Q3 2020 Mondelez International Inc Earnings Call
Good day and welcome to the Mandalays International third quarter 2020 earnings Conference call.
Today's call is scheduled to last about an hour increase.
Including remarks by month to lease management and the question and answer session.
In order to ask a question. Please press the star key followed by number one on your Touchtone phone.
Any time during the call.
I'd now like to turn the call over to Mr., Shep Dunlap, Vice President Investor Relations for modeling please.
Please go ahead Sir.
Good afternoon, and thanks for joining us.
With me today are Dirk van to put our chairman and CEO and Lee.
Because they're a miller our CFO earlier.
Earlier today, we sent our press release and presentation slides, which are available on our website Monta Lee's international Dot com forward slash investors.
During this call will 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 more details on our forward looking statements.
As we discuss our results today I must.
Noted as reported will 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.
That's the back of our slide presentation.
In today's call Derek will provide a business update.
Who will take you through the financials and our outlook, we will close with QNX.
With that.
I'll now turn the call over to Don.
Thank you Shep and good afternoon.
We are very encouraged by our performance in the third quarter.
Execution was strong.
We continue to accelerate our strategic initiatives.
And all of our regions worrying growth.
Themes have been resilient and focus and we continue to prioritize safety during Q3 as we build for the remainder of the year.
We continue to manage successfully through uncertainty and cold weather related challenges.
And as a consequence, we are outperforming our categories.
Can you to gain significant market share.
While our category outperformance is in most markets around the world that aren't very diverging markets in category situations, depending on how they are affected bike overall dynamics.
Our largest categories biscuits and chocolate continued to perform well.
Gum is still under significant pressure due to changes in consumer mobility and habits.
And candy, while initially under pressure also improved meals and powdered beverages continue to do well.
The mountain remained elevated in developed markets and we saw sequential improvement in emerging markets.
In developed markets, where more of our business is in the girls in each channel and our gum business. It's also smaller.
I continue to be good momentum.
In emerging markets. The majority of our markets grew in Q3, including key markets, such as India, China, Brazil and Russia.
What conditions do vary and some markets are still challenged, particularly where our portfolio school skews towards gum and candy or radar sales are mostly in the traditional trade, which is mainly in Latin America, the middle East and Africa.
Our long term growth strategy remains unchanged, but.
During this crisis, we have accelerated certain initiatives in order to emerge stronger and build further on our advantage position.
First we are simplifying our business in order to facilitate more growth and reduce costs. Examples of this would be SK, you reduction and innovation streamlining.
Second we are accelerating a number of growth initiatives in order to maintain order momentum and built on our share gains for instance in H. do we at our increasing investment in our brands and commercial capabilities.
We've also focused more on the momentum in E commerce and the grocery channel.
Third in order to offset some of the extra cobiz related cost, we have advantage or advanced a number of strategic cost reduction initiatives.
It also prioritizing stronger between Capex project.
And fourth we are rolling out changes in our ways of working and optimizing our organization structures, while strengthening some new more required capabilities.
Switching now to slide five.
Q3 was a strong quarter across all key metrics, we delivered organic net revenue growth of 4.4%, we'd holding or gaining share in over 80% of our revenue base.
We had good momentum on children coming into the <unk> that me 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 <unk> related costs and.
And operating income grew strongly at 10.5% despite the significant increase in our investments.
And lastly, we continue to improve free cash flow generation delivering them up on 7 billion year to date up.
Point 5 billion versus the same period last year.
I'm now on slide six as stated we continue to believe that our growth strategy is the right one for this environment.
Not only do we believe that our strategy is the right. One we have the ambition to emerge from this crisis, even stronger than we were before.
To do so we are accelerating certain areas of investment and other initiatives.
We didn't the current strategy in light of the current dynamics.
Let me highlight a few of these areas, where we are making strong progress.
We are stepping up working media investments behind our brands in the second half of this year.
This is possible because we'd be restarting investments during the second quarter when because of all the issues arising been described is just started it did not make sense to invest.
We are seeing good results from this increase in investment for example, as one proof point or market share momentum continued in Q3.
Also our ROI on these investment has increased significantly we now rank in the top tier in our industry.
And interesting to note is that we are skewing our spend to digital even more for the first time. This year, we will be spending more on digital than on TV.
Another area of Great progress is brand equity increases our marketing teams have successfully adapted to our brands communication to the circumstances. Some of it is focused on purpose and human connections all theirs on staying playful, while staying at home or some others are about reinforcing height.
Jean practices.
As a consequence, our brands, our forging stronger connections with our consumers really connecting through their purpose.
In another area, we are on track to be 75% through our SK you reduction exercise by yearend.
Our teams are focused on ensuring we don't lose shelf space or incurred too much waste, while increasing sales, reducing inventory and increasing line efficiency.
I do want to reiterate that while 25% SK you reduction sounds like a big number this represents a very small percentage of our revenue.
Of course highlight these debts, we have successfully implemented cost mitigation programs that we expect to fully offset the government related costs, we incurred in the second half of the year.
Well this helps to deliver an own 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 there.
The company is functioning very well in this new reality, but most of our office associates working from home for the foreseeable future.
We've also optimized our organization shifting people do where do we need the most like E commerce digital or RG yeah.
Switching to slide seven.
Well I look over the crisis has been all absorbing we are continuing to progress even enhance our E.S.G. 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 Alpharetta, Robert Perkins Robert.
Robert will help us increase minority representation in our business and I device me My team and the brother company on how to take further action to drive an even more inclusive culture at monopolies.
As it relates to sustainability, we are continuing to invest in creating a more sustainable supply chain for cocoa.
We just don't feel the 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 to sustainable futures the investment program to amplify our impacted sustainability areas.
Its role is to invest in the novelty of sustainability and social impact solutions, mainly in our palm and go growing communities.
With these actions even more showed them before we living our purpose to empower people to snacks right.
With that I hand, it over to Luka.
Thank you gave guidance or good afternoon, everyone.
Our third quarter performance was strong income saw revenue grow share gains profitability in cash flow.
As we exit Q2, we've already seen signs of improvements in both business units that had been highly affected by the dolls and traditional trade cultures, and we were expecting a good quarter with a combination of sustained consumption trying to develop market, but also because the goal.
Although I wouldn't emerging market.
We closed Q3 with overall goal last 4.4%.
I would develop market that deeper sound organic increase all black people take aside why emerging markets returned to more normal life.
Anybody glass, 5.3%.
To provide more color.
It would be about a month, but as far as North America goals, we continue to see in the paper consumption versus pre called level, albeit at a lower rate than you want to.
And for Europe, too, we sell something must be paid demand across all our key mark.
In emerging markets, we saw a good goal make people sign up the business units right.
Including in loud businesses, like India, China, Russia, and Brazil, as operating for speech and E.
Enabling back the Mobileye and.
I'd now like to traditional trade.
Although the situation.
Majority of our emerging market, we expect some color because restrictions and challenging economic circumstances to continuing park of Latin America, and Middle East Africa, and impacting disproportionately I want gum and candy.
Go this quarter, including trade restocking as demand spikes in North America, and Europe, yet to be paid.
Well, that's additional upside glow just in emerging markets, resulting in trading basically no normal levels as we exited Q2.
He's contributed approximately one point girl.
Turning to slide 10-Q.
I'm glad to go through but.
Oh, sorry.
Right.
Mix was unfavorable due to lower won't probably.
And revenues.
As mentioned goal includes approximately one point, though pipeline.
In terms of categories.
Steve continued to experience strong FEMA, we go at nearly 8%.
Even by North America I'm Yeah.
We don't really a key contributor and an important driver of our share gains in the category.
Chocolate, we don't the goal at more than 5%.
Easily aided in part by dark chocolate businesses, such as <unk> and Brookfield returning to a bicycle.
Oh, Okay, Okay, like UK, Germany, Russia, Australia, France, and no debt.
<unk> had a very good quarter.
These wins are also includes nearly 2.5 homes.
In late two will probably pay.
Overall topic leaking well angle Paul that Gainshare.
Gum and candy declined double digit price.
Right now to be driven by Gov, which improved from Q2 levels nothing seems facing significant headwinds.
From social distancing and less out of home heating and be talking to you in some emerging markets like Mexico and western.
Turning to slide 11.
I wanted to spend a moment on ecommerce channel.
I don't know, it's going to be taking on more important.
He called the strategy, we grew 17% on imported basis in Q3 and decreased 25% about what that means.
No no pool market, we grew triple digits.
Close to people digital UK and double digits in China and funds.
In some of those market our E commerce sales greater than our lunch right now because we have more.
We see multiple instances significantly commerce checking easier such as a good thing paycheck.
Important we'd be E commerce to drive me Crazy.
As we look to me and generate additional demand.
This is also obviously to our bottom line, we're probably going to be comparable to our flight business.
Building on our existing plan, we are making substantial investments to pay this business to the next level. This includes our increased investments in more detail about walking yeah.
Capex, we've been engagement and being cooped online shopping site I'm, showing we have the right path.
The right price, we'd be packs and Bumbles impact you platforms, what school and flamenco opportunity maybe to be entitled to consumers.
Turning to copy them show.
Page 12.
I would like.
I mean, you and sustained share gains he succeeded as stronger execution of our team trusted global and local player ending batsmen more walking <unk>, yeah, we compare the.
Okay can you buy goods resolved.
We have had broken chat.
Obama revenue base on that yet.
Well, who show beside its rounded to the U.S. five person.
We went down 3% when compared to the last quarter as we scale it down.
Down slightly.
Peacekeeping chocolate where drivers once again I'd be skewed I don't think that 90% of our revenue base.
And chocolate as okay, maybe 5%.
Gum and Candy I don't Daisy.
Uh huh.
Notable share gains include the U.S. funds, China lots of these.
Okay, Lhasa, almost say that chocolate.
Many of these share gains such as glass in China, <unk> and UK Chocolate bites me pickup in terms of the absolute size.
Similar to our comments last quarter. It is important to understand that yesterday's topic would go all last week on 7% that's going to be flat I'm measured channels, such as convenience and we'll probably pay.
He also does not include the impact of our business, which is performing quite well.
Now let's review our.
Performance on slide 13.
Overall, I was talking about being strong in the third quarter.
We increased gross profit due to volume leverage and productivity.
As well as some promotional decisions.
Operating income dollars increased more than 10% due to warmer introduction by simplification exports, which helped offset called the labor cost of approximately 60 million.
Called we call. This year has been built by doing so far about $200 million.
Importantly, we continue to step up I will walk in media investments to further strengthen our brand.
They are top of mind with consumers and position ourselves well going forward.
Moving to regional performance on Slide 14, no.
North America grew 6.3% driven by innovative biscuits consumption and strong share gains.
Ongoing investments in working yeah and strong execution.
Enough to sustain our goal they share gains.
Tom was down double digits due to you said 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 called would we like to call a meaningful walking me again coming back.
Europe right you go to sleep on 4% in the quarter, we saw good topic legal in chocolate biscuits and meals.
Brian All go across key markets was quite impressive with solid we saw some UK, France, Germany, Russia, Benelux and the Nordics.
In terms of pipe, we won't probably see continued to find what NOLA urea exceed 20% 2019 revenue and that I'd be more than two points to be you.
In terms of Shapell coal mines, we drove notable shopping you pay funds, Germany and Russia.
Well I told US we tend to grow at solid increases in volumes more than offset called too late to the call and unfavorable mix. In addition, working media increased in the quarter.
AMEA Boston go all 4.2% with growth across most markets as you point out in the street had become less on those.
China grew high single digits, holding double digits cold in Q2.
With significant checking to discuss.
Yeah. He turned to goal Weve, a high single digit increase for the quarter driven by chocolate and significant disconnect cool.
And the excellent execution of the team there.
Australia, New Zealand, and Japan posted low single digit go south.
Southeast Asia grew mid single digits in Q3, but we did see some headwinds in certain countries, such as Polycom and visibility.
Where towards the end of the quarter category slowdown due to more difficult economic conditions, which I expect to perceive money up curve.
I wasn't going to be set not classic <unk> declined low double digit.
As the economy that pressure.
The operating income dollars to want to be sudden besides due to volume increases and cost mitigation that despite meaningful increases walking.
Latin America grew coupon Waqar Syed hung back that resolved in Brazil, why not go to inflation pricing.
Something Tina Latin America grew by approximately 1%.
Mexico declined low double digit you put significant decline, okay, which is more than 40% of that season, it's out of home topicals remain impacted by sort of these films.
Biscuits business in Mexico posted robust goal.
In Brazil, we posted double digit growth in the fourth or even by Golden piled up languages chocolate and biscuit.
Underlying goal will be single digits, when taking into consideration the lapping of the supply chain when they could be shoes left here.
Gum and candy remained significantly impacted by called.
Posting double digit declines.
We feel good about equal the progress of our supply chain in store execution and Mako. These countries, but we know that we have to do.
Out west that I'm getting some foods posted a decline as called continues to impact traditional trade channels.
I'm in can be as a topic, we sell double digit.
Oh I am Lucky nice.
So that's pricing cost containment measures and improved supply chain performance more than offset called to make this call. We also benefited from currency hedges, that's up I have been kind spot fleet.
Our expectation is that cost South Latin America will remain challenging in the medium term given its action in place and economic and Baumann feedback.
We remain focused on execution and targeted investments to drive share gains as well as cost controls.
Now turning to earnings per share on slide 18 on a year to date basis, Yes is up 6% driven mostly by your play can get Q3, EPS was flat versus previous years, we don't break in Gainesville, six cents and taxes.
I now move on to our free cash flow on slide 19.
We believe our free cash flow of 1.7 billion through the first three quarters I.
I'm increase of almost $500 million versus previous year.
Hi, you're more focused topics nobody's Saatchi and strong working capital management with a three day improvement in our cash conversion cycle.
I'll try this result.
In addition, the FERC that statement some of which will reverse in Q4 also positively impacted these results.
Moving to our outlook on slide 21, BP BP sequel remains challenging set of market, but we are providing an updated view on Obama expectations based on what we know today.
We expect who you know Bonny light vehicle, all 3.5% loss.
Implied Q4 would be broadly in line with Q3, when excluding infiltrates ball.
We expect overall.
Cool before but below Q3 levels, but equally I speak on can you stepping up walking.
We face some accretion on inflation I might add on transportation costs and bad luck, you know nice, though you expect the basketball favorable currency hedges to subside.
For the full year adjusted EPS is expected to grow at 5% class at home some sports.
Cash flow should be approximately 3 billion.
Yeah, it should be in the low to mid Twentys and.
Adjusted interest expense is projected to be approximately 350 million.
We are also planning to wait to see our share buyback program in the fourth quarter deep.
Even if the business is performing well gosh really strong and we have further strengthened our balance sheet.
It is not expected to habits and significant impact on the P.S. easier even proxy differently.
Fourth translations knowledge that seek to negatively impact our reported Friday Biocrops American people three percentage point and bps by foresight on the year based on current market trades.
This is based on current conditions and does not factor in is significant because they should have you're breaking them down that could be treated by lucky that Washington <unk> called it.
This also incorporates the full year expectations in computing 11 open today.
And being home consumption in certain developed markets, such as North America, and Europe must be paid.
Headwinds in certain emerging markets predominantly in our Latin America.
The middle East, North South trades, and possibly southeast Asia and about what mom business continued weakness in world travel.
With that.
Let's open top hope your name.
If you would like to ask an audio question. Please press star one on your telephone keypad.
Given that star one to ask an audio question.
And your first question is from the line of Andrew Lazard with Barclays. Please go ahead.
Great. Thanks, so much good afternoon turkeys you pointed out in the prepared remarks organic sales growth was strong across all regions. Perhaps you can maybe take us through your thoughts on how trends look currently in in key regions. As you enter for Q and then as a follow on maybe you can extrapolate kind of freaky results into Fourq.
Q and whatever you feel comfortable talking about now regarding 21 at this stage you know because the company will obviously be lapping significant covert costs will have incremental brand investment you'll be lapping as well as have incremental cost saves kicking in right. As you go into next year as well. Thanks, so much.
Okay.
Thank you Andrew.
Maybe what I can do is do a little tour, maybe through categories and regions because the two are quite linked and then Luca can talk about Q4 and 21.
So if you look at the categories. The categories are are.
Affected by the mobility of the consumers are so I would say that 80% of our revenue is coming from advantaged categories that are performing very well and top in those categories. We have strong model. These brands and we are increasing our market share. So biscuits is the is the main.
Drivers at the moment.
The demands remains very strong globally.
We had high single digit revenue growth in Q3, and we had very strong share gains.
Chocolate.
Okay. That's came back in Q3.
He accelerated versus Q2, largely because of some of our emerging markets came back like for instance, India.
And the the 5% growth that you're seeing in Q3 is despite the world travel retail a headwind.
Reach squeeze off two points of the growth of chocolate and yeah World travel retail as you can imagine at this stage he still.
Lower than 20% of flight it was used to be.
I think we we do see that chocolate growth because we have a very advantage portfolio, which is skewed to at home consumption in the emerging markets. We have a low unit price a b do you have a good affordability in there in our chocolate and middle of the road and with the right.
A price point that.
The one that remains very challenged <unk> Gmbh.
We knew that in recession sorting and moments that gummies affected it recuperate slowly.
But he's probably recuperating in a bit slower than we would have anticipated and that has to see everything with the consumer mobility. The 75% of gum consumption is on the go and even if we had not been blocked anymore or a UNFI.
Personally about to go back to lock down in Europe.
The consumer is still not as mobile as before.
And doesn't meals and powdered beverages are doing quite well. So if you keep that in mind and then you go through the regions.
And you know more or less what the mix is of the regions. Again gives you an idea of hobbies doing so north America, 80% biscuits.
Demands of biscuits as I've said remains very elevated our execution has been very strong very strong share gains.
Consumers are snacking more at home.
Still available.
Well above the pre govies level not as high as in in March and April, but still quite increased consumption.
And so.
North America Europe is is solid and seemed very RV go over time. The fact that you probably will get more recommendations to stay at home. We expect these elevated consumption to continue for a while.
It he said same in Europe in mass retail, but our business. There is more also on the goal get away from home and World travel retail is consolidated in our European number. So apart from that Europe has very strong mass retail and now that if you go back you locked down we can expect that the dirty.
Main like that.
And we did see an improvement in the convenience channel in a in Europe, but.
But as I said before the world travel retail still remains very soft.
And then in emerging markets two thirds of our markets, which we had already mentioned in the Q2 call bounced back quite nicely.
I'm talking about China, India.
Brazil, and some of the European emerging markets like Russia.
The Q2 was a disruptive, but they're all coming back haul a high single digit growth.
At this stage, we do not expect a repeat of the disruption that we saw at the beginning of the crisis I think it's impossible in those countries to do the same sort of locked down.
That they did because it it led to severe economic effect.
So we continue to see those markets are recuperating would bid bumps and it's not going to be won a nice thrilled to of course, it depends a little bit on the local situation and what the government does but overall I would expect the emerging markets to gradually keep on improving.
And then there is one third of our emerging markets.
That aarding.
Already in situations, where the macro effects are more pronounced.
On top unfortunately, those markets are having.
Having a high mix of gum and candy in their sales and so they are severely affected and those are the ones that that are having.
Most serious problems I'm talking about Mexico, a central America.
Talking also about the middle East and parts of Africa, and also a few countries in southeast Asia.
So that gives you an idea where we are I think that situation will continue in Q4, and even stretch out into beginning of next year I don't see a huge change taking place on the on the regional situation. So as we see them today, maybe look at you can talk a little bit about Q4 and 21.
Yeah.
Sure Hi, Andrew So beeping on what you just said we had line of sight at this point to as we said the full year revenue number that piece, a three and a half black person ending.
And importantly, as Steve just said all the underlying trends that have been discussed so far out broadly unchanged.
To Q4, and certainly as you know we stopped in November and that is why we see a Q4 in terms of topline that these people are saying, though so cool.
As far as the big goals do you want to be another strong quarter I won't completely.
More in line with Oh, Yeah, why go play or we wouldn't compete by speaking working media, we see the benefits of that or do you can do that too high ROI.
Gates up they have to do best beside the medical file continuous investment that wouldn't be a summit factset, but lower than in the past Oh, I'm, sorry, coffee costs as well as side were very pleased with the positive effect of the cost initiatives that we're putting in place and we have put in place.
That's possible emerged stronger.
Nevertheless, we see some cost pressures, particularly in the U.S. seems fairly basic demand and the need we have to improve on shots availability is causing some excellent just fixed cost that we have been.
Eating also by competitors and others that maybe that pressure, where he didn't get as well as we bhagyam portion of all the transportation on the spot market and as I said he places like <unk>.
In addition, we are running out of some positive people excited you see now in Latin America in other wars and I would say gross profit will be more muted in terms of growth in Q4 versus the 6% you have just seen Q3.
On places like the one we are going to be a plan for next year, but based on what we know so far we believe that 2020, one should be all not going down I can give you some flavor on that on the building blocks of the plan I first of all we expect to retain our share gains into convenience.
Jim bass on not only working media, but the NAR marketing and sales we talked many times about distribution opportunities we have around the world in emerging markets is one example, despite cold call subsiding into next year and be emerged stronger initial piece that.
In our mind wouldn't carried the benefits in good blend btwenty, one we will lean, but yep side in the business to sustain you got share gains that that we see and potentially to weather and more recessionary environment. These.
These kits and chocolates from what we see today, we've continued to do well, but as you say, we wouldn't be lapping some elevated go nothing's likely plenti, particularly in developed markets and discuss but on the flip side I think there should be the Cobra Europe. The most impact they called me a copy goes and Tom cruise.
Talking about cost commodities imports inflation or is it broad stroke along to walk we have seen in the last few years in some cases pulling something chocolate and cocoa and in some countries for for instance, Brazil that would be inflation up a bit old yeah in the neighborhood of what we have seen the last.
He is the sum of all of these again should lead to a 20.1 that should be on onboarding them.
We will have to stay tuned and I'll give you more a label and updates as a as we both the Q4 results but.
You know needless to say that that I've seen some unknowns like Brexit or the potential tax change in D.U.S. on him as he said he left so called <unk> and so I think it is important that they stay on time I know, we talk to you more about this.
The situation there.
Ladies and pollution, though of what we all great. Thanks, everybody.
Thank you Andrew.
Our next question is from the line of dorm ownership.
Organ Stanley. Please go ahead.
Hey, guys.
So either improved or are you.
So the marketshare results have been very impressive for you guys. This year and biscuits and chocolate. Obviously, you had some momentum pretty cool did but it's ramped up even more during coded. So just wanted to get your thoughts on the sustainability of loan to lose market share gains as you look out to 2021, particularly as you have to cycle. These.
Typical covert comps and perhaps some of the higher he's he's spend might play into that.
Yes, yes, yes.
First of all.
This this quarter.
The the areas, where we are gaining or holding share is a is that 85%. It's about three points lower than it was the previous quarter.
That's minus.
And so overall I would say we've held onto our shares.
Geographically speaking and then in value terms, so very well, what's more important to be trees don't report it here, but which we know is that said that the size of the market share gains is quite significant.
And it seems some of the more important areas like in China gum or.
Germany, Germany, chocolates or biscuits in the U.S., China, Brazil, Germany, and so on.
If we analyze what happens is that in the beginning I would say at the beginning of the Gulf. It crashes art. He was our supply chain and our route to market that partially helped us because we saw an increase of our total distribution points. We saw very good customer service levels seem to circumstances and.
And so on and we have PST in some parts of the world.
We also know that consumers in this crisis tend to go to trusted brands they want to feel safe. So they go to the brands They know and trust, particularly the big heritage sort of state of the nation brands around the World and then we we are a company that's with the increased media and adapted messaging.
On our brands.
As much as we can through the cofins situation and that all seems to play very well for us and we've done a number of very successful adaptations of our brand. So we can see the equity that we have in our brands increasing.
And then the third factor I would say is it since there was more at home snacking our range that we have in the different categories or range of product is better suited.
In more in the classical biscuits in crackers, I would say, which is a very real sort of sort of consumption and also in the tablet category of chocolates and that's really helping us so going forward to be doing a number of actions to sustain those are those share gains reentry.
These are working media in the second half, but going into next years Weve continuing to do that same the same thing.
And so yes, Andrew was mentioning we lap a number of things that that will be beneficial for us. We also have some cost pressures obviously.
Obviously, but we are also increasing again, our AMC investment are for our algorithm allows us to do that and I think it's critical in a situation where that there might be a recession and the consumers might still be a little bit unsure I think we need to keep on supporting our brands Sobi for me.
We think that's going to help we are doing a lot of work on the in store visibility starting Christmas or leave probably will start Easter early.
We've got some very big steam Activations coming up for next year. Some some very exciting stuff then and so I feel that we probably have the the best activity plan related to our brands that we've had in a number of years coming up for next year.
And then we are working very hard on our promotional strategy.
We are keeping an eye on value and or any value plus strategy that we need to do like multi buys or or family packs or whatever is needed for the at home consumption.
And then the last thing we are doing is that we have done a number of launches of innovation innovation in certain countries like an expansion of the milk a spread the launch of the new biscuit brand in Germany.
And so on and.
Based on all these things and the fact that we have the momentum and be seen great connection of our brands to the consumer we have confident that on top of the elevated level of this year, we can increase our market share further next year.
Great. Thanks.
Okay.
Thank you though.
And your next question is from the line of Ken Goldman of JP Morgan. Please go ahead.
Hi, Good evening I'm like you have taken down your your exposure to joint ventures. This year I wanted to ask a little bit about the spirit. You previously qualified these jvs, maybe a little bit more as investments than core strategic assets.
Can you get us how do you see these investments today in respect or maybe some other opportunities you have out there.
And does the sale or partial sale of your equity, let's say anything about your longer term strategy. If anything I guess I'm just trying to get at you know what's what's the plan here going forward for for some of these assets. If you if you're willing to talk about it. Thank you.
Yeah. Thank you kind of maybe I'll take that I mean, I wouldnt read anything, but we said many times. We then we remain optimistic.
Optimistic about both assets are they had pretty on the long term potential to start when they compete in a strong coffee, Greece or they have a solid fundamentals best categories and these companies are equipped to you know get more traction.
I'll now keep trying to like Oney mom calls, yes, as one example on.
They are gaining share or they have a clear strategic direction, they are executing quite well and basketball management teams that.
Can even income side the advantage all of the topic was I got that right that that both companies had so there are all the ingredients in our minds for a long term top and bottom line GAAP School Apple pencil.
We are not able to really talk specifically about Oh Gee yen ideas.
So far but I think you saw a strong quarter for <unk> convenient more mindful topline beacon consensus is gaining penetration assumption momentum, yes, and a really strong outcomes across all metrics and they continue to to be back rates and not create cash flow. So we.
That Ah. Thank you Hi Inn wall kind stock price would say for most companies and a you know nothing consistent with other companies as well and the broad CPG World. We made a series of moves that quite frankly were more topical than anything and.
If you look at our balance sheet, we had showed the top quite a while since the beginning of the upsell on TV, we are comfortable around or you know kind of that as a woman or should we make farther trades. They would be a diaper bag for us and we try to coordinate with other major shareholders.
And now no I wouldn't say he clearly made.
Major shareholders, we own 22.9%, though of the company wells come on you all that he's getting doesn't matter you for Optionality and are having said that though we are committed for the long term success of the company you might expect some trades from us in the coming quarters.
Does that I should improve the current bidding we could slow by we will remain disciplined bull in the JV and <unk> and a you know I'm the kind of circumstances, we want to retain.
Now both stock. So what you have seen recently was more tactical than anything we took up arms control certain stock price levels I I, we didn't make it to put these companies I know we didn't need the angel.
But as you said overtime, we want to replace those with a with a snacking assets.
Great. Thanks, so much.
Your next question is from the line of Brian Lane with Bank of America. Please go ahead.
Hey, good and good afternoon, everyone.
So maybe just to follow up on.
Lukas the comment you made in response to Andrew's question related to the algorithm next year and.
More interested in it at this point in cash flow. So I guess two questions around that one would you expect that free cash flow would also be or free cash flow conversion would also be sort of on on algorithm and then maybe connected to that.
No part of the algorithm is Ben you know to returning cash to shareholders right via share repurchases and dividend increases annually. So would we expect that that would be part of the equation again in 21.
So the straight answer to two last part of your question is absolutely. Yes, we remain committed to dividends to what we said several times about the then growing in excess of our bps I think the last dividend increase or you know likes that.
Share buybacks to continue absent that you know and I can see since all things that at least on a you know might happen or not and so I'll say, yes, there should be share buy backs and finally on free cash flow.
Free cash flow or there is no reason to expect.
He is slowed down next year, having said that I think you know we went public with that JV.
That reset the base for tax purposes, they see now in Europe, and the recent tax component that he's gonna be try to free cash flow next year, but I feel like at this point, you know might not be going up from this year, but I don't see it in some of the thoughts are.
One time as that I just thought I think you can think about a three three Clos billion dollar cash flow even for next year. That's the plan at this point.
Okay terrific. Thanks Luca.
Thank you Brian.
And your next question from the line of Chris Growe with Stifel. Please go ahead.
Hi, good evening. Thank you.
Just had two questions if I could high the first would just be in relation to the S.K. you rationalization program just want to get a sense of that start here in the quarter does that ramp up in the fourth quarter into next year.
And I guess I'm also curious like where do you see the benefits of that coming through so as you come behind that with more innovation is it just better volume growth as our mix improvement that sort of thing and then just a quick question if I could on inventory levels you get some benefit this quarter from shipping inventory does that are you back to where you want retail inventories to be or your own inventories are there.
We're building to go as we move into fourth quarter and next year. Thank you.
Okay maybe.
Maybe I'll do the SK using the look I can do the the inventory.
So.
The the SK use or the timeline on that is it's a gradual.
Largely driven.
In the negotiations with the trades and around the world. There are certain moments you can make these changes and for instance in Europe that moment is the beginning of next year. So we're preparing for it now but the implementation really only be beginning of next year. So roughly I would say if you.
Look I did.
Around the world, we should we should be 75% done by year end and then the rest would be done in the beginning of 21.
And you have to think about this as as part of a broader simplification program that is meant to drive both.
Both the topline and the bottom line and cash flow.
It's a simplification of SK use the number of innovation initiatives and also I'm looking at on a brand portfolio.
So we do not expect a negative top line impact it or they represented 25% represent a two or 3% of our revenue, but we do we think to be really easily replaced that with high velocity on the remaining as can you will get more shelf space and then the benefits as I already mentioned.
More sales, we expect our inventories to go down because it's those if you use that take a lot of the inventory.
In manufacturing it is less complexity less downtime fewer changeover show it gives us a benefit on our costs and then on the on the customer side, we give them better customer service, it's going to be easier for them to manage their shelf and so their costs go down still so it's it's just a support.
To deliver on our long term algorithm. This is not meant to be transformative or from a magic margin perspective, but it does it does help us to deliver on the top and the bottom line and the cash flow of our algorithm look.
Okay.
On the inventory level, there, obviously puts and takes I would say, we got to a more normalized level or at the end they'll Oh by Q3 overall I think we are in the night, Nick decent situation as I said the might be places, where we need to.
Well it'll be more other than where we are fun I wouldn't expect a you know a big pickup you to eventually glanzman in a in the quarters to come in.
And obviously, we want to India with the right level three.
As we have always done.
Thank you for those answers I appreciate it thanks.
Thank you.
And your next question it sounds a lot of Robert Moskow with Credit Suisse. Please go ahead.
Hi, Thank you just wanted to to make sure I understood. The implied sales guidance for Q. It seems like it's below 8%.
To date, you're at 3.9, so just wanted to understand why it might be lower than year to date and.
And then also can you be more specifics about cost action plans the efficiency plans second quarter. They were in last year.
And yeah D.A.
And is that where most of these cost reduction plans are going to take place and if so.
Does that make it more difficult to capitalize on the growth as they recover.
I Ah we said it is a three and a half a percent plots on the full year sold imply a goal crepe as I said you piece on the ball three per cent for Q4, I wouldn't read too much into you know a different number than not and 3% in Q4 I.
He also clearly said that that he's one point they'll go into 4.4% that you see in Q3. So again, we are not mine. So as you think about a bulk you for unfortunately at this point.
Yes.
No trading bank three and as we look into next year again, we won't like not all these initiatives that will allow us to eat.
He said that he saw now on I believe I think that's the simple way to think about it in terms of cost initiatives are.
I would say they are pretty much across the board the emerged stronger initiatives. The initiatives. We have taken a interim so are you designing our cost packages in terms of pushing back and let Brent golfing themselves.
Walking I believe you know working media and increasing working media those I suspect that you see consistently throughout the region, yes that might be just like you asked where Oh North Americas web.
Morning themselves by the government.
But overall again, they are fairly ER and consistent across the board.
Okay. Thank you.
Thank you Robert.
Your next question is from the line of Alexia Howard is Bernstein. Please go ahead.
Hi, there good evening.
Yeah, Hi, Hi, Alexander.
Two quick questions first.
Hi.
Oh no.
Oh.
<unk>.
Yes.
<unk>.
Yeah.
And did you pick the word.
And then my follow up.
It seems like it could be around okay.
With the need for.
Hello.
Let's see it.
You're talking about a new center.
Yeah.
I believe are you thinking about changing.
Well I still think coke.
That sounds good.
Thank you.
Uh huh.
Thanks, Alexia it it was very broken up so I I had difficulties understanding what you exactly I suppose an echo somewhere on the line and made it difficult I think you asked me what I heard it was it about E commerce, but I don't know what the details.
We're.
Somebody they look at their look out Oh, maybe you know I try again.
I didn't understand the second part of the question a goal I mean I know the first part was about the commerce or the second part I have no clue.
And I try to I mean, I see it.
Yeah.
Yeah, let's try once again.
Right now.
Yes, yes.
Hello.
You mentioned that you want.
Yeah.
In some areas.
From a different and obviously area.
Thank you.
Water sales.
Yeah.
Hankering could you just give the Tiger <unk> dollar you can.
She and her team and then the second question was on Coke.
I'm I'm just curious about.
He might be changing your regional approach.
One thing given your you put a new scent for magazines in Indonesia, I mean.
$400 a ton.
This is calling in some parts of Africa.
How are you thinking about changing your regional approach to why you're guiding the decline from politically so please [laughter].
Yes, yes, yes, now we work.
It was not you ever the technical side of things So next year [laughter].
On E Commerce, Yes first of all you see.
Being a very good growth in E commerce as I mentioned in the prepared remarks, roughly you could say that or E commerce.
Head space or is it largely in China and in the U.S.
The rest are the two other big countries, we have on the UK and France.
But I would say the biggest gap we have in China Beach, we are catching up to be working very hard on that overall, we've seen market share gains are largely in most of the areas around the world with exception of France at the moment and we've also started to enter into smaller.
Yeah countries and that he's going to give us some XTRAC again.
Also overall, though if you take globally our shares on an offline are similar so we have some headroom here and there, but then we are overrepresented somewhere else.
So that that's a little bit the situation on on the E commerce going forward, it's about expanding our assortment to meet the channel need.
It's about recreating impulse experience, it's about you.
Developing our our data as it relates to the consumers and getting better connections for them, it's about putting more investment in there and then experimenting with two other areas that are that are developing for us an E commerce, but she's E business to business.
And direct to consumer.
So also important to mention is that our margins are similar online and offline. So that's the situation on E Commerce, if I go to Gokul.
Vietnam.
Experimenting with its cocoa in all the regions.
But at this stage.
We are going to continue in large part to continue to source from my Ghana and Ivory Coast.
The V. sourcing in Latin America resource in India, we source in Indonesia, but it's been one of the biggest.
Cocoa bias in the world and so in those regions do not offer us enough quantity due to shifts in shifting developing real.
Cocoa sourcing takes years sobi working on that but it's not going to happen next year I'm not with the amount of cocoa that we need to buy.
On the other hand, we have already started to reflect the extra l. IDR than living.
Income differential into our pricing and so we are fully sets to absorb that next year.
I mean, we feel good about the supporting what the government in those two countries are trying to do we think it fits in our E. As GE approach and at the same time Vicki we want to we want to keep on going with our own program Coca Cola life, which is complimentary to that be thinking there.
It's the right thing to do because we want a real sustainable future for cocoa and farm farmer income is really critical.
And and we are making sure to go lives that we can actually see that then monitor.
What's going on so we are planning to have 100% of our cocoa volume by 2025 being sourced through our cocoa life program.
So I would say that is the the answer on on cocoa.
Perfect. Thank you very much and the color I'll pass it on thank you.
No problem. Thank you.
And your final question is from the line of David Palmer with Evercore ISI. Please go ahead.
Thanks, Good evening, just a follow up on emerging markets in <unk> and a question on the marketing or grocery investments.
And you had nice improvement in Russia, Brazil, and some other markets and you mentioned in the previous question that you expect emerging markets to continue to improve and.
I think you also said in your prepared remarks that there were some late quarter slowing in the east Asia outside of China. So it.
Maybe just some clarification about where you feel like the momentum is in continuing to improve across emerging markets would be helpful. And then just in terms of your growth Reinvestments you guys don't have you know, it's sort of just a windfall this year such that you're spending a ton of money in advertising. So would I expect this to be somewhat of a measure.
Your plan about what you're doing and you said advertising are working media as you said it would be going up particularly in digital so could you talk about that growth spending where you're spending it what's where you're getting this higher or why do you think that's going to continue into 21. Thanks.
Okay.
I'll take the first part and then do the second front.
Yeah sure.
[laughter] so on emerging markets I would say the.
The temporary headwinds.
In our mind do not hamper the long term prospects for me, we feel that we are executing well we have a an advantage network. We have deep distribution, we had good momentum pre crises <unk> coming out of the crisis in most of the emerging markets is very fast I'm thinking about India.
Brazil.
Share gains that we see and and obviously given that we can only focus on what we control and she's execution cost management selective investment.
HM we remain I'm confident about two doses I mentioned and those those are the markets, where we're seeing good momentum China, India European.
Im.
Sorry emerging markets.
Brazil little bit of the parts of Africa we've.
We feel that they are already back in positive territory I feel confident that they will keep on girls <unk> growing they were performing very well for us before the crisis, if anything I think weve improved our position during the crisis and be a pretty strong teams on the ground.
It wherever we are cautious and very neat.
Need to work hard because we are.
Hampered by the local situation that's more in Latin America thinking Mexico thinking.
Wakeham for Russia, which is a the central America, and the Caribbean and Colombia, and some of the middle Eastern into Southeast Asia countries, that's very gum and candy is big for us and the recuperation of gum and candy is going to be critical for us. So he's doing a lot of work.
How to promote gum consumption in the time of Cobiz, where people are more spending more time at home and they are wearing masks and so on which is which is a contra indicative for gum consumption.
Ever you're trying to.
Make sure that for next year, we see good momentum in that category. So that's the part that I would say that we are a bit more careful.
Luca.
Yeah, So now let's see David.
You know the way you have to see these SAP I think in Q2, given the circumstances, we pulled back.
And so we doubled down the second part of the year that we said many times the share gains that were seeing there truly broad based they are across multiple plants multiple countries with the exception I would say ill Oh gosh. We are extremely pleased with the share gains we have seen biscuits chocolate and so we want to be.
Great and goals and that we will continue to invest into 2020. One so between the fact that called costs will subside keeping the fact that in Q2, we will be lapping nowhere agency spending I think you would see you know I'm not going to see them that starting from so eat it and.
Yes expansion should be in line with expectations call for next year I don't expect you know the same material impact that we are having now the second part of the unto themselves looking media into next year as a Ah we will be lapping a lower Q2 and B, we will have other labors.
To that PNNT, including I called the cost side to be able to fund these incremental.
Investment, but reality is that the more we can repeat dose that gauge the back or even in a context, where maybe topic always would be is likely impacted by potentially.
Potentially such.
Very very helpful. Thank you.
Yeah, Barry White conveyed.
Thank you Barry I think that's.
Oh no further questions.
Okay now and there are no further questions at this time I would like to turn the call back to management for closing remarks.
Okay. Thank you Angela.
Well. Thank you for connecting as you can see we have a a good solid.
Solid third quarter, we feel.
Good about so read the fourth quarter is heading and and how we will close the year. We've given you a first flavor of what 21 looks like which we also feel pretty good about and obviously in the next call. We will give you the guidance for the year.
If that's possible because you never know what happens in these coffee situation. Thank you for your interest and thank you for your questions and if there's anything else feel free to connect a andrei or shep and he can give you more information. Thank you.
Thank you gentlemen.
Today's conference call. Thank you for your participation you may now disconnect.
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