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 headwind, world travel retail continues to shine, while remaining below last year at approximately 20% of 2019 revenue, which was a headwind of more than 2.2% in Europe. In terms of share performance, we drove notable share gains with the UK, France, Germany, and Russia. OI dollars returned to grow as solid increases in volumes more than offset COVID-related costs and unfavorable mix. In addition, working media increased in the quarter. EMEA posted growth of 4.2%, with growth across most markets as operating restrictions have become less onerous. China grew high single digits, following double-digit growth in Q2, with significant share gains in biscuits. India returned to growth with a high single-digit increase for the quarter driven by chocolate and significant biscuit growth, along with excellent execution from our team there. Australia, New Zealand, and Japan posted low single-digit growth. Southeast Asia grew mid-single digits in Q3, but we did see some headwinds in certain countries such as Thailand and the Philippines, where, towards the end of the quarter, categories slowed down 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 under pressure. EMEA 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. Excluding Argentina, Latin America grew by approximately 1%. Mexico declined low double-digit due to a significant decline in gum and candy, which represents more than 40% of that business, as out-of-home categories remained impacted by social distancing. The biscuit 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 market in this country. But we know that we have more work to do. Our Western Andean countries posted a decline as COVID continues to impact traditional trade channels. Gum and candy as a category are down double digits. Operating income in Latin America grew 11% as pricing, cost containment measures, and improved supply chain performance more than offset COVID-related costs. We also benefited from price hedges that are better than the current spot rate. Our expectations are 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 investments to drive share gains as well as cost controls. Now turning to earnings per share, on a year-to-date basis, EPS is up 6%, driven mostly by operating gains. Q3 EPS was strong versus previous years without breaking gains of $0.06 and taxes overriding them. Moving on to our free cash flow. We delivered free cash flow of $1.7 billion through the first three quarters, an increase of almost $500 million versus the previous year. Higher earnings, more focused CapEx, lower restructuring, and strong working capital management, with a three-day improvement in our cash conversion cycle, have driven this result. In addition, deferred tax payments, some of which will reverse in Q4, positively impacted this result. Moving to our outlook. Disability still remains challenging in several markets, but we are providing an updated view of our expectations based on what we know today. We expect full-year comparable revenue growth of 3.5% plus, implying Q4 will be broadly in line with Q3 when excluding the feeling of trade stock. We expect overall good EBIT growth in Q4, but below the three levels, particularly as we continue setting up working media, as we face some additional inflation in North America around transportation costs. In Latin America, we expect the benefit of favorable currency hedges to subside. For the full year, adjusted EPS is expected to grow at 5% plus at constant foreign exchange rates. Free cash flow should be approximately $3 billion. Effective tax rates should be in the low to mid-20s, and adjusted interest expense is projected to be approximately $350 million. We are also planning to resume our share buyback 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, considering its proximity to year-end. Currency translation is now expected to negatively impact our reported revenue by approximately three percentage points and EPS by $0.04 on the year, based on current market trends. This is based on current conditions and does not factor in a significant degradation of the operating environment that could be triggered by material growth in COVID. This also incorporates expectations of a continued elevated demand for in-home consumption in certain developed markets, such as North America and Europe, but also headwinds in certain emerging markets predominantly in our Latin America region, the Middle East, North Africa countries, and some parts of Southeast Asia and for our gum business. Continued weakness in world travel retail. With that, let's open it up for Q&A.

Great. Thanks so much. Good afternoon. Dirk, as you pointed out in the prepared remarks, organic sales growth was broad-based across all regions. Perhaps you can take us through your thoughts on how trends look currently in key regions as you enter Q4? And then as a follow-on, maybe you can extrapolate 3Q results into 4Q and whatever you feel comfortable discussing now regarding 2021 at this stage, because the company will obviously be lapping significant COVID costs, will have incremental brand investment, and you'll be lapping, as well as incremental cost savings kicking in as we go into next year. Thanks so much.

Okay. Thank you, Andrew. Maybe what I can do is provide 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, categories are affected by the mobility of the consumers. I would say that 80% of our revenue is coming from advantaged categories that are performing very well. In those categories, we have strong Mondelez brands and we are increasing our market share. So biscuits are the main 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, accelerating versus Q2, largely because of some of our emerging markets rebounding, like India. 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. World travel retail is still lower than 20% of what it used to be. I think we do see that chocolate grows because we have a very advantaged portfolio that skews toward at-home consumption. In the emerging markets, we have a low unit price, we have good affordability, and our middle-of-the-road products have the right price points. The one area that remains very challenged is gum. We knew that in recessions or in downturns, gum is affected and it recuperates slowly, but it’s probably recovering more slowly than we would have anticipated. This has to do with consumer mobility; 75% of gum consumption happens on-the-go. Even if we're no longer in lockdown, or unfortunately are about to go back into lockdown in Europe, the consumers are still not as mobile as before. Meals and powdered beverages are doing quite well. So if you keep that in mind and then go through the regions, you know what the mixes of the regions can give you an idea of how we're doing. So North America is 80% biscuit; demand for biscuits, as I said, remains very elevated. Our execution has been very strong, leading to strong share gains, with consumers snacking more at home, still well above pre-COVID levels, although not as high as in March and April. But still, the elevated consumption is expected to continue. In biscuits, same in Europe in mass retail, but our business there is also more on-the-go and reliant on out-of-home consumption. World travel retail is consolidated into our European number; aside from that, Europe has very strong mass retail. Now that we are going back into lockdown, we can expect that to remain strong. We did see an improvement in the convenience channel in Europe. But as I said before, world travel retail still remains very soft. In emerging markets, two-thirds of the markets that we had already mentioned in the Q2 call bounced back quite nicely. Talking about China, India, and Brazil, those markets that were disrupted in Q2 are all coming back with high single-digit growth. At this stage, we do not expect the repeat of the disruption we saw at the beginning of the crisis. I think it's impossible in those countries to do the same sort of lockdowns as before because it led to severe economic effects. We continue to see those markets recuperating with bumps; it’s not going to be a smooth road owing to local situations and government actions. But overall, I would expect the emerging markets to gradually keep improving. There is one-third of our emerging markets that are in situations where the macro effects are more pronounced. On top of that, unfortunately, those markets have a high mix of gum and candy in their sales. They are severely affected. Those are the ones with more serious problems, like Mexico, Central America, and the Middle East and certain parts of Africa and Southeast Asia. That gives you an idea of where we are. I think that situation will continue into Q4 and stretch into the beginning of next year. I don't see a huge change taking place in the regional situations as we see them today. Maybe Luca can address Q4 and 2021.

Yes, sure. Hi, Andrew. Building on what has just been said, we see a line of sight at this point to as we said, it fully aligned with our revenue outlook number that this 3.5% plus. Importantly, as Dirk just said, all the underlying trends discussed so far are likely unchanged in Q4 and certainly as we start November. This is why we see a Q4 in terms of top-line growth being around 3% or so. As far as EBIT goes, Q4 should be another strong quarter. I want to reiterate this is more in line with last year's growth rate. We will continue investing in working media. We'll see the benefit of that, as Dirk alluded to higher ROI and the share gains attest to the merit of continuous investment. There will be some effect but lower than in the past in terms of COVID costs, and we are very pleased with the positive effect of the cost initiatives we have put in place. We expect to retain our share gains and to continue investing not only in working media but in marketing and sales. We've talked many times about the distribution opportunities we have around the world in emerging markets as one example, despite the COVID costs subsiding into next year. As we emerged stronger from this pandemic, we will reinvest the upside in the business to sustain the material share gains we see potentially during a recessionary environment. Biscuits and chocolate, from what we see today, will continue to do well. But as you say, we would be lapping some elevated growth in 2020, particularly in developed markets and biscuits. On the flip side, I think we should see a recovery of the most impacted categories and countries. Talking about costs, commodities and forex inflation are in line with what we have seen in the last few years. In some cases, for instance, in chocolate and cocoa, and in some countries like Brazil, there will be high inflation. However, overall, we are maintaining a consistent approach to cash flow, where it should provide solid results.

Great, thanks, everybody.

Thank you, Andrew.

Hey, guys. So what is impart for you? The market share results have been very impressive for you guys this year. Biscuits and chocolate obviously had some momentum pre-COVID, but it's ramped up even more during COVID. Just wanted to get your thoughts on the sustainability of Mondelez market share gains as you look out to 2021, particularly as you have to cycle these difficult COVID comps and perhaps how the higher advertising spend might play into that.

Yes. 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 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. We’ve seen key gains in important areas like China gum, or Germany chocolate, or biscuits in the U.S., China, Brazil, Germany, and so on. If we analyze what happened, in the beginning of the COVID crisis, our supply chain and our route-to-market partially helped us because we saw an increase in our distribution points and very good customer service levels given the circumstances. We also know that consumers during this crisis tend to gravitate toward trusted brands, as they want to feel safe. So they turn to brands they know and trust, particularly big heritage brands around the world. We are accompanying that with increased media and adapted messaging for our brands as much as we can to the COVID situation. That all seems to play very well for us. We've implemented a number of successful adaptations of our brands. We can see the equity that we have in our brands increasing. Lastly, the fact that there has been more at-home snacking helps; our range of products, particularly in biscuits and chocolates, is well suited for home consumption. So going forward, we’re doing many actions to sustain those share gains. We’re increasing our working media in the second half. But going into next year, we’ll continue with the same approach. Yes, as Andrew mentioned, we will be lapping several beneficial aspects from this year. We’ll have some cost pressures, obviously; but we’re also ramping up our advertising and marketing investment, which our algorithm allows us to do. This is critical in a situation where there might still be a recession. We’ll be supporting our brands continuously. Additionally, we’ve executed several innovative product launches in certain countries this year, like the expansion of the Milka spread and the launch of a new biscuit brand in Germany. Based on all these factors, and the strong alignment we’re seeing from our brands with consumer interests, we’re confident that we can further increase our market share next year on top of this year’s elevated levels.

Great. Thanks. Okay.

Thank you, Dara.

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

Thank you, I’ll address that part. We continue to be optimistic about both assets, which clearly have long-term potential. They operate in strong categories with solid fundamentals. These companies are well-positioned to capitalize on key trends, such as the on-demand coffee market. They are gaining market share and have a clear strategic direction, executing effectively with strong management that enhances their competitive advantages. We see all the elements necessary for long-term growth in revenues, profits, and cash flow. While we can't discuss the specific results of the JVs at this moment, we believe they had a strong quarter, with top-line performance surpassing expectations, increasing market penetration, and positive results across various metrics. They continue to generate cash flow, and we think their value exceeds what the current stock prices indicate for both companies, which aligns with trends observed in the broader consumer packaged goods sector. We’ve made a series of tactical moves rather than strategic ones. Our balance sheet has been well managed this year. Concerning KDP, we are comfortable with our current ownership levels, and any future trades will occur at favorable values. We will coordinate with other major shareholders. As for the JVs, we hold a significant 22.9% stake. We welcomed the IPO as it provides us with options. Nonetheless, we remain committed to the long-term success of these companies. You can anticipate some trades in the upcoming quarters to enhance the current limited flow, but we will remain disciplined regarding the JVs and KDP. Under the present conditions, we intend to maintain our exposure to both stocks.

Great. Thanks so much.

Hey, good afternoon, everyone. So maybe just a follow-up on Luca’s comment regarding the algorithm for next year. I’m more interested in cash flow. So I have two questions around that. One, would you expect that free cash flow 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. So, would we expect that this 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, and we've said several times that dividends would grow in excess of EPS. I think the last dividend increase reflects that. Share buybacks should continue absent any acquisitions or any other potential opportunities that may or may not arise at this point. So I would say yes, share buybacks should be part of the plan. Regarding free cash flow, there’s no reason to expect a slowdown into next year. Having said that, we did publicly state that the JV has reset the base for tax purposes in Europe, and there is a tax component that is going to be tracked into free cash flow next year. But I believe that it might not be going up from this year; considering some of the one-time tax impacts I mentioned, you can anticipate a $3 billion cash flow target for next year. That's the plan at this point.

Okay, terrific. Thanks, Luca.

Thank you, Bryan.

Hi, good evening. Thank you. I just had two questions if I could. The first one would be in relation to the SKU rationalization program. Just want to get a sense of whether that starts 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. As you come behind that with more innovation, is it just better volume growth? Is there mix improvement, that sort of thing? And then just a quick question 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 to build as we move into the fourth quarter of next year? Thank you.

Okay. Maybe I'll address the SKU question and then Luca can take inventory. So the SKUs, the timeline on that is gradual, largely driven by negotiations with the trade. Across the globe, there are specific moments when we can make these changes. For example, in Europe, that moment is the beginning of next year. We are preparing for it now, but the actual implementation will only begin next year. Overall, I’d say we should be 75% done with this SKU reduction by year-end, with the rest finished in early 2021. This process should be seen as part of a broader simplification program meant to drive both the top and bottom lines and cash flow. We aim to simplify SKUs and reduce the complexity of our innovation initiatives while reviewing our brand portfolio. We do not expect any significant negative impact on top-line revenue. The percentage of the SKUs we are reducing represents only a small fraction of our overall revenue, approximately 2-3%. We expect to enhance our sales velocity on the remaining SKUs resulting in better shelf space. The benefits, as mentioned, include increasing sales, reducing inventory, and improving line efficiency. This will reduce costs due to less complexity and downtime during manufacturing. Thus, it supports our long-term algorithm but is not transformative from a margin perspective. Luca?

Yes. On inventory levels, there are obviously puts and takes. Overall, I think we achieved a more normalized level at the end of Q3. I believe we are in a decent situation. There might be certain areas where we need to make adjustments, but overall, we should be fine. I wouldn’t expect any major inventory replenishment issues moving forward, and we want to end the year with the right inventory levels, as we have always done.

Thank you for those answers. I appreciate it.

Thank you.

Thank you. Just wanted to make sure I understood the implied sales guide for Q4. 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 the year-to-date figure. Can you also elaborate on specific cost reduction plans and efficiency plans? It looks like Q3 worked in Latin America and EMEA; is that where most of these cost reduction plans will take place? And if so, does that make it more difficult to capitalize on growth as they recover? Thanks.

We stated that it's 3.4% plus for the full year, so the implied growth rate for Q4 is about 3%. I wouldn’t read too much into the difference from Q3. I also clearly stated that there is one point of growth in the 4.4% you see in Q3. Thus, we are not far from the 3% mark for Q4. Importantly, at this point, we have the right level of trade inventory. Looking into next year, we want to ensure that we have all the initiatives in place to support our expected performance. As for cost initiatives, they are being implemented throughout the board. The strongest initiatives we’ve taken focus on designing our cost packages to push net revenue growth while decreasing non-working media and increasing working media. These effects should be visible across the regions. Yes, there might be some regions, like North America, where we’re seeing more revenue growth management adjustments, but overall, they are quite consistent across the board.

Okay. Thank you.

Thank you, Robert.

Hi there. Good evening. Can you hear me?

Yes. Hi.

Hi, Alexia.

Two quick questions. Firstly, on emerging e-commerce, you talked about your representation and presumably remaining online. And then my follow-up around cocoa sourcing, I'd like to know if you're thinking about changing your sourcing strategy, especially since you’re opening a new center.

Thanks, Alexia. It was very broken up, so I had difficulties understanding your specific questions as there was an echo somewhere on the line that made it difficult. I think you were asking — I heard it was about e-commerce, but I don't know what the specifics were. Maybe you can try again.

Yes. 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've got zero context.

Can I try? Can you hear me?

Yes, there still...

Let's try once again. Is it clearer now?

Yes.

Yes. Perfect. All right. So on e-commerce, you mentioned that you are under-represented in some areas and over-represented on e-commerce in different regions. Could you 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 curious whether you might be changing your regional approach to cocoa sourcing given you put a new center of excellence in Indonesia. Meanwhile, there's cocoa over $400 a ton and cocoa taxes are going up in some parts of Africa. Are you considering changing your approach to where you're sourcing cocoa from globally?

Yes, yes. It works now. It was not you, it was the technical side of things, Alexia. On e-commerce, yes. First of all, we're seeing very good growth in e-commerce, as I mentioned in the prepared remarks. Roughly, you could say that our headspace is largely in China and in the U.S. The two other big countries are the UK and France. But I would say the biggest gap we have is in China, which we are catching up on; we're working very hard on that. Overall, we've seen market share gains, largely in most areas around the world with the exception of France at the moment. We’ve also started to enter into smaller countries, which will also give us some extra gains. Overall, if you analyze globally, our shares offline and online are quite similar. There’s some headroom here and there, but then we are over-represented 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's needs. It’s also about recreating the impulse experience with improved data engagement focused on the consumer, along with placing more investment in our online platforms. Additionally, we’re experimenting with developing new areas for us in e-commerce, including e-business-to-business and direct-to-consumer channels. It's also important that our margins are similar online and offline. On the cocoa side, we are not —we are experimenting with cocoa in other regions. But at this stage, we are going to continue in large part to source from Ghana and Ivory Coast. We also source in Latin America, India, and Indonesia. However, we are one of the biggest cocoa buyers in the world, and those regions do not offer us enough quantity to shift at this moment. Shifting and developing real cocoa sourcing takes years. We're working on that, but we don't expect a quick turnaround next year with the amount of cocoa that we need to buy. We have already started to reflect the extra Living Income Differential in our pricing. We are fully equipped to absorb that during the next fiscal year. We feel good about supporting what the governments in those two countries are trying to do. It fits in with our ESG approach. Additionally, we want to keep working with our Cocoa Life program, which is complementary. We think it’s the right strategy, given the importance of sustainable futures for cocoa, and farmer income is critical. Our goal is to ensure 100% of our cocoa volume is sourced through our Cocoa Life program by 2025. So, that would be our response on cocoa.

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

No problem.

Thank you.

Thanks. Good evening, just a follow-up on emerging markets and a question on marketing or grocery investments. On EMs, you had nice improvement in Russia, Brazil, and some other markets. You mentioned in your prepared remarks that you expect emerging markets to continue to improve. I think you also said that there was some late-quarter slowdowns in Asia outside of China. Could you clarify where you feel the momentum is to continue to improve across EMs? Also, regarding your growth reinvestments, as you guys don't have a windfall this year, I'm assuming your spending will be somewhat measured. You also remarked that advertising or working media will be increased, primarily in digital. Could you discuss that gross spending: where you expect to spend and areas where you've received high ROIs? Do you think that’s going to continue into 2021? Thanks.

Okay. I'll take the first part and then Luca can answer the second. 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 advantageous network, deep distribution, and consistent momentum from pre-crisis operations. We're coming out of the crisis in most emerging markets nicely. See markets like India and Brazil, which show our gains. Ultimately, we can only focus on aspects we control: execution, cost management, and selective investment. We’re confident about the trends in markets where we see good momentum, such as China, India, and certain emerging European markets like Brazil. These markets were disrupted; however, they are now returning with high single-digit growth. At this stage, we expect no repetition of early crisis disruption. Those countries cannot go back to lockdown procedures due to severe economic effects we faced at the start. We continue to anticipate gradual improvement in these markets. That said, about one-third of our emerging markets still face pronounced macroeconomic headwinds, especially in categories that rely on gum and candy sales. Thus, we are faced with challenges in key areas such as Mexico and Central America, as well as select countries in the Middle East and Southeast Asia. It is crucial for us to revitalize gum and candy consumption during COVID as restrictions and affected mobility become prevalent. So we are continually investigating how we can modify our promotion methods for gum to encourage consumption possibilities in this current climate of restrictions. Thus, we're working diligently on that, focusing on maintaining a positive atmosphere surrounding these products. So, that's where we feel the momentum stands. Luca?

Thank you, David. What you see is that in Q2 we had to pull back on spend, but we did double down in the second part of the year. As we've mentioned prior, our share gains are broad-based, across various brands and markets with the exception of gum. We'd like to ensure that we retain those positions, so we will continue to invest through 2021. Between the dip in COVID costs and the lapse of lower spending from Q2, we believe the revenue-foundation and number should reflect positively on 2021 expectations. Expect more investment in working media. However, we will be lapping lower expenditures noted in Q2. Additionally, COVID costs will be negatively impacting parts of P&L, despite growth in terms of EBIT and EPS.. With that said, we see a favorable trajectory on the investment return on the media and marketing areas helping retention of recent share gains in both bisque and chocolate forwards.

Very, very helpful. Thank you.

You're very welcome.

Thank you. I think with that, there are no further questions.

Okay. Thank you, Angela. Well, thank you for connecting. As you can see, we had a good, solid third quarter. We feel good about how the fourth quarter is heading and how we will close the year. We’ve given you a first flavor of what 2021 looks like, which we also feel pretty confident about. In the next call, we will share our guidance for the year, provided circumstances allow it, as we remain cautious due to the unpredictability of the COVID situation. Thank you for your interest, and thank you for your questions. If there’s anything else, feel free to connect with Andrei or Shep, and we can give you more information. Thank you.