Q3 2024 Mondelez International Inc Earnings Call
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Speaker Change: Good day and welcome to the Mondelēz International 3rd Quarter 2024 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Mondelēz management and the question and answer session.
Speaker Change: In order to ask a question, please press the star key followed by the number one on your touchtone phone at any time during the call.
Speaker Change: I would now like to turn the call over to Mr. Shep Dunlap, Senior Vice President, Investor Relations for Mondelēz. Please go ahead, sir.
Shep Dunlap: Good afternoon and thank you for joining us. With me today are Dirk Vandeput, our Chairman and CEO, and Luca Zaramella, our CFO. Earlier today we sent out our press release and presentation slides which are available on our website.
Shep Dunlap: 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.
Shep Dunlap: 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.
Shep Dunlap: In addition, we provide year-over-year growth on a constant currency basis, unless otherwise noted.
Shep Dunlap: You can find the comparable gap measures and gap-to-non-gap reconciliations within our earnings release and at the back of the slide presentation. Today, Dirk will provide a business 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.
Dirk Vandeput: Thanks, Shep, and thanks to everyone for joining the call today. I will start on slide 4.
Dirk Vandeput: I'm pleased to share that we delivered strong top-line growth with positive volume mix.
Dirk Vandeput: Developed markets grew mid-single digits led by solid progress in North America biscuits as well as recovery in Europe following successful implementation of our annual pricing.
Dirk Vandeput: Strong profit-dollar growth enabled us to continue our track record of robust free cash flow, generating $2.5 billion a year to date.
Dirk Vandeput: We expanded our presence in the fast-growing cakes and pastries category by acquiring a majority stake in Evert, a leading player in cakes and pastries in China.
Dirk Vandeput: I'll provide some additional color on this exciting partnership in a few minutes.
Dirk Vandeput: We remain diligent in driving progress against our long-term growth strategy, focused on our core categories of chocolate, biscuits, and baked snacks.
Dirk Vandeput: These core categories continue to show strong consumption and on top consumers remain very favorable to our iconic portfolio, as such generating significant headroom opportunities.
Dirk Vandeput: These strong fundamentals, combined with our advantaged geographic footprint, keep on giving us confidence that we are well positioned to compound long-term sustainable growth.
Dirk Vandeput: Turning to slide 5, you can see that organic net revenue grew 5.4% this quarter, with adjusted gross profit dollar growth of 11.2%, enabling us to continue investing in the business.
Dirk Vandeput: ANC spending is up mid-single digits, helping to drive continuing consumer and customer loyalty to both our iconic global brand and our local jewels.
Dirk Vandeput: An adjusted EPS grew 28.6% this quarter and we have generated $2.5 billion in free cash flow through the first nine months of the year.
Dirk Vandeput: On slide 6, we are pleased to see that developed markets are beginning to recover, with solid revenue growth and an increasing healthy volume mix in the third quarter.
Dirk Vandeput: Unlike many of our peers, we're seeing continued consumer uptake of our core snacking categories.
Dirk Vandeput: In North America we are seeing volume growth start to rebound as inflation cools and we continue to expand distribution in areas like club.
Dirk Vandeput: Similarly, in Europe, revenue grew 8.1% in the third quarter, following significant disruption earlier in the year, as our annual pricing took hold.
Dirk Vandeput: Unlike many of our peers, both volume mix and net revenue are beginning to turn the corner.
Dirk Vandeput: Consumers are continuing to embrace chocolate and biscuits as everyday indulgences and our revenue growth management strategies enable us to meet every consumer's needs with a broad array of product formats, pack sizes and price points to meet their definition of value.
Dirk Vandeput: Turning to slide seven, you can see a bit more context on how and why our snacking categories remain durable.
Dirk Vandeput: In North America, consumer confidence remains stable, despite continuing concern with overall grocery prices.
Dirk Vandeput: Biscuit category volume is improving to flat to slightly up over the last three months. In the United States, private label volume share is declining, demonstrating that consumers remain loyal to their favorite brands and that our price-packed architecture is working.
Dirk Vandeput: As a result, our two largest U.S. brands, Oreo and Ritz, are gaining share year-to-date.
Dirk Vandeput: Meanwhile, in Europe, elasticities are moving slightly higher, but remain modest. We continue to see solid category value growth in both biscuits and chocolate, with private label share declining over the past three months.
Dirk Vandeput: Some consumers are shifting to smaller packs of chocolate for everyday snacking, and again, our RGM and price pack architecture enable us to offer an appropriate range of choices.
Dirk Vandeput: As we head into the year-end festive season, seasonals are also looking solid.
Dirk Vandeput: In emerging markets, modest elasticities continue. Consumer confidence is stable in India, Brazil and Mexico. While the overall China economy remains challenged, we're seeing optimism beginning to return as stimulus policies take effect.
Dirk Vandeput: Turning to slide 8, it's important to reinforce that while the external environment remains volatile, we remain focused on accelerating our long-term growth strategy.
Dirk Vandeput: We are continuing to reinvest in our brands, expand distribution, drive M&A and scale sustainable snacking.
Dirk Vandeput: We remain on track to deliver 90% of revenue through our core categories of chocolate, biscuit and baked snacks by 2030. And our teams continue to deliver strong progress against our strategic agenda.
Dirk Vandeput: For example, our Oreo brand launched in August, an innovative collaboration with Coca-Cola, our largest global brand activation to date.
Dirk Vandeput: These two iconic brands joined forces in a 360-degree marketing campaign encompassing digital, social, celebrity, and in-person activation.
Dirk Vandeput: to unite our strong fan bases and build buzz around two high-profile, limited editions. A Coke-flavored Oreo cookie and an Oreo-flavored Zero Sugar Coke.
Dirk Vandeput: Along with these marketing activations, we are continuing to strengthen store availability, visibility, and execution around the world.
Dirk Vandeput: For example, in Brazil, the convenience channel is growing high single digit on a year-to-date basis with plans to further grow coverage in this channel with additional stores.
Dirk Vandeput: We are also continuing to harness the power of acquisition to capture synergies and drive growth.
Dirk Vandeput: For example, in China, our acquisition of Evert step changes our growth in the cakes and pastries category.
Dirk Vandeput: I'll provide additional color in just a minute.
Dirk Vandeput: Importantly, we remain committed to driving progress toward a more sustainable snacking business.
Dirk Vandeput: through our continued focus on our environmental and social sustainability agenda.
Dirk Vandeput: For example, we recently introduced new recyclable paper packaging for our legendary Lou Biscuit brand in France, Belgium, and the United Kingdom.
Speaker Change: Shep Dunlap, Luca Zaramella, Luca Zaramella, Luca Zaramella, Luca Zaramella, Shep Dunlap.
Speaker Change: Now let's dig a little deeper into the cakes and pastries category and our recent announcement in China.
Speaker Change: As you can see on slide nine, the global packaged cakes and pastries category is valued at about $95 billion U.S. dollars.
Speaker Change: Mondelez currently holds the number 3 global share position, and because this category is highly fragmented around the world, we see significant opportunities for bolt-on M&A as well as organic growth.
Speaker Change: and our 2022 acquisition of Cipita, a leader in croissants, baked rolls and related snacks, anchored in Central and Eastern Europe.
Speaker Change: In China, as you can see on the right-hand side of the slide,
Speaker Change: The packaged cakes and pastries category is valued at about 14 billion U.S. dollars. Within that category, the frozen to chilled segment is growing double digits, currently estimated at 1.5 billion dollars.
Speaker Change: Chinese consumers increasingly seek fresh, premium options with innovative and sophisticated taste profiles to meet a growing range of snacking occasions.
Speaker Change: On slide 10, you can see that's why we are excited about the expansion of our existing partnership with EVIRB, the Chinese leaders in the fast-growing frozen to chilled baked snacks category.
Speaker Change: We have worked with Evert for several years to develop, manufacture, market and sell cakes and pastries featuring some of our iconic brands including Oreo and Philadelphia.
Speaker Change: Our recent purchase of a majority stake will enable us to further accelerate growth through continuous innovation, leveraging the combination of our high-value brand with Evert's advanced R&D and technical expertise.
Speaker Change: Chinese consumers increasingly are seeking fresh premium products with demand growing especially fast among younger generations in mid-tier cities.
Speaker Change: Evert has a strong presence among key customers, including club stores, and our expanded partnership will enable us to scale distribution broader and faster.
Speaker Change: Before I turn the microphone over to Luca, I'd like to share some preliminary perspective on our approach to 2025 in light of the widely known cocoa cost headwind.
Speaker Change: Chocolate remains a great category and continues to generate significant consumer interest.
Speaker Change: Consumers count on our iconic brands.
Speaker Change: including Cadbury Dairy Milk, Milka, Toblerone, Cote d'Or, Marabou, Freya, Lacta to celebrate special occasions, to share with family and friends and to unwind with a moment of mindful indulgence.
Speaker Change: As we will continue to invest in our brands, we remain confident that consumer loyalty will not only endure, but continue to grow, even as we execute the necessary short-term pricing steps.
Speaker Change: While we remain relentlessly obsessed with consumer value, we do anticipate some upticks in elasticity in certain markets, and we might need to adapt to more aggressive RGM and promotions.
Speaker Change: And while the temporary cost increase of COCO will put pressure on our margins, we will continue to invest in tools that strengthen brand loyalty and accelerate growth, such as VZ coolers to improve visibility and accessibility, as well as continued strong investments in working media.
Speaker Change: We expect the majority of our portfolio to grow both top and bottom line consistent with our algorithm and we believe we are taking the right steps to position the chocolate business for attractive and long-term sustainable growth.
Speaker Change: We remain confident that we are well equipped to appropriately manage input cost headwinds and to emerge stronger.
Speaker Change: With that, I'll turn it over to Luca to share additional insights on our financials.
Luca Zaramella: Thank you, Dirk, and good afternoon everyone.
Luca Zaramella: Q3 was a strong quarter across our key financial metrics, including top-line, gross profit dollar, ANC investments, earnings growth, and free cash flow.
Luca Zaramella: Revenue grew 5.4% with strong pricing execution and positive volume mix growth.
Luca Zaramella: Developed markets grew 5.6% with a volume mix increase of 1% driven by both North America and Europe.
Luca Zaramella: Total revenue for emerging markets grew 4.9%, with a volume mix decline of 1%, driven by Western brand boycotts in AMIA and the lower volumes mostly in Mexico.
Luca Zaramella: Moving to portfolio performance on slide 14.
Luca Zaramella: Biscuits and baked snacks grew 3.3% for the quarter.
Luca Zaramella: Several brands deliver robust growth, including Aureolite, Belvita, Lou, 7 Days, and Club Social.
Luca Zaramella: Chocolate group plus 9.2% with strength in both developed and emerging markets.
Luca Zaramella: Volume mix was down minus 1.2 percent, driven mostly by challenges in Latin America, whereas most of Europe came back strongly after customer disruption.
Luca Zaramella: Cadbury Dairy Milk, Milka, Toblerone and Freya Marabu all deliver strong growth for the quarter.
Luca Zaramella: Gum and candy grew 5.6%, driven by continued momentum and strength in key markets, including Brazil and US candy.
Speaker Change: Volume mix in this category was likely positive.
Speaker Change: Let's review market and share performance on slide 15.
Speaker Change: We held our gain share in 35% of our revenue base, with solid results in chocolate as well as in gum and candy.
Speaker Change: This trend was partially offset by our U.S. biscuit business, which accounts for approximately 25 percentage points of revenue.
Speaker Change: We expect total share metric to improve moving forward, as Europe gained share in Q3 following customer disruption in F1.
Speaker Change: The U.S. still has work to do but we have seen shareholding in the last three months and believe new price packs in Q4 should help drive further improvement.
Speaker Change: Moving to regional performance on slide 16. Europe grew 8.1% in Q3. Execution was strong in key markets such as the UK, Germany and France, all delivering significant growth. We saw a slight uptick in elasticity resulting from pricing, but consumer sentiment remains relatively stable.
Speaker Change: OI dollars were up more than 46%, including significant AMC investments, and due in part to pricing versus favorable COCO phasing.
Speaker Change: North America grew 3.7% against a strong compare of nearly 10% in the prior year.
Speaker Change: Solid performance in growth channels, distribution gains, and impactful brand activations like the Oreo Coca-Cola partnership drove Q3 growth.
Speaker Change: New price pack for Oreo Ritz and Chips Ahoy that will provide better representation in the three to four dollar range are just beginning to hit retail shelves now.
Speaker Change: North America Y increased 6.5%.
Speaker Change: AMIA grew 5.8%.
Speaker Change: China posted strong results with high single-digit growth fueled by continued investments in brand building across Oreo, Chips Ahoy and Stride, coupled with ongoing distribution gains, adding approximately 80,000 new outlets on a year-to-date basis.
Speaker Change: On the flip side, chocolate continues to perform well, especially within the low unit price segment, which grew mid-single digits.
Speaker Change: Australia, New Zealand and Japan deliver another strong quarter of growth driven by RGM, strong activations and innovation.
Speaker Change: Boycotts in the Middle East and Southeast Asia remain a headwind to results.
Speaker Change: We expect this dynamic to persist for the foreseeable future. However, it is largely embedded in the base beginning Q4.
Speaker Change: The overall impact to the region was approximately 2 percentage points worth of growth.
Speaker Change: AMIA increased OI dollars by more than 15% with meaningful ANC increases.
Speaker Change: Latin America grew 2% in the quarter. Brazil and Western India posted growth, while Mexico was down modestly.
Speaker Change: Latin America-wide declined 4.8% due primarily to lower volumes in Argentina and Mexico.
Speaker Change: Turning to page 17, in Q3 we saw strong double-digit gross profit dollar and NOI dollar growth.
Speaker Change: Top-line growth, pricing execution and ongoing cost discipline have fueled these results. In addition, COCO is still relatively benign in Q3 thanks to our effective coverage strategies.
Speaker Change: In Q4, this dynamic will reverse with meaningful pressure to profit as COCO catches up to market levels.
Speaker Change: next to EPS on slide 18.
Speaker Change: Q3 EPS grew more than 28% in constant currency, on the same drivers as OI.
Speaker Change: We continue to generate strong free cash flow, as you can see on slide 19. We deliver $2.5 billion to date, which includes a payment of nearly $400 million in the quarter related to the EU Commission matter.
Speaker Change: We have repurchased $1.2 billion in stock year-to-date and will continue to be opportunistic for the remainder of the year and into 2025.
Speaker Change: Before moving to our outlook, I'll provide some additional context on COCO.
Speaker Change: due to tight physical availability ahead of the new crop.
Speaker Change: At this stage, the new crop outlook remains positive, with significant recovery compared to last year.
Speaker Change: With still a few weeks to go before pods are harvested, we believe this is good news. We also continue to employ a flexible hedging structure that would allow us to risk manage next year.
Speaker Change: Moving to slide 22 and our approach to pricing and cost as we move into 2025.
Speaker Change: In terms of pricing, we will continue to utilize all the tools in our RGM playbook to minimize volume declines and limit elasticities, thus protecting penetration and frequency of consumption.
Speaker Change: We will keep price points, especially for entry-level and low-unit items.
Speaker Change: We will also improve our participation at multiple price levels, offering consumers more choices.
Speaker Change: Additionally, we will continue to reinvest in our brands, primarily through working media.
Speaker Change: by focusing on non-working media, overheads and productivity. We will not take shortcuts or make temporary moves that disturb the business, but rather focus on areas where we can make lasting changes.
Speaker Change: We will also not sacrifice key investments or product quality.
Speaker Change: Net, we are confident that we have a strong plan to navigate the headwinds presented by COCO next year.
Speaker Change: We will focus on what we can control and will remain agile as needed to ensure the long-term health of this category, while positioning ourselves to emerge stronger when cocoa prices settle at more sustainable levels.
Speaker Change: Turning to our Outlook.
Speaker Change: Our outlook for 2024 remains unchanged.
Speaker Change: Just a word on EPS.
Speaker Change: We continue to expect high single-digit growth of a 2023 base that includes developed market GAM.
Speaker Change: When you look at year-to-date margins, two things are clear, aside from strong operating performance.
Speaker Change: First, we procure cocoa at much better prices than the market.
Speaker Change: Thus, profit growth has been quite good.
Speaker Change: On the other side, Q4 is a bit of an anomaly, as we procure cocoa for Q4 close to peak, if not at peak prices.
Speaker Change: While, at the same time, we will not yet have the benefits of either additional pricing or planned COCOA savings initiatives in Q4.
Speaker Change: While next year COCO will be significantly higher than the average of 2024, it is projected to be lower than Q4 2024.
Speaker Change: Most of our other key assumptions remain consistent with what we shared with you on our last call, with the exception of interest expenses, which is now estimated at 250 million dollars for the year.
Speaker Change: Although it is premature to get into specifics around our 25 outlook,
Speaker Change: I would note a couple of items.
Speaker Change: The majority of our business, which is not chocolate, will be on algorithms.
Speaker Change: We expect peak cocoa pricing to be reflected in the first half of 2025 while chocolate margins should improve sequentially versus Q4 2024.
Speaker Change: Dirk Put, Shep Dunlap, Luca Zaramella
Speaker Change: Our plans around pricing RGM and cost management are expected to be significant and help provide room for reinvestment.
Speaker Change: However, where we sit today, it is tough to see a path to earning growth in 2025 unless COCO adjusts down from the current future curve and or elasticities are much more benign than our current planning assumptions, ergo there will be additional pricing.
Speaker Change: But as we said a few times, we believe COCOA in 2026 is going to normalize.
Speaker Change: and we would have a meaningful rebound of our chocolate profit to allow for us to get back on track with our algorithm.
Speaker Change: Clearly we do not control cocoa prices, but in the unlikely event that they would not normalize by 2026, our gradual approach to pricing seems still to be the best approach to take.
Speaker Change: Overall we feel good about the fundamentals of the business, our growth opportunities, the investments we are continuing to make in the business, and our plans to navigate this short-term cocoa dynamic.
Speaker Change: We expect to emerge from this period of elevated cocoa prices even stronger and better positioned for attractive, sustainable earnings growth. We will provide more details related to 2025 at our year-end call.
Speaker Change: Finally, a word on our sales of the J. D. Pitt shares.
Speaker Change: We are happy overall with the return we realized on our coffee financial investments.
Speaker Change: Some of the proceeds will be deployed immediately towards lowering our CP balance, but eventually will be deployed towards buyback and to support M&A.
Speaker Change: There will be a modest dilution in Q4, with a full year 8 cents headwind. We will issue an 8k with more details over the coming weeks.
Speaker Change: With that, let's open the line for questions.
Speaker Change: Thank you. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question.
Speaker Change: We'll go to our first question from Andrew Lazar with Barclays.
Andrew Lazar: Thanks so much. Good evening. Maybe, Dirk, first, I was hoping you could discuss the puts and takes in 3Q and maybe specifically how that shapes sort of your strategy and shot put going forward, you know, in light of the challenges that Coco is going to present next year.
Dirk Vandeput: Hello, Andrew.
Speaker Change: We continue to invest in working media, in our brands.
Dirk: Yes, chocolate is a challenge, but we are quite clear on which principles we have and what vision we have to deal with the cocoa challenge.
Dirk: Our second one is, of course, within that category, to hold or gain market share, and taking an overall long-term approach to how the category will develop and how our business will develop.
Dirk: We have to price next year, but we are very conscious of making sure that we protect key price points.
Dirk: and certain thresholds. So we're doing a lot of work on our low unit pricing in emerging markets or entry-level pricing in developed markets and we're launching a bunch of new sizes in our chocolate business.
Dirk: I think our RGM plans are well thought through. We just went through everything with all the different business units that we have and I think the work that has been done is very strong. And we've really thought through how we think the category will evolve in the coming months.
Dirk: The rest of our business is business as usual.
Dirk: Maybe a few more things in the sense that we are not taking any shortcuts for short-term gains.
Dirk: Next year, we do realize that there is additional pricing and we will have some extra pressure. But overall, as I said before, we think chocolate is an outstanding category and we are fully committed to it.
Dirk: Or cocoa pricing is still very volatile. It could be more or less than we planned. So being agile next year in how we deal with those situations will be another critical thing for us I believe.
Dirk: I hope that helped.
Andrew Lazar: Yeah, no, very helpful. I appreciate that. Thank you. And then just a quick follow-up, Luca. I realize, obviously, you're not prepared to provide detailed 25 guidance yet, but fourth quarter, as you mentioned, it's the first one where you'll see, you know, the impact of significantly higher COCOA costs. So, I guess, how does 4Q implied guidance, which looks, for EPS, I think, down some, you know, 20% or so year over year, inform the way we should think about next year? Whatever else you can share along those lines, knowing you're not going to provide the full thing yet.
Andrew Lazar: Thank you.
Luca Zaramella: As you rightly point out, the implied EPS in 4Q4, based on us reaffirming guidance, is down year on year. But I said in the prepared remarks that I see that as a sort of anomaly. First of all, because COCO costs 4Q4 were locked in when COCO was at peak value.
Luca Zaramella: And second, clearly in the numbers in Q4, there is no effect of additional pricing or for that matter of the cost measures that we will put in place as of the beginning of 2025.
Luca Zaramella: bear in mind that in 2025 pricing will not flow through as of day one and so it will take a little bit of time for profits to improve and quite frankly profit improvement is more towards the second half of the year
Luca Zaramella: Please also consider, as we talk about 2025, that cocoa costs are lower in the second half versus F1.
Luca Zaramella: On 25, I can tell you that we have done a lot of work in scrutinizing all our costs.
Luca Zaramella: and we will be removing sizable...
Luca Zaramella: We have increased the amount of productivity that we will be delivering to our supply chain. And we have clearly a full slate of initiatives in RGM.
Luca Zaramella: that should limit elasticities.
Luca Zaramella: As I said, it is hard to see a path to EPS growth into 2025.
Luca Zaramella: Unless COCO adjusts down materially, and that is...
Luca Zaramella: Price a little bit more forward to in an attempt to offset the cocoa impact that we will have inevitably next year
Speaker Change: We'll move next to Ken Goldman with J.P. Morgan.
Ken Goldman: Hi, thank you. Good afternoon. I have one question on North America and then a follow-up.
Ken Goldman: On North America, you know, the comment was made that your categories are sort of bucking the, you know, it seems to be a larger, more challenged trend across snacking and...
Ken Goldman: You did mention RGM as being part of it. I appreciate that. I'm just trying to get a sense of what you're seeing as the other factors that is allowing...
Ken Goldman: or that are allowing your categories.
Ken Goldman: to do better than, you know, what we're seeing kind of elsewhere across that broader snacking continuum, as someone once said.
Speaker Change: I would say the category is growing modestly and is improving slightly. And I would say that overall, we see the consumer also getting more confident.
Speaker Change: But high prices remain certainly a big concern, high food prices I would say, and consumers clearly feel that their purchasing power is deteriorating.
Speaker Change: particularly I would say in the lower income consumers, they're the ones that feel most of the pressure. I would say that as it relates to our categories,
Speaker Change: First of all, we have recognized that the perception of value of the consumer has changed. If you go two years back, consumers were really shopping for the price.
Speaker Change: Dirk Put, Shep Dunlap, Luca Zaramella
Speaker Change: remain important for them, it is part of most shopping baskets.
Speaker Change: And as a consequence, we needed to fit our products within that shopping basket. And that meant that...
Speaker Change: And so in Q3, we have worked with promotions to bring our products there. And going forward, we have launched a range of new packs on Chips Ahoy, on Oreo.
Speaker Change: that will be sold at $2.99. And so we think that's the way we are bucking the trend, really. So on one hand, categories that the consumer really doesn't want to do without.
Speaker Change: And so the overall category is pretty stable. And on top of that, we're starting to gain some market share because we are hitting the right price points right now.
Speaker Change: Thank you for that. And then for my follow-up, I wanted to make sure I understood the comment about next year, the majority of the portfolio be growing within Algo on the top line. Is the implication that part of the portfolio, the minority, will not be?
Speaker Change: with Inago and just trying to get a real sense of what the messaging was there about the top line next year, just given all the puts and takes about elasticity and pricing and so forth.
Speaker Change: Yeah, it's basically related to our mix of different categories that we have. We have 70% of our business that is non-chocolate, and that is the part that we are expecting to be in line with our normal algo, and then the chocolate part will not be in line with our algo. That's what we were referring to. On the bottom line, specifically.
Speaker Change: on the bottom line. So that was a bottom line comment, just to make sure.
Speaker Change: Yes, I said that 70% of the portfolio is on ALGO, the remaining part which is chocolate is not going to be on ALGO on the bottom line.
Speaker Change: Great, thank you for your time. We see a pretty strong top line for next year. Yeah, yeah, that's why I wasn't... No, that's helpful. Thank you. I appreciate it, guys.
Speaker Change: Thank you, Ken.
Speaker Change: We'll go next to John Baumgartner with Mizzou Host Securities.
John Baumgartner: Good afternoon. Thanks for the question.
John Baumgartner: All right.
John Baumgartner: Dirk, I'd like to ask about the growth plans for cakes and pastries and if you could speak to your vision there. To what extent do you view the company as sort of a disruptor in the space where there's unique capabilities in biscuits and confection that you can sort of leverage and bake goods?
John Baumgartner: and in light of Evers and that frozen cake technology, the capabilities from that, to what extent is that a China-specific opportunity relative to one that can be expanded to Europe, North America, some other markets? Just maybe your thoughts on where you see your advantages competing in the baked goods space. Thank you.
Speaker Change: Yes. Well, cakes and pastries, packaged cakes and pastries is a 95 billion category. It's much bigger if you include the non-packaged, but that's not the area that we consider as where we want to play. It is a category that's already growing 7% CAGR over the last five years.
Speaker Change: and in fact, low double digit over the last two years. Per kilogram, it's higher value than the biscuits category. And the category is quite strong in some of the key markets where we play, the US, Europe, China.
Speaker Change: The opportunity is that it's a highly fragmented category. We are number three globally.
Speaker Change: But we only have a three and a half percent share. So there is an opportunity to bring in known brands that come with a certain quality aspect and a certain positioning, but also by offering soft cakes or pastries that are in line with that brand from the biscuits category. So an Oreo to play in that category, for instance, or some of our other brands.
Speaker Change: Evert particularly, we already have a company that goes from frozen to fresh in the store which is Give and Go in Canada which is a company that has been growing very fast.
Speaker Change: and Evert is similar, but to the sense that they are much more into the cage segment.
Speaker Change: In China, this category is really booming. These are quite sophisticated products and I have to say that the quality that they can produce thanks to their proprietary way of producing is quite exceptional.
Speaker Change: and we can see a long runway of possibilities.
Speaker Change: But we have started to think about, okay, how can we expand this to the rest of the world because the quality is so high. But for the time being, our first priority is to make sure that we get the strong growth that we would like to see in China.
Speaker Change: Thanks, Dirk.
Speaker Change: OK.
Speaker Change: We'll go next to David Palmer with Evercore ISI.
David Palmer: Thanks. Your comments on 25 were pretty clear in saying that...
David Palmer: You see it hard to see a path EPS growth and 25 that would likely require a breakdown in cocoa or sustained benign Price elasticity that could enable perhaps earlier price offsets to what you're seeing I Wonder right now. Obviously, you don't have that visibility into that and I wonder what the reality would be
David Palmer: when that reality would be that you could essentially feel like you could give a pretty narrow range of EPS outcomes for 25.
David Palmer: Is it something that, like by the first quarter earnings, you would have that sort of a time frame where you have pricing in place, you're seeing the reaction from that, perhaps you're a little further into your COCO price setting for the year. I'm just wondering about the timing.
Speaker Change: Look, I think here, as I said, there are two.
Speaker Change: elements that will come into play. One is cocoa prices.
Speaker Change: There has been some nervousness in the market as of late, but we believe that it is the result of the fact that the industry is still quite short.
Speaker Change: since they are waiting for the new crop to materialize.
Speaker Change: On the fundamentals of COCO, the latest top count is slightly below the five-year average in Ivory Coast, same in Ghana, but it is well up versus last year.
Speaker Change: Importantly, the ivory coast port arrivals are up 25% already versus prior year, and that really points in the direction of good supply coming our way.
Speaker Change: Call it in the next month or couple of months. I think the situation will be will be much much clearer
Speaker Change: much more clear. Importantly, what will drive COCO prices is the arrival in Europe, which will be most likely in January, February, and I think by then we should really have a sense of COCO cost.
Speaker Change: On the other side, on the level of elasticity, look, I think you know that it takes a little bit of time to implement price in Europe.
Speaker Change: For the rest of Europe, we will have to wait towards the end of Q1, beginning of Q2. In emerging markets, as I said, we are going to price...
Speaker Change: but there we will protect price points in the entry level. So a long way to say COCO costs should be clear by the end of this year, beginning of Q1, and prices particularly in Europe will be much clearer towards the end of Q1, beginning of Q2.
Speaker Change: That's very helpful. And I guess I want to just pick your brain on just the U.S. snacking. Ken asked you about why cookies perhaps is doing towards the high end of the snacking category, which is historically weak right now. Obviously you're a global snacking player and you participate in confectionery outside the U.S. in a bigger way, but confectionery in the U.S. is particularly weak. I'm wondering why you think
Speaker Change: You know, confectionery in the U.S. is so weak right now, and if there's any sort of...
Speaker Change: interesting juxtapositions you could create between those two, you know, what you see, for example, in developed market Europe and with chocolate and the price receptivity, for example, and the consumer versus what we see in the US, which seems to be pretty rough right now. Thanks.
Luca Zaramella: Luca, it's really tough for us to comment about the chocolate market in the USA because as you know we have a small participation in that market and B because there are other companies that might have a much better point of view. What we can tell you is
Speaker Change: In Europe and in emerging markets, our brands have been built consistently over the years in terms of distribution, support, price point. We have never pulled back a dollar.
Speaker Change: Since Dirk arrived, in terms of advertising, we have been increasing consistently.
Speaker Change: our marketing capabilities with our Chief Marketing Officer.
Speaker Change: have improved dramatically. The execution is there. So I think in our case, at least,
Speaker Change: We have been consistent in executing and investing and increasing distribution of our brands throughout. And look, we are lucky to have our brands, maybe, but those have been built by people at Montbellis and we are very proud of that.
Speaker Change: Dirk Put, Shep Dunlap, Luca Zaramella
Speaker Change: We'll move next to Peter Galbo with Bank of America.
Peter Galbo: Hey guys, good afternoon. Thanks for taking the question.
Peter Galbo: Yes. Luca, I just wanted to actually circle back on your comment on 25 EPS, you know, the path to difficult growth. Just for real clarity, does that also include the dilution from JDE, or is that on a like-for-like basis, just so we're clear?
Luca Zaramella: No, I was quoting Light for Light, we will issue in due time an 8k. You might imagine by looking at the multiple of JD EPIS, even when we got 30% premium to the unaffected stock price, you might imagine that
Luca Zaramella: that multiple is lower compared to ours. So even if, you know, we had to buy...
Speaker Change: Dirk Put, Shep Dunlap, Luca Zaramella
Speaker Change: Just curious if you can unpack that a bit more. Just did it come in where you kind of thought it would? Is there an expectation of more of that just in the fourth quarter? Any additional color would be helpful. Thanks very much.
Speaker Change: but it was a pipeline for back to school activities. I can tell you, for instance,
Speaker Change: Dirk Put, Shep Dunlap, Luca Zaramella
Speaker Change: Thanks for watching!
Speaker Change: We'll go next to Chris Carey with Wells Fargo Securities.
Chris Carey: Hi, good evening. So, Luca, this is, you know,
Chris Carey: Follow-up question, then I'll just ask, you know, one quick other one.
Chris Carey: But, you know, on the confidence around COCO, you know, in the coming, you know, three, four weeks, relative to just your expectations for next year, can you just talk about how much flexibility you might have to respond?
Chris Carey: from a productivity standpoint, say if those expectations get worse over the next month, or obviously we know if they get better, that's obviously helpful. But just as you think about, you know, the...
Chris Carey: the ability to manage through different variability and maybe hold to the expectations that you have for next year, as you sit here today, just how much flexibility do you have to respond within your early budgets if say things get worse from the overhead or the productivity or the other things that you mentioned.
Speaker Change: So, we have clear covert strategies. I think at this point in time, we have a good part of our 2025 COCO needs.
Speaker Change: for On The Bough.
Speaker Change: half of the needs that we have and when we put that in place, I was very clear that we covered mostly the second part of the year as the structure is inverted and so you have a benefit by going further out. The rest is covered through mostly colors.
Speaker Change: and which would allow us to really participate if the market had to adjust down, but at the same time.
Speaker Change: protecting the upside exposure. So we have quite a bit of flexibility, I would say, on the should the market adjust.
Speaker Change: I think one-third of the pricing next year is going to be done through RGM. That is maybe a little bit less flexible, but the rest provides us with some flexibility.
Speaker Change: Okay, thanks. And then just one quick follow-up on a couple of regions. Latin America volume has decelerated a bit here through the year. We've been hearing that from a number of your global peers just around hitting kind of tougher comps relative to last year. Can you just comment on the underlying in the business right now? And then on the China piece,
Speaker Change: This is just optimism at this point, so that's it for me. Thanks.
Speaker Change: Yes, well, on Latin America I would say overall we still feel pretty good about Latin America. It is true that the volume has started to go into negative territory but that is driven largely by Mexico. In our case.
Speaker Change: Brazil, we still see a very strong performance and also in what we call WACAM, which is largely everything else except Argentina.
Speaker Change: some pricing adjustments that we need to do, particularly in the candy and the chocolate categories. But for instance, gum meals and Oreo are doing quite well in Mexico.
Speaker Change: So I wouldn't feel that Latin America is particularly a major problem area for us But it certainly has slowed down versus what it was in the previous quarters
Speaker Change: We will take our final question from Tom Palmer. Oh, sorry. Sorry.
Speaker Change: Excuse me, uh...
Speaker Change: Sorry, I still needed to talk about China and why we see optimism.
Speaker Change: So, overall, we have a very good performance in China. Businesses are doing quite well. We have mid-single-digit volume mixed growth. We have high single-digit net revenue growth.
Speaker Change: The government has released some economic boosting policy which we are monitoring and we think that is going to affect overall consumer thinking and consumer buying.
Speaker Change: We think our category, biscuits, will be stable.
Speaker Change: Big shifts in channels
Speaker Change: towards snack chains and club warehouses, which are, for instance, out of the Nielsen scope. So that is something that is on top of what you can see in the data.
Speaker Change: So we think overall, driven by a strong category and the distribution gains that we have, we're probably more optimistic about China than most other companies, but we do feel an underlying trend that the consumer is getting in more positive territory.
Speaker Change: We'll move to our final question from Tom Palmer with Citi.
Tom Palmer: Good evening and thank you. I wanted to ask first on organic sales growth. The guidance would seem to imply an acceleration in the fourth quarter, perhaps even versus what we saw in 3Q. Could you help frame the regions in which this improvement might be most apparent? And then just to confirm, this would be volume driven or are there some pricing actions to consider in the fourth quarter with then more coming in 2025?
Speaker Change: in Q4. I think you're going to see strong performance in North America. You're going to see strong performance in AMIA, which, by the way, we start laughing.
Speaker Change: the boycotts that started last year in Egypt war.
Speaker Change: Latin America, we have been a little bit more conservative, but I think there should be a little bit of an improvement there too.
Speaker Change: In the end if you do the implied growth rate for Q4, in light of asked affirming guidance on top line which is at the high end of the 3 to 5 algo, you should get to a Q4 that is a little bit higher than what Q3 is.
Speaker Change: Go to Beadaholique.com for all of your beading supply needs!
Speaker Change: Okay, thanks for that.
Speaker Change: Okay, I think that was the last question, Shep. Well, thank you for attending the call. Strong quarter and we hope that we will do well in 2025 also and I hope you got convinced that our plans are in place to make that happen.
Speaker Change: Talk to you next time. Thank you. Thank you, everyone.
Speaker Change: Thank you. Ladies and gentlemen, this does conclude today's program. Thank you for your participation. You may disconnect at any time.