Mondelez International Inc (MDLZ) — Q3 2023 Earnings Call Transcript

Good afternoon, and thank you 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. 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 the slide presentation. Today, Dirk will provide a business and strategy update followed by a review of our financial results and outlook by Luca. We will close with Q&A. I'll now turn the call over to Dirk.

Thanks, Shep, and thanks to everyone for joining the call today. I will start on slide four. Our strong third quarter results and our prospects for the future confirm that we are positioned for high-quality, sustainable growth. We remain confident in the durability of our categories, the strength of our iconic brands and the consistency of our execution. We delivered strong profitable volume growth with a healthy share performance. All our geographic regions grew double-digits in both revenue and profitability. To manage cost inflation and enable robust reinvestments, we continue to leverage our RGM capabilities. RGM is an area where we believe there is significant room to do more over the next several years. We continue to reshape our portfolio to focus on our core categories of chocolate, biscuits and baked snacks with the successful divestiture of our developed market gum business, generating additional reinvestment opportunities. Our strong year-to-date performance, the continued strength of our categories and our ongoing focus on strong commercial plans and execution provide the confidence to again raise both our organic net revenue outlook to 14% to 15% and adjusted EPS growth outlook to approximately 16%. Turning to slide five. You can see that in the third quarter, we delivered both top and bottom line strength, enabling us to continue substantial reinvestment in our brands. We delivered organic net revenue growth of 15.7% for the quarter. Year-to-date revenue is up 17%, nearly $4 billion ahead of last year. We also delivered adjusted gross profit dollar growth of 22.3% for the quarter. Again, we are ahead of last year's pace with 20% growth year-to-date, up $1.7 billion. The strong performance enables us to reinvest in our brands and capabilities to drive attractive growth in future periods. Our A&C investment is up 28.5% for the quarter and 21.5% for the year, which demonstrates our commitment to continue to build the strength of our brands. These results translated into strong adjusted OI growth, up 24.5% for the quarter and close to $900 million for the year. As you can see on slide six, our third quarter growth was driven by strong volume/mix, up nearly four points. We are especially pleased that our European pricing actions, which were implemented earlier this year are successfully behind us. We view this quarter's strong volume/mix performance as evidence that we are taking the right actions to continue delivering sustainable growth and share gains. Consumers continue to choose our trusted and beloved brands, despite significant pricing due to ongoing inflation. More broadly, we view our strong performance in the third quarter as evidence that our long-term strategy continues to pay off. Since the launch of our growth plan in 2018, we have consistently delivered gross profit dollar growth, which allowed for a virtuous cycle of yearly increasing high-return investments. We remain confident that this strategy will continue to consistently deliver attractive growth. Turning to slide seven. We continue to see evidence that consumer demand for our snacking categories remains resilient and that consumers continue to prefer our widely loved brands over private label alternatives. In North America, the biscuit category is experiencing some softness in scanner data, most notably among lower-income families. However, I would note that these families are increasing their purchases in the non-measured club store channel. Our total US biscuits volume was up more than 3% in Q3, showcasing the continued strength of our brands and investments in both measured and non-measured channels. We are seeing particularly strong growth in unmeasured channels like club stores, e-commerce and food service. Meanwhile, in Europe, consumer confidence is improving with a significant step-up versus 2022 and remains broadly stable throughout Q3. We're seeing positive volume growth in biscuits and chocolates, which has accelerated over the last three months and is outpacing broader food driven by solid elasticities and lapping of 2022 disruptions. In Q3, our European chocolate and biscuit business delivered solid volume growth of 2.6%, which again shows the resilience of our categories and the strength of our brands. In emerging markets, consumer confidence remains strong. We continue to see resilient underlying demand and lower price sensitivity than in developed markets. During Q3, we delivered strong growth in terms of both volume and value at 4% and 24%, respectively. And we are confident that we have strong opportunities to continue to drive expanded distribution and create new snacking occasions. On slide eight, you can see a few examples of our growth acceleration strategy in action. We continue to invest in our brands and connect closely with consumers to stay in line with changing consumer tastes and snacking occasions. We are also driving growth in a broader range of channels while accelerating our focus on premium segments and harnessing the power of recent acquisitions to advance geographic expansion. For example, Oreo continues to grow its strong position as the world's favorite cookie, and its share performance here in North America has grown nicely. Our recent partnership with Super Mario Brothers executed both online and in-store is just one example of the many creative campaigns that leverage personalization and local relevance to reinforce the brand's playful persona. Along with continuous reinvestment in our brands, we are also investing in growth channels. For example, our belVita business is up nearly a full share point in the US club channel, driven by growing shopper interest in convenience, tasty and better-for-you options for morning snacking on-the-go. Sold in individual portion packs and delivering more than 14 grams of whole grains per serving. belVita offers a great solution for consumers who are too busy to eat a traditional breakfast. We're continuing to grow this business with a new customized and digitally targeted social and digital media campaign celebrating the ritual of belVita and coffee in the morning. Another important element of our growth strategy is investing in the fast-growing premium chocolate space. We have re-launched Toblerone with a robust campaign inspired by luxury fashion brand, positioning it as a jewel. We're supporting this launch with a strengthened brand persona, Never Square and substantial investments in A&C. Bringing this dual concept to life, our new pralines called Toblerone Truffles recently debuted in the United Kingdom, Switzerland and Australia as well as airport duty-free stores in key markets. They will expand to additional markets next year. Finally, we continue driving geographic expansion of our recently acquired brands. For example, Ricolino headquartered in Mexico is now the number one Hispanic confectionery brand in the United States, growing well and in line with our expectations. Turning to slide nine. Let's zoom in closer on the snack bar business to highlight the strong progress. We're excited about the opportunities in this space, and we believe there is significant runway ahead led by the strong and growing brands of Clif Bar, Grenade and Perfect Snacks. We expect our snack bar business to exceed $1.2 billion net revenue this year. Let's start with Clif, where we are excited about our current results and the long-term opportunity to broaden distribution, expand into new formats and increase our geographical reach. Year-to-date, Clif is up double-digit in top line growth. And within that, the Clif Kid Zbar has been a particular standout. Zbar is a delicious organic non-GMO soft-baked, whole grain energy snack for kids with zero trans fat or artificial flavors. Zbar is growing at twice the rate of the total bars category with consumption dollar growth up 19% versus last year. Grenade also continues to exceed our expectations. Grenade is performing very well in the sports nutrition space with signature bars that are high in protein and low in sugar. Since our acquisition a bit more than two years ago, we have doubled the business, thanks to strong core growth in the UK and distribution expansion in Ireland, Nordics and the Benelux. Perfect Snacks also is experiencing continued double-digit value growth, strengthening its position as the number one refrigerated protein bar in the United States. We have a great portfolio and strong conviction in the growth potential of our snack bar business and we will continue investing to drive leadership in the segment. Turning to slide 10. I'd like to take a moment to share progress on an important element of our sustainability strategy. Just two years after joining the science-based target initiative, net zero carbon emission, we have submitted a time-bound plan laying out how we aim to achieve our target of net zero greenhouse gas emissions across our full value chain by 2050. To reach this critical milestone, we have completed a detailed process of re-baselining providing documentation of our carbon accounting and aligning to new standards. Putting this plan into action in the near term, we are making solid progress towards our 2025 goal of reducing end-to-end carbon emissions by 10%. We are working hard to transform our business operations and supply chains. Over the past two years, we have scaled regenerative agriculture practices across our signature sourcing programs for cocoa and wheat, achieved renewable energy at manufacturing sites across every region and reduced CO2 emissions through plant and logistical efficiencies. We continue to believe that helping to drive positive change at scale, including through reducing our climate impact, is an integral part of value creation with positive returns for our stakeholders. We encourage you to read our Snacking Made Right report for additional details and context on our broader sustainability goals and progress. With that, I'll turn it over to Luca to share additional insights on our financials.

Thank you, Dirk, and good afternoon. Q3 was strong all across our business, with high-quality top and bottom line growth, healthy volume mix, record profit dollar increases and substantial brand reinvestment. We delivered double-digit organic net revenue of 15.7% with growth across each region, underpinned by volume mix of almost 4% as well as by some pricing of around 12%. Our business is proving to be resilient, both in emerging markets, which grew 19%, with strong performance virtually everywhere, and in developed markets, which grew more than 13% with balanced trends from both North America and in Europe. Turning to portfolio performance on slide 13. Our chocolate, biscuits, gum and candy businesses all posted double-digit increases in Q3. Biscuit increased by 12.4%. Oreo, LU, Biscuit, TUC, 7Days and Clif delivered double-digit growth and robust volumes. Chocolate grew by 14.9%, with double-digit growth in both developed and emerging markets. Cadbury Dairy Milk, Milka, Toblerone and Lacta all posted double-digit increases. Gum and candy grew more than 30%, with particular strength coming from emerging markets. Now let's review market and share performance on slide 14. We held or gained share in 65% of our revenue base, driven by brand building investments as well as solid North America supply chain performance and strong sales execution, particularly in emerging markets. Moving to regional performance on slide 15. As far as Q3 goals, we delivered double-digit revenue growth in every single region, with a significant contribution from healthy volume/mix growth, including Europe, which has rebounded after lending pricing this summer and is now in a much stronger position. This robust growth and volume performance translated into operating leverage across the business. Notwithstanding material marketing investment, profit growth delivery has been very strong in all regions. Europe grew by 15.4%, with nearly 30% OI growth that was driven by pricing and volume/mix. Top line strength was broad-based with the UK, Germany and France among those posted strong results. Cadbury Dairy Milk, Milka, Oreo, 7Days and Grenade were among brands with double-digit growth. European elasticities remained stable in both chocolate and biscuits. North America grew by 11.4%, with OI dollar growth of more than 24%, driven by higher pricing and volume/mix growth of 4.6%. Oreo, Clif, Tate's and Sour Patch all grew double-digits, while Ritz and belVita posted high single-digit increases in the quarter. Profitability in the base business remained strong, while acquired businesses, such as Clif and Tate's, posted strong double-digit profit dollar growth. This is an important proof point showing how accretive our M&A agenda can be. Clif profitability continues to improve. And as I said last quarter, we still have some synergies opportunities as we have now integrated the platform into SAP. AMEA grew by 11.9%, with volume/mix growth of more than 3%. OI dollars increased by 18.1%. India and Australia grew double-digits, while China increased high single-digits in the quarter. Latin America grew more than 35% with OI dollar growth of nearly 37%. Latin America top line grew more than 16%, excluding Argentina. Mexico to Western Andean countries and Brazil, once again delivered great results. Ricolino grew high single-digits and remains on track in terms of integration work. Moving to page 16. We delivered nearly $650 million in gross profit dollar growth or more than 22%, driven by top line growth, volume leverage and productivity. Year-to-date, gross profit dollar growth is now more than $1.7 billion. This provides ample funding to reinvest for future growth and flow to the net earnings line. OI dollar growth was more than $300 million for the quarter or up more than 24% versus last year, driven by solid cost discipline, effective pricing and volume leverage. Year-to-date, OI dollars have grown by $880 million or almost 24%. The EPS on slide 17. Year-to-date, EPS grew more than 18% in constant currency or more than 13% reported dollars, driven primarily by strong operating gains. Turning to slide 18. Free cash flow is $2.4 billion year-to-date, which represents an increase of $0.5 billion year-over-year. Year-to-date, capital return is $2.2 billion. Moving to our outlook on page 20. Given the strength of our Q3 and year-to-date performance, strong volume/mix momentum across our brands and overall demand resilience, we are now raising our full year outlook for both revenue and EPS. We now expect top line growth of 14% to 15% versus our original outlook of 5% to 7% and most recent outlook of 12% plus. EPS growth is also expected to be approximately 16% versus our prior outlook of 12% plus and original outlook of high single-digit. In terms of the assumptions, no change to our double-digit inflation. We also expect interest expenses of approximately $325 million for the year. Leverage is expected to be in the mid to upper 2s range by year-end. With respect to currency, we now expect $0.15 of EPS headwinds related to ForEx impact for the year versus $0.11 in our prior outlook, of which $0.12 have been materialized already in the year-to-date. On the gum divestiture that became effective as of the beginning of October, this current outlook reflects the loss of the business for the entirety of Q4. We are not providing yet restated financials as teams are working through the definition of the impact and importantly, the removal of stranded costs. While we will provide a full update in the next earnings cycle, we do not expect any material EPS dilution as we will remove the majority of stranded costs in '24. The outlook revision reflects our increased confidence in the year, ongoing resilience of consumer consumption in our categories, relatively benign elasticities, continued brand reinvestments and completion of pricing in Europe and the health of our emerging markets. There is a lot of volatility around the world, and it is important to note that this current outlook does not reflect a material deterioration of the geopolitical environment and ForEx rounding in some areas of the business. Finally, a word on share repurchases. Now that we have received the proceeds of our sales outcome, our balance sheet is the strongest it has ever been, with long-tenure debt at very compelling interest rates relative to the current cost environment. We decided to pause buybacks in Q3 and were in our traditional blackout periods late in the quarter and the month leading up to earnings. However, we expect to consider buybacks for the remainder of the year and into next, given the current stock price versus our view of intrinsic value and long-term potential of our company. We realize we have underspent versus our original outlook of $2 billion for the year, and that provides the opportunity to take advantage of current low stock price levels. Additionally, we could pull forward from our '24 share repurchases if an appropriate opportunity presented itself. We will be flexible and opportunistic in our timing, depending on various useful factors. We believe this is the right thing to do, given the current context. Importantly, this does not represent a change in our ability to pursue our well-defined capital allocation strategies as our priorities remain the same in terms of reinvesting in the business and in selected strategically and financially attractive bolt-on M&As as well as strong dividend growth. With that, let's open the line for questions.

Thanks so much. Good afternoon. Dirk, clearly, pricing, as you went through was very strong in the quarter. But despite this, volume came in better than our forecast in every region as well. And we know price sort of comes and goes. So I'd really like your thoughts more on how you feel about the sustainability of volume growth going forward, particularly in the context of sort of the state of the consumer as you see it?

Yes. Thank you, Andrew, and hello. First of all, yes, maybe restating quickly what is driving the volume growth in the different regions to give a clarification around that. And yes, we are constructive as it relates to volume for the remainder of this year and next year and then I’ll talk a little bit about the consumer. So we have a strong volume/mix across all our regions. Overall, we're up almost 4%. If I start with North America, there we are up 4.6% year-to-date, 3% in volume/mix. The categories are experiencing a little bit of softness there. But our biscuit business is performing significantly better and delivering some significant volume share gains, about 1.2 points in the last 3 months. We also have that from unmeasured channels, which are performing well, the club channels, online because consumers are shifting there because that gives them better pricing opportunities. Switching to Europe, there we see a 3.3% volume/mix increase. Year-to-date, that is flat considering the disruption we had in the beginning of the year. We see biscuits and chocolate volumes being quite resilient. And in Q3, we saw the volume/mix growth accelerating, outpacing the rest of food. The reason there is that the elasticities are quite solid. And we also take into account that we are lapping 2022 disruptions in Europe. And then emerging markets are up 3.4% in volume/mix. Year-to-date, also 3.4%, but we have certain markets like India and Mexico, where we have double-digit volume growth. It's quite remarkable because these markets have significant pricing, all the emerging markets. The reason being is that consumer confidence is quite good. The demand is resilient. We see the consumer in places like India, China, Mexico are in a four-year high, and that is clearly having an effect on demand. We also are gaining in these markets by expanding our distribution. That's always an extra benefit that we have. And we've been doing smart downsizing. One of the things we do in these markets is our LUPs or lower unit price. We try to keep that price constant that we have the entry into the category not being affected. Going forward, we expect the recovery in Europe to continue because pricing has landed and we are back on the shelf, and we are running full force in our commercial activities. Our inventory levels around the world are very healthy, including in North America, so we don't see any effect there. The elasticities remain relatively benign. But here and there, some modest upticks, but all the dynamics are included in our outlook. We think that the expansion of volume in emerging markets is going to continue. And in fact, it's a good problem to have. But in India and Mexico, the key challenge is to how to keep up with the heavy volume increase that we're seeing. And then we believe that everything we're doing for our long-term strategy is the things we are focused on and different activities that we have planned confirm that this is working for us, particularly also, for instance, the reinvestments we're doing. Maybe quickly on the consumer because that is probably the biggest factor to keep in mind as you think about volumes going forward. We find that consumer demand remains very resilient in our key markets. Consumers continue to prioritize spending on grocery and branded products. And we see the consumer confidence outlook for '24 stable for developed markets in North America and Europe, but very positive for emerging markets. So if I quickly think this through, modest improvement probably in consumer confidence in Europe and Australia. Why? Because inflation is clearly easing there. They see the real disposable income go up. There is some shifting to smaller packs in places like France and the UK and to discounters because they're looking still for value for money. But overall, we feel pretty good about the consumer in Europe and Australia. In the US and Canada, we think the consumer confidence will be holding, but we have to monitor trends quite closely because we see shifts to non-measured channels, as I said, such as e-commerce and club, we see buying of more multipacks. We see lower-income families pull back on the amount of the frequency of their trips to the store. And we also have the delayed unwinding of the pantry loading due to the phasing out of the SNAP benefits. And then in emerging markets, we continue to see steady improvements with those four-year highs that I was talking about. Consumers are very optimistic about the future. Even in China, consumer confidence is improving, but slower, but we still have like 60% of our Chinese families expect their income to improve. Private label, maybe private label is losing share in the US and Canada. There is a bit of a watch out in Europe because brands have been taking pricing. But overall, I would say, we feel very good about the outlook for the rest of the year and for next year.

Great. Thank you for all the color. Really helpful. And a very quick follow-up just for Luca, I think. Just regarding what the implications are for Q4 based on your updated full year guidance? And maybe more importantly, any high-level thoughts to consider for '24 at this point? Thanks again.

Thank you, Andrew. Our revised estimate of 14% to 15% suggests a revenue growth for Q4 of around 7% to 10%. Given that we're comparing with a 15.5% top line growth from last year, this brings us in line with year-to-date figures. This provides a good indication of where we expect to end Q4. Additionally, we need to manage retailer inventory carefully as we approach next year, as there could be some pricing changes, and we want to start Q1 with strong momentum. On earnings per share, we project a growth of about 16% for the year, which indicates a moderate increase in constant currency for Q4. This is partly due to increased investment in A&C, along with some foreign exchange volatility, especially in markets like Argentina, Nigeria, Pakistan, and Egypt, making it hard to predict exchange rates this quarter. I have taken a cautious approach with our assumptions to avoid any surprises. It's worth noting that gum is excluded from these figures, so this isn’t a like-for-like comparison. I believe you will be pleased with the EPS and continued profit growth in Q4. I'm also pleased to report that emerging markets are performing very well. Although we don’t disclose specific numbers, EBIT in these markets is up more than 20% year-to-date in real dollar terms. These markets can be volatile but ultimately yield good profits for us. Looking ahead to 2024, we are in the final stages of planning, but I can share some key points. The business is experiencing positive momentum, which we expect to carry into 2024 for both revenue and profit. Pricing will be less of a focus next year compared to this year, but we anticipate it to remain above average, especially as we adjust for costs related to cocoa, sugar, and other commodities. We expect that significant growth will come through distribution expansion in both developed and emerging markets, supporting volume momentum into 2024. Our categories in emerging markets still have room for growth, and we have invested to facilitate that. The platforms we've recently acquired, such as Clif and Ricolino, are performing well and will create more synergies as we proceed into 2024. While I don’t have specific figures regarding the gum divestiture, our goal is to eliminate all associated stranded costs in developed markets. So far, we’re on track with our expected 2024 financials.

Hey, thank you. I just wanted to get a clearer sense of the messaging around share repurchase. You paused in Q3. You reduced your outlook for the year. But at the same time, you're saying, hey, if there's an opportunity, maybe you can pull forward some of your planned repurchases for '24, if I heard that right. So I just wanted to maybe ensure I heard that right that I can reconcile these comments. And maybe it's just as simple as you pivoted a bit toward debt paydown earlier this year, you weren't 100% sure when gum would close. Now these factors are somewhat behind you, so you can forge ahead on buybacks. I just want to ensure it's a little bit of a whipsaw effect there in terms of how we're seeing or I'm seeing the commentary? I just wanted to make sure I can clarify that.

Thank you, Ken. You're right in your analysis. We view share repurchases as a crucial factor in total shareholder return. I regularly analyze our historical buybacks, which we also present to our Board. It's fair to say that all the repurchases made since Mondelez's inception have provided very good returns, significantly exceeding our cost of capital. Our capacity for stock buybacks at this time is important, given what we've purchased so far this year. We will remain flexible and disciplined in our approach. I believe our stock is somewhat undervalued right now, so we will be strategic in how we proceed. I don’t have much more to add to your insightful question. I would like to clarify that this doesn’t indicate any changes to our capital allocation framework. I mentioned Clif and Ricolino in my prepared remarks, and I'm very pleased with the positive outlook on those investments. Dirk pointed out our capacity constraints, but in my view, there’s nothing better than investing in established brands like Oreo, Milka, and Cadbury Dairy Milk. Their proven propositions and distribution advantages are delivering strong returns. Finally, we remain committed to dividends and plan to continue increasing them in the foreseeable future. Our cash flow is strong, with an increase of $0.5 billion compared to last year. Overall, everything is proceeding well with our capital allocation.

And then quickly, just at the risk of, I guess, eliciting some groans maybe by dredging up last month's topic, just curious where you are in your research about GLP-1s? Even on a broad level, if you don't have specifics, is there a reason to think that your snacking categories won't be affected, just assuming there's any impact at all? Just wanted to kind of pick around for your initial thoughts there.

Yes. Thanks, Ken. Well, first of all, I think the whole topic has been overblown. And I think it's important to put it in perspective and look at the data. At this stage, we see absolutely no short-term impact on our results. We don't see it in our business. We are, of course, monitoring, and we have a special work stream to stay close to the topic. We do estimates, we do projections, we talk to pharmaceutical companies, we talk to consumers and so on. So we're staying close to the subject. But long-term, even using the most optimistic forecast, we believe the impact will be very modest to our volumes in our categories. We're talking about a 0.5% to 1% volume effect 10 years down the road. That's based on what we know today and projections that are not ours, but that are being used by several different sources, and that assumes quite significant adoption rates of the drug. Even if the impact would be bigger than that, I think over a 10-year period, it will be manageable, and we will have adequate lead time to adjust and prepare for any changes that we see. Having said all that, if you think about it, obesity rates around the world are very different. And we have one of the lowest exposures since 75% of our sales come from outside of the US, 40% of our sales are in emerging markets. And so the average BMIs in all those countries are much lower than in the US. So our exposure is significantly lower than some of the other food companies. On top of that, I believe that our portfolio is really well positioned. We constantly innovate and adapt our products. We do that all the time to adapt to changing consumer tastes and behavior. Portion control is a big part of our strategy. So 20% of our sales are already in snacks that are less than 200 calories. We have a large part of our portfolio that is chocolate, which is not hunger satisfaction, but it's a small indulgence. And we have healthier alternatives like for the breakfast occasion, belVita, which is a replacement snack or some of our snack bars, which are meal replacements and that fit perfectly into the diet of GLP-1 patients. So if I go through all that and if I'm honest, at this stage, this is really into our top areas that we are focused on and that we are trying to manage. We monitor it, but it's really not a big concern for us at this stage.

Thanks, operator. Good evening, everyone. I have a follow-up to Ken's question and another question. Regarding Ken's inquiry about capital allocation, Luca, you were strategic with paying down commercial paper and you paid off the term loan this year, addressing some of the variable rates and avoiding shifting from low interest to high interest. As you look ahead over the next year or two, do you see many more opportunities where you would consider paying down debt? It seems that paying down debt may not be your top priority, especially considering what you've accomplished over the past year. Then I have a follow-up.

No, I think that's absolutely correct. We are very happy with the loan tenure debt that we have. The average cost of debt is very compelling. It was a series of decisions that we took over the last few months, including the sell-down of KDP to really go and strengthen the balance sheet and making sure that we were not facing material pressure in the interest cost line. I think in hindsight, that has proven to be quite a good decision. The reality is, I still see our stock as undervalued. And so when you look at the cash flow this year, and you adjust for the coffee taxes that are really one-time in nature, I mean, you start talking about $3.7 billion, $3.8 billion of cash flow generation. And I think if you take that and continuous growth of dividend, we have what it takes really to manage the business very well. And so I don't feel really compelled at this point in time to go and pay down more debt. We have some debt coming due next year. It is absolutely manageable. And when that comes due, hopefully, interest costs will be lower than today, but again, not really a major concern for me at this point.

Okay. Great. I have a couple of follow-up questions regarding what you mentioned about 2024. I believe you previously indicated mid-single-digit cost of goods inflation for that year. Is that still the case? Additionally, when considering organic sales growth, in this quarter, Argentina and gum together contributed approximately 500 basis points to the organic sales comparison. I’m curious about how we should approach the various factors influencing organic sales growth. I know you've mentioned some insights on volume and price, but I would appreciate your thoughts on these two aspects.

Yes. Transparently, it's noted both in the prepared remarks and in my script that Argentina accounted for just over two points for the company. If you exclude gum completely from the year-to-date numbers, regarding both volume and revenue, I would say there is no significant change to either. In terms of growth rates, Argentina is clear, but it's always been in that range, slightly higher in Q3. For gum, there's no significant impact on the top line dynamics in both volume and revenue. Looking ahead to next year, I anticipate inflation will be higher than mid-single digits, likely between 5% to 10%. Recently, cocoa has experienced a significant spike due to the pulp count from [indiscernible] and Africa being notably different from expectations, which is causing pressure on cocoa prices. The positive aspect is that we are covered for a substantial portion of the first half of next year, and we also have protection for the rest of the year. While I won't provide extensive details, you should anticipate general inflation to increase. Additionally, energy costs, particularly crude oil, have risen recently. I believe we are not yet finished with inflation at this point. There could still be variability, and exchange rates come into play as well. Inflation might be slightly higher than the mid-single digits we've mentioned, but we will remain flexible as we work through our plans. We have a sensitivity analysis in place to ensure we are not caught off guard. Our coverage is favorable, and we will be pricing at replacement cost into 2024.

Thanks. Just, first, a follow-up on Andrew's 2024 question. It seems like we should be thinking at least in an upward bias for profit, but maybe a little bit higher than normal on revenue, largely because of the pricing side. Correct me if I'm wrong on that thinking. But digging deeper, I just wanted to ask you, you mentioned some things that were giving you confidence about next year, such as the distribution gains in emerging markets. What are some of the hurdles or watchouts that you're really thinking about specifically for your business? This earlier this year, it was about getting through pricing in Europe. What are some things you're really watching out for as you go into this next year?

Thank you, David. I don’t want to divulge too much about the 2024 guidance. I understand you're eager to get insights on our expectations for next year. We have made significant investments in the business this year and believe our categories are strong globally. You've seen the share numbers we've been posting, and we're satisfied with the overall business momentum. At this moment, I can’t predict exactly how next year will unfold. I think your views on the top line and bottom line are generally accurate. We're currently assessing the implications of gum and its impact on EPS, as well as stranded costs. I will provide more details in the next quarter. Regarding distribution, especially in emerging markets, we are pleased with our performance in China, India, and Mexico because our categories remain underpenetrated. Additionally, we see considerable growth potential from distribution gains in both developed and emerging markets. In the US, due to various supply chain issues, we've lost some PDPs, but we are reinstating those PDPs and exploring alternative channels where our market share is lower. Given this situation, I feel optimistic that you'll see a positive top line heading into 2024. I hope this provides some clarity, but I can’t reveal much more at this time.

No, that's helpful. Just a quick question on the US. There was another player out there that we're seeing some reduced merchandising activity and shelf presence because of a clean store initiative and a major retailer. You guys are pretty good at getting merchandising. Is that going to affect your business in the near term in the US?

No, no. We are in good shape as it relates to shelf availability and stock levels. The shelf availability is higher than it was last year. The stock levels are where they should be. They're not high. Our sales are higher, our units are higher. We have more displays, and we have more items carried with that retailer. So we see no effect. I want to point out that we do have a DSD system that covers the stores, and that is always very helpful in driving in-store execution and finding the necessary extra space and presence. And so we're also making sure that we have the right level of staffing at the store level. But no, I cannot confirm that we see the same effect. We feel very good about how things are playing out at the moment.

Thank you and good afternoon. Just wanted to check on Ricolino. You've said that the integration is progressing well. That's a case where you have a revenue synergy opportunity just given their distribution footprint. How quickly is that ramping up? Can you give an update on just how that's progressing and if that's coming along with your expectations? I think the expectation was it would give a lift to some of your legacy brands as well. How is that coming along?

Yes. Regarding the top line synergies, we are integrating the two distribution systems, which will triple our distribution points. This is a significant step for us. Currently, we are in the testing phase after separating the distribution system from Bimbo and Ricolino to establish a larger system than we had before. We plan to open about 100 distribution centers. In Mexico, we are three-quarters of the way there, and everything is on schedule. We have commenced testing of the combined routes at several distribution centers, and we expect to start seeing effects over the next 18 months. So far, everything is proceeding as planned, and we are optimistic about the substantial benefits that will emerge next year.

Okay, great. Thanks so much.

Thank you.

Thank you.

Hi. Thank you. Just wanted to follow up on the commentary about the channel shift in the US with club and e-commerce growing much faster than measured channels in the biscuit business. Can you talk about how that's impacting your share performance and if there's a margin difference for you between the channels? And maybe just as a follow-up, are you seeing or hearing from retailers in the measured channels that they're adjusting for the consumer behavior shift?

Yes, the shift is noticeable because those channels offer larger packs, both online and in club channels, which is what consumers are looking for. We see our overall volume share increasing due to the share we are gaining, even though those channels are not always measured. However, we are aware that our shares are rising in those areas, and we feel optimistic about the situation. Our margin remains about the same, so we do not observe a significant impact on margins. Additionally, brands like belVita are benefiting from this shift due to their larger presence in those channels. Overall, we are experiencing a clear volume and share effect with no effect on margins and no necessary adaptations on our part.

Thank you for that. I'll pass it on.

Good afternoon. Thanks for fitting me in.

Hi, John.

Hi, John.

Luca, I'd like to ask about reinvestment. Overhead expenses were up double-digits in Q3. They're also up double digits year-to-date as well, I think. Can you just update us on the progress there, where you've made the biggest improvements in capabilities for this year's spending? What capabilities you plan to build next with future investments into through 2024? And then maybe how you're thinking about generating operating leverage on that spending as we move forward?

Yes. So the numbers are somewhat impacted by the acquisitions as well. So the acquisitions are clearly incremental year-on-year and they make their way into overhead cost in particular. So the way you have to think about our overhead cost is the following. We have been managing inflation quite effectively as a company. Inflation, though, particularly labor-related inflation, has been a little bit higher. In these numbers, there is a cost associated with our management incentive plan and long-term incentive plan. The company has done very well, and that has resulted in some incremental costs. All the rest in terms of corporate costs and other functions, we have been investing in three areas selectively. One, it is digital capabilities, and it is the biggest bump you see in corporate costs. We have been investing in sales, and we have been investing in marketing. All the other functions have managed inflation that is below the revenue growth in their respective markets. And functions like finance, particularly has been pretty much, I would say, a little bit higher than flat in terms of cost. So we have been selectively investing in three areas: digital services, sales and marketing, and that will continue into next year. All other assets are being kept absolutely in control. And then there is a cost associated with the acquisitions and management incentive plans. That's a simple way you have to think about it. Where do we spend in terms of investments? We will continue investing in sales capabilities, particularly in emerging markets. We will continue to invest in marketing, both people and A&C, as we call it. And in terms of digital, there is going to be an acceleration. We are looking into as a major investment that is coming our way and that is both capital and running costs, but it's too early to talk about that. So hopefully, that provides you with some color around our total overhead costs.

Yes. That's great. And then, Dirk, just coming back to the adjacent categories, the packaged croissant and the snack bars, I think you referred to it as being in a test and learn phase. And I'm curious, there's a lot going on right now with innovation, synergies and the assets. What sort of stands out to you thus far in terms of surprises or having a greater appreciation for these assets? What are you learning from test and learn at this point?

Yes, I wouldn't say it's all test and learn. So it's a mixture of just reinforcing the businesses that we have, more launches from our own range, doing some geographical expansion, doing some distribution expansion. So it's a lot more than just test and learn. If I start with snack bars, I think we are discovering the power of snack bars. That's why we highlighted it in the prepared remarks. We're doing particularly well with Clif and also with a brand like Grenade in the UK and in Europe, which is really growing very fast. So first conclusion would be snack bars are going to be a real strength for us. There's a big opportunity in the rest of the world. If you look at the development of the snack bar market in the US, it's far ahead of the rest of the world. So we see a huge opportunity there in the years to come, particularly in the Anglo-Saxon countries, we think that's going to happen first. As it relates to cakes and pastries, there is this segment, which is in-store bakery. Give & Go, that's not a test and learn anymore. That's now a $900 million business, but that has been very incremental to us. We've seen some very significant growth. It's a segment that is growing very fast, and we're taking share. So our expectation is that going forward, Give & Go will continue to see big growth because clients like Target or Walmart are moving from made in-stores towards freeze and thaw, which is what Give & Go is offering there. So second conclusion, the in-store bakery segment is going to be very interesting for us going forward. And then the third one that is important for us is the expansion of our current brands into the cakes and pastries market. So we've launched Cakesters in the US or we have launched Airy Cake in China under Oreo, both very big successes. Things that are clearly an indication that our brands have the potential to play in this cakes and pastries space, and it's a very nice addition that really extends the footprint and the consumers that we have. And then lastly, there is Chipita, which is the packaged croissant. We're doing test and learns in three markets at the moment around the world. Not all the results are in, but we've seen, for instance, in a country like Brazil that there is a real interest. The segment is really not that established, but our test and learn was very positive, and we are now gearing up for a launch in the country. I'm expecting in the other countries that we are doing some tests that we will get similar results because if you think about it, Give & Go was already very successful in places like Mexico or in the Middle East. So it's a real sort of emerging market proposition, meal replacement at a very affordable price and reasonable quantity of product. So I think there's going to be a real opportunity to make that a worldwide business for us. So those would be the four big ones at the moment from the adjacencies. So far, so very good, I would say. We'll keep on informing you. But everything is going in line or in fact well above plan in this area. Thank you for joining us. We've concluded our call. We are pleased with this quarter's performance and optimistic about the upcoming quarter and next year. We appreciate your interest and look forward to speaking with you next quarter.

Thank you, everyone.