Mondelez International, Inc. (MDLZ) Q3 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the Mondelez International Third Quarter 2020 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, Vice President, Investor Relations for Mondelez. Please go ahead, sir.

Good afternoon, and thanks for joining us. With me today are Dirk Van de Put, our Chairman and CEO; and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides, which are available on our website, mondelezinternational.com/investors. During this call, we'll make forward-looking statements about the Company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K, 10-Q and 8-K filings for more details on our forward-looking statements. As we discuss our results today, unless noted as reported, we'll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results. In addition, we provide our year-over-year growth on a constant currency basis, unless otherwise noted. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within our earnings release and at the back of our slide presentation. In today's call, Dirk will provide a business update then Luca will take you through the financials and our outlook. We will then close with Q&A. With that, I'll now turn the call over to Dirk.

Thank you, Shep, and good afternoon. We are very encouraged by our performance in the third quarter. Our execution was strong. We continue to accelerate our strategic initiatives and all of our regions were in growth. Our teams have been resilient and focused and we continued to prioritize safety during Q3, as we will for the remainder of the year. We continue to manage successfully through uncertainty and COVID-related challenges. And as a consequence we are outperforming our categories, continuing to gain significant market share. While our category outperformance is in most markets around the world that are very diverging markets in category situations, depending on how they are affected by COVID dynamics. Our largest categories biscuits and chocolate continue to perform well. Gum is still under significant pressures due to changes in consumer mobility and habits. And Candy while initially under pressure also improved. Meals and powdered beverages continue to do as well. Demand remained elevated in developed markets and we saw sequential improvement in emerging markets. In developed markets where more of our business is in the grocery channel and our Gum business is also smaller, we continue to be good momentum. In emerging markets, the majority of our markets grew in Q3, including key markets such as India, China, Brazil and Russia. But conditions do vary and some markets are still challenged, particularly where our portfolio skews towards gum and candy or where our sales are mostly in the traditional trade, which is mainly in Latin America, the Middle East and Africa. Our long-term growth strategy remains unchanged. But during this crisis we have accelerated certain initiatives in order to emerge stronger and build further on our advantage position. First, we are simplifying our business in order to facilitate more growth and reduce costs. Examples of this would be SKU deduction and innovation streamlining. Second, we are accelerating a number of growth initiatives in order to maintain our momentum and build on our share gains. For instance, in H2 we are increasing investment in our brands and commercial capabilities. We've also focused more on momentum in e-commerce and the grocery channel. Third, in order to offset some of the extra COVID-related cost, we have advantage or advanced a number of strategic cost reduction initiatives. We also prioritizing stronger between CapEx projects. And forth, we are rolling out changes in our ways of working and optimizing our organization structures, while strengthening some new more required capabilities. Switching out to slide five. Q3 was a strong quarter across all key metrics. We delivered organic net revenue growth of 4.4%. We are holding or gaining share in over 80% of our revenue base. We had good momentum on share coming into the pandemic. And I'm satisfied that we have sustained share gains beyond the initial phase of the crisis. This demonstrates the strength of our brands and our supply chain. Our gross profit dollars grew strongly at 6%, despite the incremental COVID-related costs. An operating income grew strongly at 10.5%, despite the significant increase in our brand investments. And last, we continue to improve free cash flow generation delivering $1.7 billion year to date, up $0.5 billion versus the same period last year. I'm now on slide six. As stated we continue to believe that our growth strategy is the right one for this environment. Not only do we believe that our strategy is the right one, we have the ambition to emerge from this crisis even stronger than we were before. To do so, we are accelerating certain areas of investment and other initiatives within the current strategy in light of the current dynamics. Let me highlight a few of these areas where we are making strong progress. We are stepping up working media investments behind our brands in the second half of this year. This is possible because we decreased our investments during the second quarter when because of all the issues arising when this crisis just started, it did not make sense to invest. We are seeing good results from this increase in investment, for example, as one proof point, our market share momentum continued in Q3. Also our ROI on these investments has increased significantly. We now ranked in the Top Tier in our industry. An interesting to note is that we are skewing are spent digital even more. For the first time this year we will be spending more on digital than on TV. Another area of great progress is brand equity increases. Our marketing team have successfully adapted our brand communication to the circumstances, some of it is focused on purpose and human connections, others on staying playful while staying at home or some others are about reinforcing hygiene practices. As a consequence our brands are forging stronger connections with our consumers really connecting through their purpose. In another area we are on track to be 75% through our SKU reduction exercised by year-end. Our teams are focused on ensuring, we don't know shelf space or incurred too much waste while increasing sales, reducing inventory and increasing line efficiency. I do want to reiterate that while 25% SKU reduction sounds like a big number, this represents a very small percentage of our revenue. The fourth highlight is that we have successfully implemented cost mitigation programs that we expect to fully offset the COVID-related costs we incur in the second half of the year. While this helps to deliver an on-algorithm year this year, it also supports our plans to continue to increase our investment in brands and capabilities again next year, while continuing to deliver against our financial algorithm. As it relates to our new ways of working, the company is functioning very well in this new reality, with most of our office associates working from home for the foreseeable future. We've also optimized our organization, shifting people to where we need them most like e-commerce,, digital or RGM. Switching to slide seven. While the COVID crisis has been all absorbing, we are continuing to progress even enhance our ESG agenda. This quarter, three areas got particular attention. First of all, we are focused on and making progress against the enhanced diversity and inclusion commitments we made in September. I am particularly pleased with our recent appointment of a New Global Chief Diversity and Inclusion officer, Robert Perkins. Robert will help us increase minority representation in our business, and advise me, my team and the broader company on how to take further action to drive an even more inclusive culture at Mondelez. As it relates to sustainability, we're continuing to invest in creating a more sustainable supply chain for cocoa. We just unveiled a new Global Cocoa Technical Center in Indonesia, which will support sustainable cocoa farming practices, and drive positive change for farmers and communities. And finally, we are developing the sustainable futures investment program to amplify our impact in sustainability areas. Its role is to invest in innovative sustainability, and social impact solutions, mainly in our palm and cocoa growing communities. With these actions, even more so than before, we living our purpose to empower people to snack right. With that, I hand it over to Luca.

Thank you, Dirk and good afternoon, everyone. Our third quarter performance was strong in terms of revenue grow, share gains, profitability and cash flow. As we exited Q2, we were already seeing signs of improvement in those business units that had been heavily affected by lock downs, and traditional trade grocers. And we were expecting a good quarter with a combination of sustained consumption trying to develop markets, but also returned to growth of our emerging market. We closed Q3 with overall growth of plus 4.4%. Our developed markets deliver a strong organic increase of plus 3.8%, while emerging markets return to more normal levels, delivering plus 5.3%. To provide more color, in developed market as far as North America goes, we continue to see elevated consumption versus pre-COVID levels, or be at lower rates than in Q1 and Q2. And for Europe too, we saw strong mass retail demand across all our key markets. In emerging markets, we saw good growth in 80% of the business unit revenue base, including in large businesses like India, China, Russia and Brazil, as operating restriction is enabling better mobility and access to traditional trade. Although the situation is better in the vast majority of our emerging markets, we expect some COVID restrictions and challenging economic circumstances to continue in parts of Latin America and Middle East Africa, and impacting disproportionately our gum and candy category. Growth this quarter included impacts of trade restocking, as demand spikes in North America and European retail, as well as traditional trade closures in emerging markets resulted in trade imbalances below normal levels as we exited Q2. This contributed approximately one point of growth. Turning to slide 10, Q3 revenue growth was driven by solid volume and pricing, mix was unfavorable due to world travel retail and gum revenues. As mentioned, growth includes approximately one point of pipeline refill. In terms of categories, biscuit continued to experience strong demand. We grow at nearly 8% driven by North America, EMEA and EU, with oil a key contributor and an important driver of our share gains in the category. Chocolate returned to grow at more than 5%. This was aided in part by large chocolate businesses such as India and Brazil, returning to robust growth, not overall. All key markets like the UK, Germany, Russia, Australia, France and Nordics did has a very good quarter. This result also includes nearly 2.5 points of headwinds related to world travel retail. Overall categories doing well and on top we are gaining share. Gum and candy declined double digit, primarily driven by gum, which improved from Q2 lows, but we still facing significant headwinds from social distancing and less out-of-home activity. And these particularly affected in some emerging markets like Mexico and Western Andean. Turning to slide 11, I wanted to spend a moment on e-commerce as this channel has clearly taken on more important. E-commerce revenue grew 78% on a reported basis in Q3, and represents 5% of our revenue base. In our top four market, we grew triple digits in the U.S., close to triple digits in the UK, and double digits in China and France. In some of those markets, our e-commerce share is greater than our offline share, while in others we have more headroom. We see multiple instances of significant e-commerce share gains this year, such as Yes [ph] Biscuit and UK Chocolate. Importantly, we believe e-commerce is driving incrementality as we look to meet and generate additional demand. This is also additive to our bottom line with profitability comparable to our offline business. Building on our existing trends, we are making substantial investments to take this business to the next level. This includes our increased investments in more digital working media, data driven engagement and improved online shopping site, ensuring we had the right packs and the right price, we did packs and bundles and testing new platforms to explore incremental opportunities in [Indiscernible] and direct-to-consumer. Turning to category and share highlight on page 12. Our effort to try meaningful and sustained share gains is succeeding, as strong as execution of our team's trusted global and local plans. And investments in more working media competitive ROIs are continuing to yield very good results. We have add or gain share 80% of our revenue based on the year to date basis. What we've shown this slide is rounded to the nearest 5%. But we were down 3% when compared to the last quarter as biscuits tick down slightly. Biscuits and chocolate were the big drivers once again as biscuits has gained share in 90% of our revenue base and chocolate has gained an 85%. Gum and Candy had gained 45%, notable share gains include the U.S., France, China, Russia biscuits, and UK, Russia and Australia chocolate. Many of the share gains such Yes in China biscuit and UK chocolate are quite significant in terms of their absolute size. Similar to our commentary last quarter, it is important to understand that the year to-date category growth of flat 3.7% doesn't reflect our major channels such as convenience and world travel retail. It also does not include the impact of our real business, which is performing quite well. Now let's review our profitability performance on slide 13. Overall, our profitability was strong in the third quarter. We increase gross profit due to volume leverage and productivity, as well as some promotional efficiencies. Operating income dollars increase more than 10% due to overhead reductions and simplification efforts, which helped offset COVID-related costs of approximately $60 million. COVID cost this year has been totaling so far about $200 million. Importantly, we continue to step up our work in media investment to further strengthen our brand. Stay top of mind of the consumers and position ourselves well going forward. Moving to regional performance on slide 14, North America grew 6.3% driven by elevated biscuit consumption and strong share gains. Ongoing investment in working media and strong DSP execution are helping us to sustain our growth they share gains. Gum was down double digit due to limited on the go consumption occasions. North America operating income increased by more than 18% due to volume leverage and cost control initiatives more than offsetting COVID-related costs and meaningful working media incremental investment. Europe revenue grew 3.4% in the quarter. We saw good category growth in chocolate, biscuits and meals. The breath of growth across key markets were quite impressive. With solid results in UK, France, Germany, Russia, Benelux and the Nordics. In terms of headwind, world travel retail continue to shine while below last year at circa 20% of 2019 revenue, and that as a headwind of more than 2.2 the EU. In terms of share performance, we drove notable share gains with UK, France, Germany and Russia. OI dollars return to grow as solid increases in volumes more than offset COVID-related costs and unfavorable mix. In addition, working media increase in the quarter. EMEA posted growth of 4.2% with growth across most markets as operating restrictions have become less onerous. China grew high single digit, following double digit growth in Q2 with significant share gains in biscuit. India returned to grow with a high single-digit increase for the quarter driven by chocolate and significant biscuit grow and the excellent execution of the team there. Australia, New Zealand and Japan posted low single digit growth. Southeast Asia grew mid single digits in Q3. But we did see some headwinds in certain countries such as Thailand and the Philippines, where towards the end of the quarter category slowed down due to more difficult economic conditions, which are expected to persist in the near term. Our Middle East and North Africa business decline low double digit as the economy there remains pressure. EMEA operating income dollars grew nearly 17% due to volume increases and cost mitigation effort despite meaningful increases in working media. Latin America grew 3.1% behind better results in Brazil, while Argentina grew due to inflation driven pricing. Ex Argentina, Latin America grew by approximately 1%. Mexico declined low double-digit due to a significant decline in gum and candy, which is more than 40% of that business, as out of home categories remained impacted by social distancing. The biscuit business in Mexico posted robust growth. In Brazil, we posted double digit growth in the quarter driven by growth in powder beverages, chocolate and biscuit. Underlying growth was mid single digits when taking into consideration the lapping of the supply chain related issues last year. Gum and candy remained significantly impacted by COVID, posting double digit declines. We feel good about the continued progress of our supply chain in store execution and market in this country. But we know that we have more work to do. Our Western Andean countries posted a decline as COVID continues to impact traditional trade channels. Gum and Candy as a category is down double digit, OI in Latin America grew 11% as pricing, cost containment measures and improve supply chain performance more than offset COVID-related costs. We also benefited from price hedges that are better than current spot rate. Our expectations is that part of Latin America will remain challenging in the near term. Given the restrictions in place and the economic environment in many markets. We remain focused on execution and targeted Investment to drive share gains, as well as cost controls. Now turning to earnings per share on slide 18. On a year to date basis EPS is up 6%, driven mostly by operating gain. Q3 EPS was strong versus previous years without breaking gains of $0.06 and taxes of setting them. I'll now move on to our free cash flow on slide 19. We deliver free cash flow of $1.7 billion through the first three quarters, an increase of almost $500 million versus previous year. Higher earnings more focused CapEx, lower restructuring and strong working capital management with a three day improvement in our cash conversion cycle have drive this result. In addition, deferred tax payments, some of which will reverse in Q4 also positively impacted this result. Moving to our outlook on slide 21. Disability still remains challenging in several markets. But we are providing an updated view of our expectations based on what we know today. We expect full year advantage revenue growth of 3.5% plus, implied Q4 would be broadly in line with Q3 when excluding the feeling of trade stock. We expect overall good EBIT growth in Q4, but below the three levels, particularly as we continue setting up working media, as we face some additional inflation in North America around transportation costs and that in Latin America, we expect the benefit of favorable currency hedges to subside. For the full year, adjusted EPS is expected to grow at 5% plus at constant ForEx. Free cash flow should be approximately $3 billion, ETR should be in the low to mid 20s. And adjusted interest expense is projected to be approximately $350 million. We are also planning to well take our share buyback program in the fourth quarter. Given the business is performing well, cash flow is strong and we have further strengthen our balance sheet. It is not expected to have a significant impact on EPS this year, given proximity to year end. For translation is now expected to negatively impact our reported revenue by approximately three percentage points, and EPS by $0.04 on the year based on current market trades. This is based on current conditions and does not factor in a significant degradation of the operating environment, that could be triggered by material gross and not COVID. This also incorporates the following expectations, a continuing level of elevated demand and in home consumption in certain developed markets, such as North America and Europe must repay. Headwinds in certain emerging markets predominantly in our Latin America region, the Middle East, North Africa, countries and parts of Southeast Asia and of our gum business. Continued weakness in world travel retail. With that, let's open it up for Q&A.

[Operator Instructions] And your first question is from the one of Andrew Lazar with Barclays. Please go ahead.

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

Okay. Thank you, Andrew. Maybe what I can do is, is do a little tour, maybe through categories and regions, because the two are quite linked. And then Luca can talk about Q4 and 2021.

Right?

And so, if you look at the categories, categories are affected by the mobility of the consumers. So, I would say that 80% of our revenue is coming from advantaged categories that are performing very well. And in top in those categories, we have strong Mondelez brands and we are increasing our market share. So biscuits is the main driver at the moment. The demand remains very strong globally. We had high single digit revenue growth in Q3, and we had very strong share gains. Chocolates came back in Q3. It accelerated versus Q2, largely because of some of our emerging markets came back like for instance, India. And the 5% growth that we're seeing in Q3 is despite the world travel retail headwind, which squeezed off two points of the growth of chocolate, and yeah, world travel retail, as you can imagine, at this stage is still lower than 20% of what it was used to be. I think we do see that chocolate grow because we have a very advantaged portfolio which is skewed to at home consumption. In the emerging markets, we have a low unit price. We have good affordability in our chocolate and middle of the road with the right price points. But the one that remains very challenged is gum. We knew that in recessions or in moments that gum is affected, it recuperate slowly, but it's probably recuperating in a bit slower than we would have anticipated. And that has to see everything with the consumer mobility, the 75% of gum consumption is on the go. And even if we're not in lockdown anymore, or unfortunately about to go back to lockdown in Europe, the consumer is still not as mobile as before. And then meals and powder beverages are doing quite well. So if you keep that in mind, and then you go through the regions, and you know, more or less what the mixes of the regions gives you an idea of how we're doing. So North America 80% biscuit, demand of biscuits, as I said, remains very elevated. Our execution has been very strong, very strong share gains, consumers are snacking more at home, still well above the pre-COVID level, not as high as in March and April. But still quite increased consumption. And so, North America is solid. And seeing where we are with COVID and the fact that we probably will get more recommendations to stay at home, we expect this elevated consumption to continue for a while. In biscuit [ph], same in Europe in mass retail, but our business there is more also on the go with away from home. And world travel retail is consolidated in our European number. So apart from that Europe has very strong mass retail. And now that we go back in lockdown, we can expect that to remain like that. And we did see an improvement in the convenience channel in Europe. But as I said before, the world travel retail still remains very soft. And then in emerging markets, two thirds of our markets, which we had already mentioned in the Q2 call bounce back quite nicely. Talking about China, India, Brazil, and some of the European emerging markets like Russia, the Q2 was disrupted, but they're all coming back high single digit growth. At this stage, we do not expect a repeat of the disruption that we saw the beginning of the crisis. I think it's impossible in those countries to do the same sort of lockdowns that they did, because it led to severe economic effects. So we continue to see those markets recuperating with bit bumps, it's not going to be one nice road of birth, that depends a little bit on the local situation and what the government does. But overall, I would expect the emerging markets to gradually keep on improving. And then, there is one-third of our emerging markets that are in situations where the macro effects are more pronounced. On top, unfortunately, those markets are having a high mix of gum and candy in their sales. And so they are severely affected. And those are the ones that that are having more serious problems, talking about Mexico, Central America, talking also about the Middle East and parts of Africa, and also a few countries in Southeast Asia. So that gives you an idea where we are. I think that situation will continue in Q4, and even stretch out in the beginning of next year. I don't see a huge change taking place on the on the regional situations as we see them today. Maybe Luca, you can talk a little bit about Q4 and 2021.

Yes, sure. Hi, Andrew. So building on what they've just said, we had line of sight at this point to as we said, it fully of revenue outlook number that this 3.5 plus percent. And importantly, as Dirk just said, all the underlying trends that have been discussed so far up are probably unchanged into Q4 and certainly as we start November. And that is why we see a Q4 in terms of top line that is 3% or so bro [ph]. As far as EBIT goes Q4 should be another strong quarter, I want to reiterate. That is more in line with that last year growth rate. We will continue investing in working media. We'll see the benefit of that, Dirk alluded to higher ROI and the share gains up there to testify the merit for continuous investment. There will be some effect, but lower than in the past in terms of COVID costs, as well as and we are very pleased with the positive effect of the cost initiatives that we are putting in place. We have put in place as part of the emerge stronger. .: First of all, we expect to retain our share gains and to continue to invest not only in working media, but in marketing and sales. We've talked many times about the distribution opportunities we have around the world in emerging market as one example, despite COVID costs subsiding into next year, and we emerged stronger initiatives that in our mind will carry the benefits into 2021. We will reinvest the upside in the business to sustain the material share gains that we see potentially to weather and more recessionary environment. Biscuits and chocolate from what we see today will continue to do well. But as you say, we would be lapping some elevated growth in 2020, particularly in developed markets and biscuit. But on the flip side, I think there should be recovery of the most impacted called categories and countries. Talking about costs, commodities and ForEx inflation is in those stock [ph] aligned to what we have seen in the last few years. In some cases, for instance, in chocolate and cocoa, and in some countries, for instance, Brazil, there will be high inflation. But overall, we are in the neighborhood of what we have seen in the last few years. The sum of all of these, again, should lead to a 2021 that should be an algorithm. We will have to stay tuned and I'll give you more flavor and updates as we post the Q4 results. But needless to say that there are still someone knows, like Brexit or the potential tax change in the U.S., or in particular the lapse of COVID. And so I think it is important that we stay agile and we'll talk to you more about the situation if there is evolutional of what we know.

Great, thanks, everybody.

Thank you, Andrew.

And your next question is from the line of Dara Mohsenian with Morgan Stanley. Please go ahead.

Hey, guys.

Hi, Dara.

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

Yes. First of all, this quarter, the areas where we are gaining or holding share is at 85%. It's about three points lower than it was the previous quarter. That's minor. And so overall, I would say we've held on to our shares, geographically speaking and in revenue terms very well. What's more important, which we don't report here, but which we know is that the size of the market share gains is quite significant. And it seems some of the more important areas like in China gum or Germany chocolate or biscuits in the U.S., China, Brazil Germany and so on. If we analyze what happened is, in the beginning, I would say, at the beginning of the COVID crisis, it was our supply chain and our route-to-market that partially helped us. Because we saw an increase of our total distribution point. We saw very good customer service level seen the circumstances and, and so on. And we have DSD in some parts of the world. We also know that consumers in this crisis tend to go to trusted brands, they want to feel safe. So they go to the brands they know and trust, particularly the big heritage sort of taste of the nation brands around the world. And then we are accompanying that with increased media, and adapted messaging on our brands, as much as we can to the COVID situation. And that all seems to play very well for us. We've done a number of very successful adaptations of our brands. We can see the equity that we have in our brands increasing. And then the third factor I would say is, since there was more at home snacking, our range that we have in the different categories, our range of products is better suited. We are in more in the classical biscuits and crackers I would say, which is very well suited for home consumption and also in the tablet category of chocolates. And that's really helping us. So going forward with doing a number of actions to sustain those share gains. We increase our working media in the second half. But going into next year, we're continuing to do that same -- the same thing. And so yes, as Andrew was mentioning, we lap a number of things that that will be beneficial for us. We also have some cost pressures, obviously. But we are also increasing again, our AMC investment. Our algorithm allows us to do that. And I think it's critical in a situation where there might be a recession and the consumer might still be a little bit unsure. I think we need to keep on supporting our brands. So we think that will help. We are doing a lot of work on in-store visibility starting Christmas early, probably they'll start Easter early. We've got some very big team activations coming up for next year, some very exciting stuff. And so I feel that we probably have the best activity plan related to our brands that we've had in a number of years coming up for next year. And then we are working very hard on our promotional strategy. We're keeping an eye on value, and any value plus strategy that we need to do like no two-bites or family packs or whatever is needed for the at home consumption. And then the last thing we're doing is that we we've done a number of launches of innovation, innovation in certain countries like an expansion of the Milka spread the launch of the new biscuit brand in Germany and so on. And based on all these things, and the fact that we have momentum and when we seen great connection of our brands with the consumer, we are confident that on top of the elevated level of this year, we can increase our market share further next year.

Great. Thanks. Okay.

Thank you, Dara.

And your next question is from the line of Ken Goldman with JP Morgan. Please go ahead.

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

Yeah. Thank you [Indiscernible] maybe I'll take that. I mean, we reiterate what we said many times. We remain optimistic about both assets. They have clearly a long term potential. To start with, they compete in a strong categories. They have solid fundamentals as categories and these companies are equipped to get more traction on key trends like on demand coffee as one example only. They are gaining share. They have a clear strategic direction. They are executing quite well. And there are strong management teams that can even enhance the advantage of the categories are in brand that both companies have. So there are all the ingredients in our mind for long term top and bottom line and cash flow potential. We are not able to really to talk specifically about JV and the results so far. But I think you saw a strong quarter for KBP continued momentum, top line between consensus, gaining penetration, strong share momentum, EPS, and really strong outcomes across all metrics, and they continue to be leveraged and create cash flow. So we believe that the value is higher than what the current stock price would say for both companies. And not in consistent with other companies as well in the broad CPG world. We made a series of moves, quite frankly, were more tactical than anything. And if you look at our balance sheet, we have showed the top quite well since the beginning of the year. So on KDP we are comfortable around current levels of ownership. And if we make further trades, there will be at the right value for us and we will try to coordinate with other major shareholders. And on JV, clearly, we are a major shareholders. We own 22.9% of the company. We did welcome the IPO that is giving us an avenue for optionality. And having said that, though, we are committed for the long term success of the company, you might expect some trades from us in the coming quarters that should improve the current limited flow. But we will remain disciplined both in JV and KDP. And under current circumstances, we want to retain the presence in both stocks. So what you have seen recently was more tactical than anything. We took advantage of certain stock price levels. I will remain committed to these companies and we'll did believe in the potential. But as you said over time, we want to replace those with snaking assets.

Great. Thanks so much.

Your next question is from the line of Bryan Spillane with Bank of America. Please go ahead.

Hey, good afternoon, everyone. So maybe just a follow up on Luca, the comment you made in response to Andrews question related to algorithm next year. And more interested in at this point in cash flow. So I guess two questions around that. One, would you expect that free cash flow would also be or free cash flow of conversion would also be sort of on algorithm. And then maybe connected to that, part of the algorithm has been returning cash to shareholders via share repurchases and dividend increases annually. So, would we expect that that would be part of the equation again in 2021?

So, the straight answer to the last part of the question is absolutely, yes, we remain committed to dividends to what we said several times about dividend growing in excess of EPS. I think the last dividend increase reflects that. Share buybacks should continue absent in a acquisitions or things that at this point might happen or not. And so I will say yes, there should be share buybacks. And final your free cash flow, free cash flow, there is no reason to expect a slow down into next year. Having said that, I think, you know, we went public with JV that reset the base for tax purposes in Europe. And there is a tax component that is going to be track [ph] into free cash flow next year. But I feel like at this point might not be going up from this year, but considering some of the tax one time as I just thought, I think you can think about a three plus billion dollar cash flow unit for next year. That's the plan at this point.

Okay, terrific. Thanks, Luca.

Thank you, Bryan.

And your next question is from the line of Chris Growe with Stifel. Please go ahead.

Hi, good evening. Thank you. I just had two questions if I could. The first one would just be in relation to the SKU rationalization program. Just want to get a sense of does that start here in the quarter? Does that ramp up in the fourth quarter in the next year? And I guess, I'm also curious like where you see the benefits of that coming through? So as you come behind that with more innovation, is it just better volume growth? Is there mix improvement, that sort of thing? And then just a quick question, if I could on inventory levels, you had some benefit this quarter from shipping inventory. Does that are you back to where you want retail inventories to be or your own inventories? Are there more building to go as we move in the fourth quarter of next year? Thank you.

Okay. Maybe I'll do the SKUs and Luca can do the inventory. So the SKUs, the timeline on that is gradual, largely driven in the negotiations with the trade. And around the world, there are certain moments you can make these changes. And for instance, in Europe, that moment is the beginning of next year. So we are preparing for it now. But the implementation will only be beginning of next year. So roughly I would say, if you look at it around the world, we should be 75% done by year end. And then the rest would be done in the beginning of 2021. You have to think about this as part of a broader simplification program that is meant to drive both the top line and the bottom line and cash flow. It's a simplification of SKUs, the number of innovation initiatives, and also looking at our brand portfolio. So we do not expect the negative top line impacted. They represent -- 25% represent 2% 3% of our revenue, but we think we will easily replace that with higher velocity on the remaining SKUs will get more shelf space. And then the benefits, as I already mentioned, more sales, we expect our inventories to go down because it's those SKUs that take a lot of the inventory. In manufacturing, it is less complexity, less downtime, fewer changeover. So it gives us a benefit on our costs. And then on the customer side, we give them better customer service. It's going to be easier for them to manage their shelf, and so their costs go down still. So it's just a support to deliver our long term algorithm. This is not meant to be transformative from a margin perspective. But it does help us to deliver on the top and the bottom line and the cash flow of our algorithm. Luca?

Yes. On inventory levels, there are obviously puts and takes. I would say, we got to a more normalized level at the end of Q3. Overall, I think we are in a decent situation. As I said there might be places where we need to do a little bit more other way we are fine. I wouldn't expect if we pick up due to inventory replenishment in the courses to come. And obviously we want to end the year with the right level of inventory as we have always done.

Thank you for those answers. I appreciate it.

Thank you.

And your next question is from a lot of Robert Moskow with Credit Suisse. Please go ahead.

Thank you. Just wanted to make sure I understood the implied sales guide for 4Q. It seems like it's below 3%. Year to date year at 3.9%. So just wanted to understand why it might be lower than year to date. And then also can you think more specifics about cost reduction plans, the efficiency plans? It looks like a quarter they work in LatAm and they work in AMEA. And is that where most of these cost reduction plans are going to take place? And if so, does that make it more difficult to capitalize on the growth as they recover? Thanks.

We said it is 3.4% plus on the full year. So the implied growth rate as I said, it is an about 3% for Q4. I wouldn't read too much into different number than 3% in Q4. I also clearly said that there is one point of growth in the 4.4% that you see in Q3. So again, we are not mind so as you think about Q4. Importantly at this point with the right level of trade inventory. And as we look into next year, again, we want to write all the initiatives that will allow us to read here that on our way. I think that's a simple way to think about it. In terms of cost initiatives, I would say they are pretty much across the board. The most stronger initiatives, the initiatives we have taken in terms of designing our cost packages in terms of pushing net revenue growth, in terms of working to reduce non-working media and increasing working media. Those are effects that you see consistently throughout the regions. Yes, there might be regions like the U.S. where or North America where are we read a little bit more in terms of revenue growth management, but overall, again, they are fairly consistent across the board.

Okay. Thank you.

Thank you, Robert.

And your next question is from the line of Alexia Howard with Bernstein. Please go ahead.

Hi, there. Good evening. Can you hear me?

Yes. Hi.

Hi, Alexia.

Two quick questions. Firstly, on immerging e-commerce. You talked about now [Indiscernible] presumably [Indiscernible]. And then my follow up around [Indiscernible] full of a ton coming in for the Yes [ph]. You're talking about a new center I believe. Are you thinking about changing [Indiscernible] sourcing code? Or is about how that strategy? Thank you.

Thanks, Alexia. It was very broken up. So I had difficulties understanding what you're exactly as there was an echo somewhere on the line and made it difficult. I think you were asking -- I heard it was about e-commerce, but I don't know what the details were. Somebody did look at the look or maybe you try again.

Yes. I didn't understand the second part of the question at all. I mean, I know the first part was about e-commerce. The second part, I have no clue.

Can I try? Can you hear me?

Yes. There still..

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

Yes.

Yes. Perfect. All right. So on e-commerce, you mentioned that you are under represented in some areas and overrepresented in e-commerce, different regions, obviously, areas where you're underrepresented relative to your motor sales that might be the area where you've got more headroom. Could you just give us an idea of which regions those are where you think there are real opportunities? And then the second question was on cocoa sourcing. I'm just curious about whether you might be changing your regional approach to cocoa sourcing given your -- you put a new center of excellence in Indonesia. Meanwhile, there's coke $400 a ton and cocoa, tax is going in, in some parts of Africa. Are you thinking about changing your regional approach to where you're getting the cocoa from globally? Hopefully, you could hear that better?

Yes, yes. Yes. Now it worked. It was not you it was the technical side of things, Alexia.

Understood.

On ecommerce. Yes. First of all, we're seeing a very good growth in e-commerce, as I mentioned in the prepared remarks. Roughly, you could say that our e-commerce headspace is largely in China and in the U.S. The rest, the two other big countries we have are the UK and France. But I would say the biggest gap we have in China, which we are catching up, we're working very hard on that. Overall, we've seen market share gains, largely in most of the areas around the world with the exception of France at the moment. And we've also started to enter into smaller countries. And that is going to give us some extra gain also. Overall though, if you take globally our shares on and offline are similar. So we have some headroom here and there, but then we are over represented somewhere else. So that's a little bit the situation on e-commerce. Going forward, it's about expanding our assortment to meet the channel need. Its about recreating impulse experience. It's about developing our data as it relates to the consumers and getting better connections with them, it's about putting more investment in there. And then, experimenting with to other areas that are that are developing for us in e-commerce, which is e-business-to-business and direct to consumer. So also important to mention is that our margins are similar online and offline. So that's the situation on e-commerce. If I go to cocoa, we are not --we are experimenting with cocoa in other regions. But at this stage, we are going to continue in large part to continue to source from Ghana and Ivory Coast. We source in Latin America. We source in India. We source in Indonesia. But we are one of the biggest cocoa buyers in the world. And so it, those regions do not offer us enough quantity to shift and shifting, developing real cocoa sourcing takes years. So we're working on that, but it's not going to happen next year, not with the amount of cocoa that we need to buy. On the other hand, we have already started to reflect the extra LID or the living income differential into our pricing. And so, we are fully set to absorb that next year. And we feel good about supporting what the government in those two countries are trying to do. We think it fits in our ESG approach. And at the same time, we keep -- we want to keep on going with our own program Cocoa Life, which is complimentary to that. We think it's the right thing to do, because we want a real sustainable future for cocoa. And farmer income is really critical. And we were making sure through Cocoa Life we can actually see that and monitor what's going on. So we are planning to have 100% of our cocoa volume by 2025 being sourced through our Cocoa Life program. So I would say that is the answer on cocoa.

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

No problem.

Thank you.

And your final question is from the line of David Palmer with Evercore ISI. Please go ahead.

Thanks. Good evening, just a follow up on emerging markets and a question on the marketing or grocery investments. On EMs, you had nice improvement in Russia, Brazil and some other markets. And you mentioned in the previous question that you expect emerging markets to continue to improve. I think you also said in your prepared remarks that there was some late quarters slowing into Asia outside of China. So maybe just some clarification about where you feel like the momentum is in continuing to improve across emerging markets would be helpful. And then it just in terms of your growth reinvestments you guys don't have -- sort of just a windfall this year, such that you're spending a ton of money in advertising. So I expect this to be somewhat of a measured plan about what you're doing. And you said, advertising or working media, as you said it will be going up particularly in digital. So could you talk about that gross spending, where you're spending it? What's -- where you're getting this high ROI, and do you think that's going to continue into 2021? Thanks.

Okay. I'll take the first part and you will do the second part, Luca.

Yes.

So on emerging markets, I would say the temporary headwinds in our mind do not hamper the long term prospects. We feel that we're executing well. We have an advantage network. We have deep distribution. We have good from momentum pre crisis. We're coming out of the crisis in most of the emerging markets very fast. I'm thinking about India, Brazil, we have share r gains that we see. And obviously, we can only focus on what we control which is execution, cost management, selective investment. We remain confident about tutors as I mentioned, and those are the markets where we're seeing good momentum, China, India, European, sorry, emerging markets, Brazil little bit of the parts of Africa. We feel that they're already back in positive territory. We're confident that they will keep on growing. They were performing very well for us before the crisis, if anything, I think we've improved our position during the crisis. And we have very strong teams on the ground. Where we are cautious and where we need to work hard, because we are hampered by the local situation that's more in Latin America, thinking Mexico, thinking walk down for us, which is the Central America and the Caribbean, and Colombia, and some of the Middle Eastern and the Southeast Asia countries. That's where gum and candy is big for us. And the recuperation of gum and candy is going to be critical for us. So we're doing a lot of work on how to promote gum consumption in the time of COVID, where people are more spending more time at home when they're wearing masks, and so on, which is, which is contraindicated for gum consumption. And we are trying to make sure that for next year we see good momentum in that category. So that's the part where I would say that we are a bit more careful. Luca?

Yes. So now may you see David, the way you have to see it these putting in Q2, given the circumstances we pulled back. And so we double down in the second part of the year. And as we said, many times, the share gains that we're seeing, they are truly broad based. They are across multiple brands, multiple countries with the exception, I would say of gum, we are extremely pleased with the share gains we have seen in this case in chocolate. And so we want to retain those and that we will continue to invest into 2021. So between the fact that COVID cost will subside between the fact that in Q2, we will be lapping lower energy spending. I think you will see an algorithm that in terms of EBIT and EPS expansion should be in line with expectations for next year. Don't expect the same material impact that we are heading in the second part of the year in terms of working media into next year. As A, we will be lapping a lower Q2. And B, we will have other labors into the P&L, including COVID costs that will subside, to be able to fund these incremental investments. By realities, the more we can retain those share gains, the better even in a context where maybe categories will be slightly impacted by a potential recession.

Very, very helpful. Thank you.

You're very welcome, David.

Thank you. I think with that's no further questions.

Okay. And there are no further questions. At this time, I would like to turn the call back to management for closing remarks.

Okay. Thank you, Angela. Well, thank you for connecting. As you can see, we had a good, solid third quarter. We feel good about the where the fourth quarter is heading and how we will close the year. We've given you a first flavor of what 2021 looks like, which we also feel pretty good about. And obviously in the next call, we will give you the guidance for the year. If that is possible, because you never know what happens in these COVID situations. Thank you for your interest. And thank you for your questions. And if there's anything else, feel free to connect Andrei or Chef, we can give you more information. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.