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Operator: Good day and welcome to the Mondelez International Third Quarter 2023 Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by Mondelez management and the question-and-answer session. [Operator Instructions] I’d now like to turn the call over to Mr. Shep Dunlap, Senior Vice President, Investor Relations for Mondelez. Please go ahead, sir.

Shep Dunlap: Good afternoon, and thank you for joining us. With me today are Dirk Van de Put, our Chairman and CEO; and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides, which are available on our website. During this call, we’ll make forward-looking statements about the company’s performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K, 10-Q and 8-K filings for more details on our forward-looking statements. As we discuss our results today, unless noted as reported, we’ll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results.

In addition, we provide our year-over-year growth on a constant currency basis, unless otherwise noted. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation. Today, Dirk will provide a business and strategy update followed by a review of our financial results and outlook by Luca. We will close with Q&A. I’ll now turn the call over to Dirk.

Dirk Van de Put: Thanks, Shep, and thanks to everyone for joining the call today. I will start on slide four. Our strong third quarter results and our prospects for the future confirm that we are positioned for high-quality, sustainable growth. We remain confident in the durability of our categories, the strength of our iconic brands and the consistency of our execution. We delivered strong profitable volume growth with a healthy share performance. All our geographic regions grew double-digits in both revenue and profitability. To manage cost inflation and enable robust reinvestments, we continue to leverage our RGM capabilities. RGM is an area where we believe there is significant room to do more over the next several years.

We continue to reshape our portfolio to focus on our core categories of chocolate, biscuits and baked snacks with the successful divestiture of our developed market gum business, generating additional reinvestment opportunities. Our strong year-to-date performance, the continued strength of our categories and our ongoing focus on strong commercial plans and execution provide the confidence to again raise both our organic net revenue outlook to 14% to 15% and adjusted EPS growth outlook to approximately 16%. Turning to slide five. You can see that in the third quarter, we delivered both top and bottom line strength, enabling us to continue substantial reinvestment in our brands. We delivered organic net revenue growth of 15.7% for the quarter.

Year-to-date revenue is up 17%, nearly $4 billion ahead of last year. We also delivered adjusted gross profit dollar growth of 22.3% for the quarter. Again, we are ahead of last year’s pace with 20% growth year-to-date, up $1.7 billion. The strong performance enables us to reinvest in our brands and capabilities to drive attractive growth in future periods. Our A&C investment is up 28.5% for the quarter and 21.5% for the year, which demonstrates our commitment to continue to build the strength of our brands. These results translated into strong adjusted OI growth, up 24.5% for the quarter and close to $900 million for the year. As you can see on slide six, our third quarter growth was driven by strong volume/mix, up nearly four points. We are especially pleased that our European pricing actions, which were implemented earlier this year are successfully behind us.

We view this quarter strong volume/mix performance as evidence that we are taking the right actions to continue delivering sustainable growth and share gains. Consumers continue to choose our trusted and beloved brands, despite significant pricing due to ongoing inflation. More broadly, we view our strong performance in the third quarter as evidence that our long-term strategy continues to pay off. Since the launch of our growth plan in 2018, we have consistently delivered gross profit dollar growth, which allowed for a virtuous cycle of yearly increasing high-return investments. We remain confident that this strategy will continue to consistently deliver attractive growth. Turning to slide seven. We continue to see evidence that consumer demand for our snacking categories remains resilient and that consumers continue to prefer our widely loved brands over private label alternatives.

In North America, the biscuit category is experiencing some softness in scanner data, most notably among lower-income families. However, I would note that these families are increasing their purchases in the non-measured club store channel. Our total US biscuits volume was up more than 3% in Q3, showcasing the continued strength of our brands and investments in both measured and non-measured channels. We are seeing particularly strong growth in unmeasured channels like club stores, e-commerce and food service. Meanwhile, in Europe, consumer confidence is improving with a significant step-up versus 2022 and remains broadly stable throughout Q3. We’re seeing positive volume growth in biscuits and chocolates, which has accelerated over the last three months and is outpacing broader food driven by solid elasticities and lapping of 2022 disruptions.

In Q3, our European chocolate and biscuit business delivered solid volume growth of 2.6%, which again shows the resilience of our categories and the strength of our brands. In emerging markets, consumer confidence remains strong. We continue to see resilient underlying demand and lower price sensitivity than in developed markets. During Q3, we delivered strong growth in terms of both volume and value at 4% and 24%, respectively. And we are confident that we have strong opportunities to continue to drive expanded distribution and creating new snacking occasions. On slide eight, you can see a few examples of our growth acceleration strategy in action. We continue to invest in our brands and connect closely with consumers to stay in line with changing consumer tastes and snacking occasions.

We are also driving growth in a broader range of channels while accelerating our focus on premium segments and harnessing the power of recent acquisitions to advance geographic expansion. For example, Oreo continues to grow its strong position as the world’s favourite cookie, and its share performance here in North America has grown nicely. Our recent partnership with Super Mario Brothers executed both online and in-store is just one example of the many creative campaigns that leverage personalization and local relevance to reinforce the brand’s playful persona. Along with continuous reinvestment in our brands, we are also investing in growth channels. For example, our belVita business is up nearly a full share point in the US club channel, driven by growing shopper interest in convenience, tasty and better-for-you options for morning snacking on-the-go.

Sold in individual portion packs and delivering more than 14 grams of whole grains per serving. belVita offers a great solution for consumers who are too busy to eat a traditional breakfast. We’re continuing to grow this business with a new customized and digitally targeted social and digital media campaign celebrating the ritual of belVita and coffee in the morning. Another important element of our growth strategy is investing in the fast-growing premium chocolate space. We have re-launched Toblerone with a robust campaign inspired by luxury fashion brand, positioning it as a jewel. We’re supporting this launch with a strengthened brand persona, Never Square and substantial investments in A&C. Bringing this dual concept to life, our new pralines called Toblerone Truffles recently debuted in the United Kingdom, Switzerland and Australia as well as airport duty-free stores in key markets.

They will expand to additional markets next year. Finally, we continue driving geographic expansion of our recently acquired brands. For example, Ricolino headquartered in Mexico is now the number one hispanic confectionery brand in the United States, growing well and in line with our expectations. Turning to slide nine. Let’s zoom in closer on the snack bar business to highlight the strong progress. We’re excited about the opportunities in this space, and we believe there is significant runway ahead led by the strong and growing brands of Clif Bar, Grenade and Perfect Snacks. We expect our snack bar business to exceed $1.2 billion net revenue this year. Let’s start with Clif, where we are excited about our current results and the long-term opportunity to broaden distribution, expand into new formats and increase our geographical reach.

Year-to-date, Clif is up double-digit in top line growth. And within that, the Clif Kid Zbar has been a particular standout. Zbar is a delicious organic non-GMO soft-baked, whole grain energy snack for kids with zero transfat or artificial flavors. Zbar is growing at twice the rate of the total bars category with consumption dollar growth up 19% versus last year. Grenade also continues to exceed our expectations. Grenade is performing very well in the sports nutrition space with signature bars that are high in protein and low in sugar. Since our acquisition a bit more than two years ago, we have doubled the business, thanks to strong core growth in the UK and distribution expansion in Ireland, Nordics and the Benelux. Perfect Snacks also is experiencing continued double-digit value growth, strengthening its position as the number one refrigerated protein bar in the United States.

We have a great portfolio and strong conviction in the growth potential of our snack bar business and we will continue investing to drive leadership in the segment. Turning to slide 10. I’d like to take a moment to share progress on an important element of our sustainability strategy. Just two years after joining the science-based target initiative, net zero carbon emission, we have submitted a time-bound plan laying out how we aim to achieve our target of net zero greenhouse gas emissions across our full value chain by 2050. To reach this critical milestone, we have completed a detailed process of re-baselining providing documentation of our carbon accounting and aligning to new standards. Putting this plan into action in the near term, we are making solid progress towards our 2025 goal of reducing end-to-end carbon emissions by 10%.

We are working hard to transform our business operations and supply chains. Over the past two years, we have scaled regenerative agriculture practices across our signature sourcing programs for coco and wheat, achieved renewable energy at manufacturing sites across every region and reduced CO2 emissions through plant and logistical efficiencies. We continue to believe that helping to drive positive change at scale, including through reducing our climate impact, is an integral part of value creation with positive returns for our stakeholders. We encourage you to read our Snacking Made Right report for additional details and context on our broader sustainability goals and progress. With that, I’ll turn it over to Luca to share additional insights on our financials.

Luca Zaramella: Thank you, Dirk, and good afternoon. Q3 was strong all across our business, with high-quality top and bottom line growth, healthy volume mix, record profit dollar increases and substantial brand reinvestment. We delivered double-digit organic net revenue of 15.7% with growth across each region, underpinned by volume mix of almost 4% as well as by some pricing of around 12%. Our business is proving to be resilient, both in emerging markets, which grew 19%, with strong performance virtually everywhere, and in developed markets, which grew more than 13% with balanced trends from both North America and in Europe. Turning to portfolio performance on slide 13. Our chocolate, biscuits, gum and candy businesses, all posted double-digit increases in Q3.

Biscuit increased plus 12.4%. Oreo, LU, Biscuit, TUC, 7Days and Clif delivered double-digit growth and robust volumes. Chocolate grew plus 14.9%, with double-digit growth in both developed and emerging markets. Cadbury Dairy Milk, Milka, Toblerone and Lacta all posted double-digit increases. Gum and candy grew more than 30%, with particular strength coming from emerging markets. Now let’s review market and share performance on slide 14. We held or gained share in 65% of our revenue base, driven by brand building investments as well as solid North America supply chain performance and strong sales execution, particularly in emerging markets. Moving to regional performance on slide 15. As far as Q3 goals, we delivered double-digit revenue growth in every single region, with a significant contribution from healthy volume/mix growth, including Europe, which has rebounded after lending pricing this summer and is now in a much stronger position.

This robust growth and volume performance translated into operating leverage across the business. Notwithstanding material marketing investment, profit growth delivery has been very strong in all regions. Europe grew plus 15.4%, with nearly 30% OI growth that was driven by pricing and volume/mix. Top line strength was broad-based with the UK, Germany and France, among those posted strong results. Cadbury Dairy Milk, Milka, Oreo, 7Days and Grenade were among brands with double-digit growth. European elasticities remained stable in both chocolate and biscuits. North America grew plus 11.4%, with OI dollar growth of more than 24%, driven by higher pricing and volume/mix growth of 4.6%. Oreo, Clif, Tate’s and Sour Patch, all grew double-digits, while Ritz and belVita posted high single-digit increases in the quarter.

Profitability in the base business remained strong, while acquired businesses, such as Clif and Tate’s, posted strong double-digit profit dollar growth. This is an important proof point showing how accretive our M&A agenda can be. Clif profitability continues to improve. And as I said last quarter, we still have some synergies opportunities as we have now integrated the platform into SAP. AMEA grew plus 11.9%, with volume/mix growth of more than 3%. OI dollars increased plus 18.1%. India and Australia grew double-digits, while China increased high single-digits in the quarter. Latin America grew more than 35% with OI dollar growth of nearly plus 37%. LA top line grew more than 16%, ex Argentina. Mexico to Western Andean countries and Brazil, once again delivered great results.

Ricolino grew high single-digits and remains on track in terms of integration work. Moving to page 16. We delivered nearly $650 million in gross profit dollar growth or more than 22%, driven by top line growth, volume leverage and productivity. Year-to-date, GP dollar growth is now more than $1.7 billion. This provides ample funding to reinvest for future growth and flow to the net earnings line. OI dollar growth was more than $300 million for the quarter or up more than 24% versus last year, driven by solid cost discipline, effective pricing and volume leverage. Year-to-date, OI dollars have grown $880 million or almost 24%. EPS on slide 17. Year-to-date, EPS grew more than 18% in constant currency or more than 13% reported dollars, driven primarily by strong operating gains.

Turning to slide 18. Free cash flow is $2.4 billion year-to-date, which represents an increase of $0.5 billion year-over-year. Year-to-date, capital return is $2.2 billion. Moving to our outlook on page 20. Given the strength of our Q3 and year-to-date performance, strong volume/mix momentum across our brands and overall demand resilience, we are now raising our full year outlook for both revenue and EPS. We now expect top line growth of 14% to 15% versus our original outlook of 5% to 7% and most recent outlook of 12% plus. EPS growth is also expected to be approximately 16% versus our prior outlook of 12% plus and original outlook of high single-digit. In terms of the assumptions, no change to our double-digit inflation. We also expect interest expenses of approximately $325 million for the year.

Leverage is expected to be in the mid to upper 2s range by year-end. With respect to currency, we now expect $0.15 of EPS headwinds related to ForEx impact for the year versus $0.11 in our prior outlook, of which $0.12 have been materialized already in the year-to-date. On the gum divestiture that became effective as of the beginning of October, this current outlook reflects the loss of the business for the entirety of Q4. We are not providing yet restated financials as teams are working through the definition of the impact and importantly, the removal of stranded costs. While we will provide a full update in the next earnings cycle, we do not expect any material EPS dilution as we will remove majority of stranded costs in ’24. The outlook revision reflects our increased confidence in the year, ongoing resilience of consumer consumption in our categories, relatively benign elasticities, continued brand reinvestments and completion of pricing in Europe and the health of our emerging markets.

There is a lot of volatility around the world, and it is important to note that this current outlook does not reflect a material deterioration of the geopolitical environment and ForEx rounding some areas of the business. Finally, a word on share repurchases. Now that we have received the proceeds of our sales outcome, our balance sheet is the strongest it has ever been, with long tenure debt at very compelling interest rates relative to the current cost environment. We decided to post buybacks in Q3 and were in our traditional blackout periods late in the quarter and the month leading up to earnings. However, we expect to consider buybacks for the remainder of the year and into next, given the current stock price versus our view of intrinsic value and long-term potential of our company.

We realize we have underspent versus our original outlook of $2 billion for the year and that provides the opportunity to take advantage of current low stock price levels. Additionally, we could pull forward from our ’24 share repurchases if an appropriate opportunity presented itself. We will be flexible and opportunistic in our timing, depending on the various useful factors. We believe this is the right thing to do, given the current context. Importantly, this does not represent a change in our ability to pursue our well-defined capital allocation strategies as our priorities remain the same in terms of reinvesting in the business and in selected strategically and financially attractive bolt-on M&As as well as strong dividend growth. With that, let’s open the line for questions.

Operator: [Operator Instructions] Our first question comes from Andrew Lazar of Barclays.

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

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Dirk Van de Put: Yes. Thank you, Andrew, and hello. First of all, yes, maybe restating quickly what is driving the volume growth in the different regions to give a clarification around that. And yes, we are constructive as it relates to volume for the remainder of this year and next year and then talk a little bit about the consumer. So we have a strong volume/mix across all our regions. And overall, we’re up almost 4%. If I start with North America, there we are up 4.6% in year-to-date, 3% in volume/mix. The categories are experiencing a little bit of softness there. But our biscuit business is performing significantly better and delivering some significant volume share gains, about 1.2 points in the last 3 months. We also have that from unmeasured channels, which are performing well, the club channels, online because consumers are shifting there because that gives them better pricing opportunities.

Switching to Europe. There, we see a 3.3% volume/mix increase. Year-to-date, that is flat seen the disruption that we had in the beginning of the year. We see biscuits and chocolate volumes being quite resilient. And in Q3, we saw the volume/mix growth accelerating, outpacing the rest of food. The reason there is that the elasticities are quite solid. And we also take into account that we are lapping 2022 disruptions in Europe. And then emerging markets is up 3.4% in volume/mix. Year-to-date, also 3.4%, but we have certain markets like India and Mexico, where we have double-digit volume growth. It’s quite remarkable because these markets have quite significant pricing, all the emerging markets. And the reason being is that the consumer confidence is quite good.

The demand is resilient. We see the consumer in places like India, China, Mexico are in a four-year high, and that is clearly having an effect on demand. We also are gaining in these markets by expanding our distribution. That’s always an extra benefit that we have. And we’ve been doing smart downsizing. One of the things we do in these markets is our LUPs or lower unit price. We try to keep that price constant that we have the entry into the category not being affected. Going forward, we expect the recovery in Europe to continue because pricing has landed and we are back on the shelf, and we are running full force in our commercial activities. Our inventory levels around the world are very healthy, including in North America, so we don’t see any effect there.

The elasticities remain relatively benign. But here and there, some modest upticks, but all the dynamics are included in our outlook. We think that the expansion of volume in emerging markets is going to continue. And in fact, it’s a good problem to have. But in India and Mexico, the key challenge is to how to keep up with the heavy volume increase that we’re seeing. And then we believe that everything we’re doing for our long-term strategy is the things we are focused on and different activities that we have planned confirmation that is working for us, particularly also, for instance, the reinvestments we’re doing. Maybe quickly on the consumer because that is probably the biggest factors to keep in mind as you think about volumes going forward.

We find that consumer demand remains very resilient in our key markets. Consumers continue to prioritize spending on grocery and branded products. And we see the consumer confidence outlook for ’24 stable for developed markets in North America and Europe, but very positive for emerging markets. So if I quickly think this through, modest improvement probably in consumer confidence in Europe and Australia. Why? Because the inflation is clearly easing there. They see the real disposable income go up. There is some shifting to smaller packs in places like France and the UK and to discounters because they’re looking still for value for money. But overall, we feel pretty good about the consumer in Europe and Australia. In the US and Canada, we think the consumer confidence will be holding, but we have to monitor the trends quite closely because we see shifts to non-measured channels, as I said, such as e-commerce and club, we see buying of more multipacks.

We see lower income families pull back on the amount of the frequency of their trips to the store. And we also have the delayed unwinding of the pantry loading from — due to the phasing out of the SNAP benefits. And then emerging markets, we continue to see steady improvements with those four-year highs that I was talking about. Consumer is very optimistic about the future. Even in China, consumer confidence is improving, but slower, but we still have like 60% of our Chinese families expect their income to improve. Private label, maybe private label is losing share in the US and Canada. There is a bit of a watch out in Europe because brands have been taking pricing. But overall, I would say, we feel very good about the outlook for the rest of the year and for next year.

Andrew Lazar: Great. Thank you for all the color. Really helpful. And a very quick follow-up just for Luca, I think. Just regarding what the implications are for 4Q based on your updated full year guidance? And maybe more importantly, any high-level thoughts to consider for ’24 at this point? Thanks again.

Luca Zaramella: Thank you, Andrew. So our revised top line estimate of 14% to 15% implies a revenue growth for Q4, which is around about 7% to 10% which, considering we are lapping a 15.5% top line growth last year, makes really the two-year stack comparable to year-to-date numbers. And so I think that should give you a sense of where we’re going to land the Q4. Keep in mind that we also want to keep a tight control on retailer inventory as we enter next year because, obviously, there is potentially some pricing, and we won’t really to enter with a strong momentum into Q1. On EPS, the expected growth of around about 16% for the year implies a moderate increase in constant currency in Q4. Reason for that is, again, the heightened investment in A&C.

And in addition, as I said in the prepared remarks, there is some ForEx volatility, particularly around certain markets like Argentina, Nigeria, Pakistan and Egypt. And it is quite difficult to predict what exchange rates will be in the course of the quarter. So quite, frankly, I have been a little bit cautious with our assumption. And as I don’t want to surprise anyone. Also remember, gum is completely removed from this number. So this is not really a like-for-like. And I think you’re going to like you realize the EPS and continued profit expansion in Q4. I also want to reassure you that the emerging markets are doing very, very, very well. And we don’t necessarily disclose numbers, but EBIT is up more than 20% in emerging markets on a year-to-date basis in real dollar terms.

So these are, again, a market that can be volatile. But in the end, they deliver a good profit for us. On ’24, we are clearly in the process of finalizing our plan, but I can give you a little bit of the soundbites around ’24. First of all, I think it is undeniable that the business is having good momentum, and that momentum from where we sit today will continue as we enter into — as we go into ’24, both in terms of top and bottom line. Pricing contribution will be clearly less important than this year, but we still see pricing contributing more than an average year, particularly as we need to price for cocoa, sugar and other commodities. A good portion as we went through the plans with the majority of the business units, a good portion of growth in both in developed and emerging markets will be coming through distribution expansion.

And that will help preserve volume momentum into ’24. And I think you know that our categories in emerging markets are underpenetrated, and we have made investment to really continue to grow. Platforms that we have acquired in recent months like Clif and Ricolino are progressing very well. And they will deliver more synergies as we go into ’24. And while I don’t have a number on the gum divestiture to disclose to you, the idea that we have is really to get rid of all the stranded costs associated with the divestiture of gum in developed markets. So I can’t be more precise, but so far, so good in terms of ’24 expected financials I would say.

Operator: Our next question comes from Ken Goldman, JPMorgan.

Kenneth Goldman: Hey, thank you. I just wanted to get a clearer sense of the messaging around share repo. You paused in 3Q. You reduced your outlook for the year. But at the same time, you’re saying, hey, if there’s an opportunity, maybe you can pull forward some of your planned repo for ’24, if I heard that right. So I just wanted to maybe sure I heard that right that I can reconcile these comments. And maybe it’s just as simple as you pivoted a bit toward debt paydown earlier this year, you weren’t 100% sure when gum would close. Now these factors are somewhat behind you, so you can forge ahead on buybacks. I just want to ensure it’s a little bit of a whipsaw effect there in terms of how we’re seeing or I’m seeing the commentary? I just wanted to make sure I can clarify that.

Luca Zaramella: Thank you, Ken. No, you’re absolutely correct and right in your analysis. We continue to see share repurchases as a key driver of total shareholder return. I do analysis regularly on the buybacks that we do historically, and we present them to our Board as well. I mean it’s fair to say that all the repurchases we have done since the creation of Mondelez have yielded good — very good returns, while in excess of our cost of capital. Our ability to buy back stock at this point in time is meaningful considering what we have bought so far this year. And look, we will remain flexible and disciplined. The reality is, I also believe that our stock is a bit undervalued at this point in time. And so we will be tactical in the way we approach this.

But I don’t have really much to add versus what you correctly said in your question. I also want to make sure that it is clear that this doesn’t imply anything in terms of changes from our capital allocation framework. I mentioned Clif and Ricolino in the prepared remarks. I’m very pleased with the numbers that I see coming to. I think those were great opportunity for us to deploy capital. Dirk mentioned that we have some capacity constraints. There is nothing better in my mind that investing in brands that are proven like Oreo, Milka, Cadbury Dairy Milk. Proven proposition, distribution gains et cetera are really making the return on those investments quite good. And finally, dividends, we are committed, and we will continue to raise dividends in the foreseeable future.

So strong cash flow, I think, you might have seen $0.5 billion up versus last year. Everything is going fine in terms of capital allocation, I would say.

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

Dirk Van de Put: Yes. Thanks, Ken. Well, first of all, I think the whole topic has been overblown. And I think it’s important to put it in perspective and look at the data. At this stage, we see absolutely no short-term impact on our results. We don’t see it in our business. We are, of course, monitoring and we have a special work stream to stay close to the topic. We do estimates, we do projections, we talk to pharmaceutical companies, we talk to consumers and so on. So we’re staying close to the subject. But long-term, even using the most optimistic forecast, we believe the impact will be very modest to our volumes in our categories. We’re talking about 0.5% to 1% volume effect 10 years down the road. That’s based on what we know today and projections that are not ours, but that are being used by several different sources, and that assumes quite significant adoption rates of the drug.

Even if the impact would be bigger than that, I think over a 10-year period, it will be manageable, and we will have adequate lead time to adjust and prepare for any changes that we see. Having said all that, if you think about it, obesity rates around the world are very different. And we have one of the lowest exposures since 75% of our sales come from outside of the US, 40% of our sales are in emerging markets. And so the average BMIs in all those countries are much lower than in the US So our exposure is significantly lower than some of the other food companies. On top of that, I believe that our portfolio is really well positioned. We constantly innovate and adapt our products. We do that all the time to adapt to changing consumers’ tastes and behaviour’s.

Portion control is a big part of our strategy. So 20% of our sales are already in snacks that are less than 200 calories. We have a large part of our portfolio that is chocolate, which is not hunger satisfaction, but it’s a small indulgence. And we have healthier alternatives like for the breakfast occasion, belVita, which is a replacement snack or some of our snack bars, which are meal replacement, and that fit perfectly into the diet of GLP-1 patients. So if I go through all that and if I’m honest, at this stage, this is really into our top areas that we are focused on and that we are trying to manage. We monitor it, but it’s really not a big concern for us at this stage.

Operator: Our next question comes from Bryan Spillane, Bank of America.

Bryan Spillane: Hey, thanks, operator. Good evening guy. So I guess I had one follow-up to Ken’s question and another question. In terms of the follow-up to Ken, in terms of capital allocation, Luca, you had — you were opportunistic, right, in terms of paying down commercial paper. You paid off the term loan this year, kind of attacking some of those either variable rate or avoiding sort of swapping out of low interest to high interest . So as you’re looking over the next year or two, like are there even many opportunities to where you would opportunistically pay down debt? Or again, not changing your capital allocation sort of philosophy, but just it doesn’t seem — it doesn’t appear that paying down debt would necessarily be at the top of the list just given what you’ve done over the past year? And then I have a follow-up.

Luca Zaramella: No, I think, that’s absolutely correct. We are very happy with the loan tenure debt that we have. The average cost of debt is very compelling. It was a series of decisions that we took over the last few months, including the sell-down of KDP to really go and strengthen the balance sheet and making sure that we were not facing material pressure in the interest cost line. I think in hindsight that has proven to be quite a good decision. The reality is, I still see our stock as undervalued. And so when you look at the cash flow this year, and you adjust for the coffee taxes that are really one-time in nature, I mean, you start talking about $3.7 billion, $3.8 billion of cash flow generation. And I think if you take that and continuous growth of dividend, we have what it takes really to manage the business very well.

And so I don’t feel really compelled at this point in time to go and pay down more debt. We have some debt coming due next year. It is absolutely manageable. And when that comes due, hopefully, interest costs will be lower than today, but again, not really a major concern for me at this point.

Bryan Spillane: Okay. Great. And then just two follow-ups on some of the commentary you’ve made about ’24, and I might have missed this, but I think you had said previously mid-single-digit cost of goods inflation for ’24. So just is that still something we should work with? And then as we’re thinking about organic sales growth, I think, you’ve been in this quarter, if you take Argentina and gum, collectively, they contributed about 500 basis points to the organic sales comp. So just — I don’t know, as we’re thinking about not extrapolating too much, right? Just how we should think about some of the other puts and takes on organic sales growth and understanding you gave some comments about volume and price, but just want to get your perspective on that, those two items?

Luca Zaramella: Yes. Maybe look, transparently and it is noted both on the pages of the prepared remarks and in my script. Argentina, I think, in total for the company accounted for a little bit more than two points, not much more than that. If you strip out gum completely from the year-to-date numbers and for the — both volume and revenue, I would say there is no material change to either volume or net revenue. So in terms of growth rates, I would say Argentina is clear, but it has always been in that range, I would say, a little bit higher in Q3. In terms of gum, no material impact to the top line dynamics on both volume and revenue. I think as you go into next year, or as we go into next year, the inflation that you’re going to see is higher than mid-single-digit.

I think it is going to be towards the higher end of 5% to 10% at this point in time. Coco lately has had a material spike. The reason being the pulp count coming out of [indiscernible] and Africa has been materially different than what people expected, I would say. So there is pressure on coco. The good news is we are covered for a good portion of the first half next year, and we are protected as well for the remainder of the year. So I’m not going to give you a lot of details here, but you would expect inflation in general to go up. And lately, I think you know, energy costs have been going up a little bit more crude oil, particularly. So I would say we are not done, I believe, in terms of inflation at this point in time. There’s still could be variability exchange rates is the other one that comes into play.

But it might be a little bit higher than the mid-single digits we told you, but we are going to be flexible for sure. As we go through the plans, we have a sensitivity analysis, and we make sure that we are never going to be called by surprise here. Our coverage is favorable, but we will be pricing at replacement cost into ’24.

Operator: Our next question comes from David Palmer, Evercore ISI.

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

Luca Zaramella: Thank you, David. I don’t want to spoil the ’24 guidance too much. I know you really want to get a sense of where ’24 is going to be look at this point. We have made material investments in the business this year. We believe our categories are very sound across the world. I think we — you saw the share numbers we have been posting. We are happy with overall business momentum. I don’t want to say exactly how next year is going to play out at this point. I think your assertion on top line and bottom line is more or less correct. I said we are working through the implications of gum and the EPS impact of it and stranded costs. I’ll give you a little bit more color in the next quarter. As far as distribution goes, look, particularly in emerging markets, there is a reason as to why we are telling you, China for us is okay or India is okay or Mexico is okay.

And the reason is that our categories in general are underpenetrated. And the second reason I would say is there is a meaningful amount of growth, both in developed and emerging markets that is coming out of distribution gains. I think in the US, for a series of reasons you know, supply chain-related, we lost some PDPs along the way. We are reinstating those PDPs. We are going into alternate channels where our share is a little bit lower. So at this point in time, I feel good that you’re going to see a good policy top line into ’24. Hopefully, that helps, but I can’t spoil it much more than that.

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

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

Operator: Our next question comes from Michael Lavery, Piper Sandler.

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

Dirk Van de Put: Yes. So talking about the top line synergies, first, what — how we’re going to get those is that we are integrating the two distribution systems. And that will, for our side of the equation, triple the amount of distribution points that we will have. So pretty important top line synergies there. But the first step is to get that integration going. We’re in the middle of testing. We had to carve out the distribution system out of Bimbo and for Ricolino and set up a new system, which is bigger than what we currently have in the company. So we have to open about 100 distribution centers. In Mexico, we’re three quarters along the way with that, and that is going very well on time and as planned. And we have started the testing of the combined routes in several of those distribution centers.

So the effect will start to take place from now going forward for the next 18 months, I would say, that we get the benefits to sort of work out for us. So far, everything is working out exactly as planned. And so we have high hopes that you will see the significant benefit from that next year.

Michael Lavery: Okay, great. Thanks so much.

Dirk Van de Put: Thank you.

Luca Zaramella: Thank you.

Operator: Our next question comes from Matt Smith, Stifel.

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

Dirk Van de Put: Yes. So, yes, the shift is noticeable largely because those channels offer larger packs, both online and in the club channels and that’s what consumers are looking for. We see our volume share going up overall due to the share that we are gaining, although those channels are not always measured, but we know that our shares are going up there. So we feel pretty good about what’s going on there. The margin for us is about the same. So we don’t see a significant margin effect. And as it relates to some of the consumer benefits we see, for instance, a brand like belVita is benefiting from that shift because it has a bigger presence in those channels. So overall, I would say, clearly a volume effect — a volume and a share effect for us. No effect on the margins and no real necessary adaptation from our side.

Matthew Smith: Thank you for that. I’ll pass it on.

Operator: Our final question comes from John Baumgartner, Mizuho Securities.

John Baumgartner: Good afternoon. Thanks for fitting me in.

Dirk Van de Put: Hi, John.

Luca Zaramella: Hi, John.

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

Luca Zaramella: Yes. So the numbers are somewhat impacted by the acquisitions as well. So the acquisitions are clearly incremental year-on-year and they make their way into overhead cost and particularly. So the way you have to think about our overhead cost is the following. We have been managing inflation quite effectively as a company. Inflation, though, particularly labor-related inflation, has been a little bit higher. In these numbers, there is a cost associated with our management incentive plan and long-term incentive plan. The company has done very well, and that has resulted in some incremental costs. All the rest in terms of corporate costs and other functions, we have been investing in three areas selectively. One, it is digital capabilities, and it is the biggest bump you see in corporate costs.

We have been investing in sales, and we have been investing in marketing. All the other functions has managed inflation that is below of the revenue growth in their respective market. And functions like finance, particularly has been pretty much, I would say, a little bit higher than flat in terms of cost. So we have been selectively investing in three areas digital services, sales and marketing, and that will continue into next year. All their assets being kept absolutely in control. And then there is a cost associated with the acquisitions and management incentive plans. That’s a simple way you have to think about it. Where do we spend in terms of investments? We will continue investing in sales capabilities, particularly in emerging markets.

We will continue to invest in marketing, both people and A&C, as we call it. And in terms of digital, there is going to be an acceleration. We are looking into as a major investment that is coming our way and that is both capital and running costs, but it’s too early to talk about that. So hopefully, that provides you with some color around our total overhead costs.

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

Dirk Van de Put: Yes, I wouldn’t say it’s all test and learn. So it’s a mixture of just reinforcing the businesses that we have, more launches from our own range, doing some geographical expansion, doing some distribution expansion. So it’s a lot more than test and learn. If I start with snack bars, I think we are discovering the power of snack bars. That’s why we highlighted it in the prepared remarks. We’re doing particularly well with Clif and also with a brand like Grenade in the UK and in Europe, which is really growing very fast. So first conclusion would be snack bars are going to be a real strength for us. There’s a big opportunity in the rest of the world. If you look at the development of the snack bar market in the US, it’s far ahead of the rest of the world.

So we see a huge opportunity there in the years to come. And particularly in the Anglo-Saxon countries, we think that’s going to happen first. As it relates to cakes and pastries, there is this segment, which is in-store bakery. Give & Go, that’s not a test and learn anymore. That’s now a $900 million business, but that has been very incremental to us. We’ve seen some very significant growth. It’s a segment that is growing very fast, and we’re taking share. So our expectation is that going forward, Give & Go will continue to see big growth because clients like Target or Walmart are moving from made in-stores towards freeze and thaw, which is what Give & Go is offering there. So second conclusion, the in-store bakery segment is going to be very interesting for us going forward.

And then the third one that is important for us is the expansion of our current brands into the cakes and pastries market. So we’ve launched Cakesters in the US or we have launched Airy Cake in China under Oreo, both very big successes. Things that are clearly an indication that our brands have the potential to play in this cakes and pastries space, and it’s a very nice addition and really extends the footprint and the consumers that we have. And then lastly, there is Chipita, which is the packaged croissant. We’re doing test and learns in three markets at the moment around the world. Not all the results are in, but we’ve seen, for instance, in a country like Brazil that there is a real interest. The segment is really not that established, but our test and learn was very positive, and we are now gearing up for a launch in the country.

I’m expecting in the other countries that we are doing some tests that we will get similar results because if you think about it, Give & Go was already very successful in places like Mexico or in the Middle East. So it’s a real sort of emerging market proposition, meal replacement at a very affordable price, reasonable quantity of product. So I think there’s going to be a real opportunity to make that a worldwide business for us. So those would be the four big ones at the moment from the adjacencies. So far, so very good, I would say. We’ll keep on informing you. But everything is going in line or in fact well above plan in this area.

Dirk Van de Put: I think with that we — Okay. Thank you. And with that, we’ve come to the end of our call. We feel good about the quarter. We feel good about the next quarter and about next year. Thank you for your interest and see you next quarter.

Luca Zaramella: Thank you, everyone.

Operator: This does conclude today’s program. Thank you for your participation. You may disconnect at any time.