Good day, and welcome to the Mondelez International Fourth Quarter 2023 and Year-End Earnings Conference Call. Today's call is expected to last about one hour, which will include remarks from Mondelez management and a question-and-answer session. I would now like to turn the call over to Mr. Shep Dunlap, Senior Vice President, Investor Relations for Mondelez. Please proceed, sir.

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, Q and 8-K filings for more details on our forward-looking statements. As we discuss our results today, unless noted as reported, we'll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results. In addition, we provide our year-over-year growth on a constant currency basis, unless otherwise noted. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation. Today, Dirk will provide a business and strategy update followed by a review of our financial results and outlook by Luca. We will close with Q&A. I'll now turn the call over to Dirk.

Thanks, Shep, and thanks to everyone for joining the call today. I will start on slide four. I'm pleased to share that we delivered our best year ever in 2023, with robust top-line growth, continued share improvements, record profit dollar growth, and strong total shareholder return. Our double-digit top-line performance was driven by strong pricing execution and positive volume mix growth. We also delivered continued share improvements as consumers across the globe remain very engaged with our iconic snacking brands. We set another record for gross profit dollar growth, achieving $2.2 billion through ongoing cost discipline and sound pricing to offset cost inflation, as well as volume leverage. We continued our track record of strong free cash flow, generating $3.6 billion. To accelerate our strategy of global snacking leadership, we continue to invest significantly in our brands and capabilities, driving multi-year growth on both the top and bottom lines. I'm especially proud of our record financial results, as well as returning nearly $4 billion in capital to shareholders. These results deepen our confidence that the strength of our brands, our proven strategy, our continued and increasing investments, and especially our great people, position us well to achieve our long-term financial targets in 2024 and beyond. Turning to slide five, you can see that 2023 was a strong year on both the top and bottom lines, with substantial reinvestment to drive continued growth in the year ahead. Organic net revenue grew 14.7% or $4.6 billion versus the prior year. Our continuing solid performance in volume mix demonstrates that consumers continue to prioritize our brands and categories. We also delivered record adjusted gross profit dollar growth of $2.2 billion, up 18.8%, significantly lapping the last several years. We are proud of our team's continued focus and commitment, which enables us to continue investing in the business to drive further sustained growth. Accordingly, we increased A&C investments by more than 21%, helping to drive consumer and customer loyalty to both our iconic global brands and our local jewels, which represent the taste of the nation in their markets. These results translated into strong OI growth of nearly $1 billion, up more than 19% versus prior years. Adjusted EPS grew 19% on top of strong growth in the past several years. All told, we remain confident that our virtuous cycle of strong gross profit dollar growth, fueling local first commercial execution, and increasing investments in our strong brands, capabilities, and talent will enable us to continue delivering attractive, sustainable growth. I'm especially proud to share that we continue to outperform our peers in total shareholder return. As you can see on slide six, our five-year TSR is nearly double the average of our peer group. Our one-year return is particularly impressive with Mondelez delivering double-digit growth, while our peer average return has fallen into negative territory. We view these results as evidence that we have the right strategy, the right brands, and the right people to continue delivering long-term value for our stakeholders. Switching to slide seven. Our performance in 2023 gives us confidence that we have not only the right growth strategy but also the right execution to deliver it. Here are just a few highlights of our strategy in action. Our biggest global brands, Oreo, Milka, and Cadbury achieved more than $10 billion in global net revenues. We continue accelerating our focus on our core categories for chocolate, biscuits, and baked snacks, because these categories offer attractive growth and profitability. We remain on track to deliver 90% of our revenue through these core categories. We also continue to make strong progress in executing our growth strategy. Our U.S. supply chain has stabilized and we have added more than 600,000 stores to our emerging market distribution channels. Additionally, we continue to advance our portfolio reshaping strategy. In 2023, we integrated Clif Bar and Ricolino, and now we are harnessing the power of these recent acquisitions to strengthen our presence in the global snack bar and the Mexican chocolate and candy segments. We also completed the sale of our developed market gum business for $1.4 billion, providing another important source of reinvestment to further advance our brands, talents, and capabilities. On slide eight, along with our financial performance, I'm pleased to share that we made significant progress toward our sustainability goals and targets in 2023. First, we continue to advance our leadership in more sustainably sourced critical ingredients. About 80% of the cocoa volume used in our chocolate brands is sourced through Cocoa Life, our signature cocoa sourcing program. There works just to lift up the people and restore landscapes where cocoa grows. We also made continued progress in helping to combat climate change. We achieved an important milestone in 2023 by submitting our roadmap to achieve net zero by 2050 through the Science Based Targets Initiative. Additionally, we continued advancing our light and right packaging strategy. More than 97% of our packaging is now designed to be recycled. We also continue investing in ways to empower consumers to make more mindful snacking choices that fit into their healthy active lifestyles. More than 55% of our snacks revenue comes from Mindful Portion Snacks, that is, snacks that are packaged in individually wrapped Mindful Portion serving sizes or with clear Mindful Portion recommendations unpack. These are just a few highlights of our continuing progress toward building a more sustainable snacking company. We continue to believe that helping to drive positive change at scale is an integral part of value creation, with positive returns for our stakeholders. We encourage you to watch our annual Snacking Made Right report, which will be published in April to view our full-year sustainability data. Turning to slide nine. You can see that like many companies, we continued to navigate through a dynamic operating environment. We are closely tracking and planning around a number of near-term themes, including continuing inflation, shifting consumer habits, geopolitical challenges, rising cocoa prices, just to name a few. We are well-positioned to address these challenges, and we remain confident that we can deliver an on-algorithm year. Our confidence is rooted in our conviction that we have the right strategy, the right execution, and the right people, as well as very strong widely loved brands. We continue to see momentum in the majority of our key emerging markets. Our categories remained resilient, and our solid volume mix performance demonstrates that consumers continue to prioritize our iconic snacking brands. To continue accelerating this momentum, we are continuing to increase our investment significantly in our brands and capabilities. We are pleased that our U.S. supply chain has substantially improved and we continue to focus on expanding distribution opportunities in both developed and emerging markets. We are also making solid progress in our European pricing negotiations. We expect to deliver robust EPS growth in both constant and real dollars in 2024. And overall, we remain confident that we have the right strategy to effectively navigate today's volatile environment while continuing to focus on long-term sustainable growth. In conclusion, I'm pleased to reiterate that 2023 was another record year. Our focus and portfolio reshaping strategy is working, and we are well-positioned to continue driving attractive growth in 2024 and beyond. By continuing to double down on our attractive core categories of chocolate, biscuits, and baked snacks, investing in our widely loved brands, focusing on operational execution and cost discipline, and empowering our great people, I am confident that we can deliver strong performance for years to come. With that, I'll turn it over to Luca to share additional insights on our financials.

Thank you, Dirk, and good afternoon, everyone. Before I get into our financial results and the 2024 outlook, it is important to provide some context related to the developed market gum divestiture and its impact on our results. On slide 11, you can see that the impact of the divestiture on revenue was around $500 million, while our growth was 0.3 percentage points negative. EPS was impacted by a minus $0.11. I'll give you more color as this relates to the outlook later in the call, and how we plan to fully offset the impact on income. Moving to slide 12. In 2023, we delivered exceptional results, starting with double-digit revenue growth, with both volume and value contributing. As we keep saying, gross profit dollars is the most important P&L variable as it allows reinvestment to protect our virtuous cycle. Last year, GP dollars grew by $2.2 billion, allowing substantial reinvestments, strong earnings, and robust cash flow generation. The strengths of these results can be seen across all regions and categories. Revenue growth was plus 14.7% in the year with 1.3 points of growth coming from volume mix. For the quarter, growth was about 10%, with a slight decline in volume mix. Emerging markets grew by 20.4% for the year and 14.9% for the quarter with strength coming from a substantial number of key countries, including Brazil, China, India, Mexico, and the Western Andean. Developed markets grew plus 11.1% for the year and plus 6.6% for the quarter, including robust growth from both the U.S. and Europe. Moving to portfolio performance on slide 13. Our chocolate and biscuit businesses both delivered double-digit growth for the year. Also, gum and candy continued to perform well with superior growth in emerging markets. Biscuits grew plus 11.9% for the year and plus 5.5% for the quarter. A large number of brands delivered strong growth for 2023, including Oreo, Ritz, Chips Ahoy!, Tate's Bake, Give & Go, 7Days, TUC, and Club Social. Chocolate grew plus 14.5% for the year and plus 11.2% for the quarter with significant growth across both developed and emerging markets. Volume mix was up by 2.5% for the year and 2.4% for the quarter. Global brands like Cadbury Dairy Milk, Milka, and Toblerone all delivered extraordinary growth while we also delivered strong growth with many of our local jewels including Lacta, Ricolino, and Kinh Do. Gum and candy grew more than 28% for the year and 20% for the quarter. Key markets including Brazil, Mexico, China, and the Western Andean area all performed well. Let's review market-share performance on slide 14. We held or gained share in 65% of our revenue base with strong results in both chocolate and biscuits. Given the amount of pricing we took in the last couple of years, we see this as a strong accomplishment and our brand investments, both from a quantity and quality standpoint, clearly played the role. Turning to region performance on slide 15. Europe grew plus 14.5% for the year and plus 11.6% for the quarter. Strong execution led to positive volume mix for the year, despite significant customer disruption in Q2. Profit in '23 was up plus 12.8% for the year and plus 1.6% for the quarter. Underlying profit in Europe continues to improve, but Q4 was negatively impacted by Forex fluctuations on some cash deposit held in dollars that function as a protection against currency volatility. Excluding these headwinds, EBIT in Q4 was up nicely, despite a significant increase in A&C. North America grew plus 9.5% for the full year, while Q4 grew plus 1.9% against an exceptionally strong comparison of almost 20% in 2022. Full year growth was driven by higher pricing, broad-based strength across brands and channels, and solid volume mix. In Q4, volumes declined as a result of softening in the U.S. biscuit category, tight inventory management in advance of Q1 pricing, and declines in Give & Go and Clif. Give & Go was impacted by our decision to release some of the holiday gingerbread kits due to low profit margins. We continue to be very happy with Give & Go overall. Clif results were driven by lower bar consumption and inventory depletion connected to retailers building inventory in Q3 to minimize potential disruption ahead of a system transition in early October. As a result, we made adjustments to inventory, driving a year-over-year shipment decline. We feel comfortable with current inventory levels along with our programming and investments to drive '24 growth. Overall, we are confident regarding our prospects in '24 for North America, given our strong activation plans, TDPs expansion, growth channels, and substantial investments in A&C. North America OI increased plus 22.7% for the year due to strong pricing and solid volume. For the quarter, OI increased by 9.5%. AMEA grew 11.7% for the year and 7.9% for the quarter. India grew strong double digits for the year and quarter, driven by both chocolate and biscuits. China grew high single digits for the year and quarter as well. Southeast Asia grew mid-single digits for the year and Australia delivered strong results for both the year and the quarter. As it relates to volume mix performance in the region for Q4, there has been some pressure on Western consumer brands in the Middle East since the war began, and we have not been immune from that, with an impact on sales in the Middle East and part of Southeast Asia. We are supporting colleagues who have been impacted in different ways around the world, as well as working with NGO partners to aid in humanitarian efforts in the regions. While volatile and difficult to predict on a go forward basis, we are tracking the situation and working with stakeholders and planning for these dynamics in our 2024 outlook. AMEA increased OI by 14.5% for the year and 18.5% for the quarter, continuing a strong track record of annual top and bottom line growth. Latin America grew 34.8% for the year and 28.6% for the quarter, with strong volume mix growth and strong price execution. Ex-Argentina, growth for LA was plus 18.1% for the year and 9.2% for the quarter, justifying the good work done by our teams beyond price management in Argentina; Latin America delivered another strong year of profitability. OI grew plus 48.5% for the year and more than 49% for the quarter. Strong volume mix pricing and continuation of gum and candy momentum drove these results. Turning to page 16. For the year, we delivered strong double-digit OI dollar growth, driven by a record high increase in gross profit of nearly $2.2 billion. This growth has enabled strong levels of reinvestment behind brands and capabilities for 2024 and beyond. In Q4, we also saw strong double-digit OI and gross profit dollar growth of more than $500 million, driven by top line strength and ongoing cost discipline. Other was impacted by the Forex dynamics and fund protection in US dollars that I discussed about Europe. Next to EPS on slide 17. Full-year EPS grew plus 19% in constant currency. The vast majority of this growth was driven by operating gains and despite currency headwind, we grew adjusted EPS at reported Forex by 14.3%. Adjusted EPS would be $3.30 per share, including $0.11 of contribution from DM Gum. I'll talk more about our plans for '24, but we will aim at removing as much standard cost as possible. Turning to slide 18. We delivered $3.6 billion of free cash flow for the full year, including the impact of more than $380 million related to cash taxes from the liquidation of our KDP stake. Our balance sheet remains quite strong as full year leverage ended at 2.6 times. Let me take a moment to discuss our outlook and some of our key planning assumptions on Slide 20. For the current year, we expect to deliver on our long-term algorithm for revenue, earnings, and cash flow. We expect to be at the upper end of our 3% to 5% algo range for organic net revenue growth as pricing in certain markets with significant chocolate portfolios such as Europe is expected to be higher than historical levels. We expect free cash flow of $3.5 billion-plus. In terms of the assumptions, for inflation, we expect a high single-digit increase for '24. This inflation is driven by significant increases in both cocoa and sugar, as well as another update in labor costs. As Europe faces more inflation than any other market, we expect customer disruption during Q1 and potentially into Q2, associated with our annual price negotiation process. This process is happening earlier in some cases than last year, so the impact might be more pronounced in Q1 for top and margin lines. We also remain committed to substantial brand support in this region and all the others, similar to our stance over the last several years. In terms of interest expenses, we expect approximately $325 million. We are expecting $0.03 of EPS headwinds related to forex impact for the year. In terms of taxes, we expect an ETR in the mid-20s. Share repurchase expectations are around $2 billion. Turning to our EPS outlook on page 21. With respect to adjusted EPS, we expect high single-digit growth of our reported base '23 of $3.30 per share, which includes the $0.11 of contribution from our divested developed gum business. We expect to eliminate nearly all of these $0.11 impact by removing stranded costs. In fact, we made good progress by already realizing this sense of stranded cost savings in late 2023. With that, let's open the line for questions.

Our first question comes from Andrew Lazar from Barclays.

Hey, everybody. Dirk, I was hoping we could get a bit of a state of the union on how you see the performance in key markets at this stage, as we saw a bit more volume weakness in North America in the fourth quarter. And conversely, it still seems like there's strength in many of the other key markets. Trying to get a sense of how you see this playing out in '24 and whether similar cadence across your markets might be the same or where it might be a bit different. And then I've just got a follow-up.

Thank you, Andrew. We are seeing a strong performance for the full year, with portfolio strength across our regions, categories, and brands. The volume mix growth has been solid this year and we anticipate that will continue into next year. Our pricing strategy has worked well across the business, and our share performance has been positive. In North America, we’ve made a recovery, while in AMEA, we have gained share. Although Europe faced some disruptions this year, we began to recover strongly towards the year's end. Emerging markets are also showing continued strength, despite some short-term challenges. We achieved significant gross profit growth of $2.2 billion this year, allowing us to reinvest substantially in the business, and our acquisitions are performing well. We saw adjusted EPS growth of 19% and real growth of 14%, with strong cash flow. Looking ahead to 2024, we have additional pricing strategies planned. In North America, these have been agreed upon, and in Europe, we are aligned with last year, with most negotiations concluded. We aim to maintain strong investments in our brands and activations, and we believe acquisitions will continue to be crucial. Additionally, we have opportunities to expand our distribution globally. Overall, we had a very strong 2023 and feel positive entering 2024. However, we are mindful of potential challenges, especially regarding cocoa prices and the need to adjust pricing accordingly, primarily in Europe, where we are well covered for the year. While consumer sentiment appears to be improving, elasticity remains at or below historical levels, although some areas are showing an increase. We expect some customer disruptions early in the year in Europe, with ongoing negotiations. There have been specific impacts on volume in Q4 that we don’t expect to continue into Q1 due to tensions in the Middle East affecting our Western brands. We anticipate this situation to gradually improve through the year. In North America, we expect a return to good volume mix growth early next year, particularly in the US, despite unique one-off issues. All of these factors are incorporated into our full-year outlook, and while we are cautiously optimistic, especially with European negotiations pending, we believe our results for 2024 may trend towards the higher end of our projections.

Okay. Great, thank you. And a quick follow-up for Luca and some of this you covered a little bit, Dirk, but I think there was a street expectation for organic sales growth for '24 to maybe be a little bit above the 3% to 5% long-term algorithm, just given the pricing that you're taking. So maybe, Luca, you could walk us briefly through some of the just key puts and takes to keep in mind as we think about the sales growth guidance for the year and maybe the phasing aspect of it. Thanks so much.

Thank you, Andrew. I would start by saying that guidance for '24 in our mind is solid, particularly as we look at what drove '23 and the continuation of that momentum into '24. And so we can, I believe, count on the resiliencies of our categories. We're happy, as I said, in the prepared remarks on our share performance. I think you will see momentum in our share, particularly in the first half, and that is related to the unprecedented A&C investment we put forward. There are still material distribution opportunities that will help us model through some of the challenges that we discussed in the prepared remarks. And finally, the acquisitions, I think will continue to be accretive for us both in terms of top line and bottom line. Decomposing the revenue guidance, pricing is clearly a key component of this plan. Its contribution will be a little bit less than we have seen in '23, but it is higher than an average year. And particularly as we price away cocoa, chocolate will contribute to most of the pricing in '24. Pricing, as we mentioned, presents a couple of challenges. One is potential customer disruption in Europe. We have planned for it. Part of it is also in the base of '23. But while I feel positive and Dirk said more than half of the price is secured at this point, we cannot really say what is going to happen and particularly as we look into Europe. Clearly, we don't control customer disruption. Having said that, I think it is important to realize that our brands are strong and that they drive significant traffic for retailers. So couple that with the fact that prices are common to market and many competitors will have to price, I think we feel quite positive at this point in time, quite frankly. The second one is elasticity, for which I feel better because competitors, as I said, will have to price too, but also because our brands are unique and we have been investing quite a bit. We expect for the year volume to be mildly positive with a good contribution actually when excluding the customer disruption. So at this point in time, given we don't control the level to which customer disruption will affect the plan, we wanted to be a little bit on the cautious side. And look, reality is if we push this through and we are successful, most likely there will be revenue upside. And so as I said, we feel good. Importantly, I want to say North America, we have very good plans as we go into 2024. And I think the lineup of all these plans plus the continuation of the momentum in the acquired platforms is good. I want to say Latin America in our case continues to be good. AMEA, despite some of the challenges, has a lot of momentum in India and China that will continue. And finally, I think if you look at Europe, excluding customer disruption, the underlying business and the categories are doing well. So I believe the year will play out well for us, depending obviously on the extent of customer disruption.

Thanks so much.

Thank you, Andrew.

Our next question comes from Ken Goldman, J.P. Morgan.

Hi, good afternoon.

Hi, Ken.

Hi, Ken.

I wanted to clarify the EPS guidance. It's based on a $3.30 figure, but it's actually better than that when you compare it to the $3.19, particularly if you exclude gum for both 2023 and 2024. Please let me know if I've misunderstood anything. I'm curious about what gives you the confidence that it will be slightly above the expected figure on that basis and how much of this improvement comes from reducing some stranded costs, which could provide an extra boost for the year compared to usual.

Yes, thank you for the question, Ken. We wanted to make sure it was clear that we are trying to eliminate all the stranded costs and so we really wanted to guide high single-digit of the higher base. The confidence comes from the fact that, as I said, we are going to have, excluding the customer disruption, good volume momentum into the business and that provides leverage. We will continue pricing in a very disciplined manner, and that will offset the material inflation that we see. Clearly, we will continue with cost, discipline, and productivity. And the fact that we will eliminate 70%, 80% of the stranded cost into '24 allows us to guide to a high single-digit of a higher base. In all this algo, we are not going to have, I have to say, a 20% A&C increase another year, but it will be most likely high single-digit or double digits. So we will continue investing across all the regions, across all the brands. And so we feel good about that. Remember finally that through the integration of Ricolino, there will be synergies coming to fruition. We are literally going live with SAP in a few days, and hopefully that will unlock both revenue and cost synergies for 2024.

Thank you. And then quick follow up. You mentioned disruption a little bit more in 1Q this year, with the understanding it's quite early, is there any way we can get a little bit more of a quantitative sense just to how to think about some of the impact potentially on the top and bottom line in the quarter? I realize, like I said, it's impossible to kind of completely forecast it at the time, but just any kind of magnitude at this point would be helpful as we think about our models, perhaps.

Look, I think as you look at the Q1 revenue pacing, we are going to have a revenue number that is a little bit below the full year algo. I think you're going to be hopefully happy with the numbers you see across three regions out of the four. Europe is going to be more impacted in relative terms versus the impact that we have already in the base in '23 in Q2, and most likely volume mix, excluding the customer disruption, is going to be a nice number and positive. I believe total volume mix might be tilted to slightly negative because of the disruption, but I can't go any further than that. We are in the middle of negotiations and conversations with retailers, and we have planned, we have a sense of what might happen, but time will tell exactly how we will land pricing in Europe.

Understood. Thank you.

Thank you, Ken.

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

Hey, thanks, operator. Good afternoon, Dirk, Luca.

Hey, Bryan.

Hi, Bryan.

It looks just... I have a couple of questions, actually, and one is just getting back to the guidance, and I just want to tie in. It's $2 billion a share repurchase this year, but you also repurchased quite a bit of shares in the fourth quarter. So if we think about the impact that share repurchases or a lower share count would have on fiscal '24, it should be more than the roughly 2% that a $2 billion repo would suggest, right? Just simply because the timing of your '23 share repurchases were so late, it should drive the share count down a little bit more than we would normally see. I just want to make sure I'm thinking about that correctly.

I think you're thinking about that correctly. Yes.

Okay, all right, Because that's going to square to just how much we need to burden operating profit growth, and I think it's not going to be quite as high as I think, as it would have sort of looked. Okay, thanks for that. And then the second question, just. Luca, if you could talk a little bit about Argentina? You know it's been topical over this earnings season for companies operating there. We've seen a range of outcomes, I guess, or actions companies have taken. So if you just kind of walk us through Argentina, does the devaluation at all have any effect on local operations? What's incorporated into the guidance, and also, maybe if you can just touch on, is that what's driving the FX guidance to be so moderate? Because we fielded that question a bunch over the last few minutes. Thanks.

So, Argentina for us is around about a $600 million business. We are very happy with the way the business has been managed over the years. We have a clear playbook. What matters in Argentina for us is not necessarily top line growth. It's not share. It is about protecting the cash that we have there. And Argentina has been consistently generating cash for us, and we have been able also to take some cash out of the country. Some of the companies have talked about exposure on net monetary position. Our net monetary position is in control. It will go down over the course of '24 as we have a clear playbook and by the way, we incent Argentina, not like all the other business units, but we incent Argentina on net monetary position and free cash flow generation. There was a little bit of a spike in net monetary exposure in Q4, and that was, as the old government put in place some price control mechanisms. But as those have been released, the net monetary position in Q4 is going to be very manageable, and I don't expect any major impact due to that. It's also fair to say that we have full control of the operation. We are free to price at this point in time, and the team is fully committed to protecting as much as they can the size and the scale of Argentina. So I don't foresee any issues or whatsoever in terms of impairment. Clearly, there has been material devaluation. The parallel market runs at rates that are even higher than the official one reported, that are obviously already much higher than last year. And so we will have to cap most likely growth for Argentina going forward into 2024. Having said that, it becomes a moot point as we guide you to organic net revenue growth and forex impact. And so the two offset each other. And if you take the guidance we gave in terms of organic net revenue growth and the impact on revenue, which is around about half a point of growth, that should do the trick in terms of you forecasting Mondelez in total.

Thanks, Luca.

Thank you, Bryan.

Our next question comes from David Palmer with Evercore.

Thank you. I have a couple of questions regarding Europe and pricing. We frequently discuss the retailer, customer, and the dynamics involved in pricing there. Are you planning to adjust prices this year? Is your pricing strategy aimed at mitigating the dollar impact from cocoa? This seems like a reasonable expectation considering the situation with cocoa, but there may be timing considerations for 2024 to keep in mind. Additionally, based on your observations, is the price elasticity in Europe significantly different from what you experience in your biscuit business in the U.S.?

Yes. Yes, your first assumption is correct in the sense that we are trying to offset the dollar impact of the inflation that we're seeing on our input costs, and we're not pricing for percentage margin, but offsetting that dollar impact which yes, we believe is a reasonable position. I think this year, seeing the situation in Europe and the fact that the retailers are seeing probably some deflation in other areas of their business, it is a little bit of an explanation to explain that not only cocoa but also sugar or hazelnut are showing significant inflation, which is not the expectation. I think by now they understand that it has to happen in chocolate, so we have high hopes that we will be able to land that in a good way. As it relates to elasticity, I would say the elasticity in Europe has been very reasonable. We might maybe expect a little bit of an uptick as prices keep on going up for a third year in a row, particularly in chocolate. But there is very little or low down-trending within the category because everybody will have to price. So we don't expect that there will be huge differences between different brands and no shifting of consumers. What we've seen in the past year is a strong price increase of 12% to 15% in Europe in chocolate, with very limited 0% to 0.5% effect on volume. And so that shows that elasticity is very low. We think that is driven because of strong brand loyalty. The fact that chocolate has a very distinct taste profile and consumers tend to stick with their chocolate brand because they like the taste and people recognize the taste of their brand. So private label is very small, and people do not tend to switch brands very easily. We call it the taste of the nation. Every country has their favorite chocolate. And then on top of that, we will do significant investments, very strong activations. We've been driving seasonals very hard. The next year, we will celebrate 200 years of Cadbury, which will be a major activation in the U.K. So all that combined makes us believe, and we have proved in the past, that the elasticity will be limited to our opinion in chocolates in Europe.

And a quick follow-up. Distribution growth seems to be a key driver, a growth driver for the company. I don't think I've ever heard you say how much of your organic sales growth will come from distribution expansion. But if you had to guess how many percentage points of that organic sales targets would come from that, what would you say?

You can roughly expect that in markets where we can significantly increase distribution, such as China and India, but also now Brazil, about 50% of our organic growth comes from distribution expansion. Globally, this contributes approximately 2% to our additional growth. The potential for expansion remains substantial; since 2019, we have added 1.7 million stores in China, India, and Brazil. For example, our biscuits are now available in around 3 million of the potential 6 million stores in China, while our gum is in only 2 million of those 6 million. In India, we added 180,000 stores in 2023 and deployed 100,000 new VISI coolers, but there are over 9 million retail outlets. We cover directly 2 million and have about 3 million under indirect coverage, bringing us to 5 million out of the 9 million stores in India. This shows the percentages and what it means for us, with plenty of room for continued growth in the coming years. Thank you.

Thank you, David.

Our next question comes from Robert Moskow with TD Cowen.

Hi. Thanks. I actually had a follow-up on the distribution question. Are you taking extra steps to monitor distribution levels at distributors or even the retailers in light of the volatility of consumption? There's been multinationals who have fallen into inventory de-loading situations in LaTAM. You're expanding distribution so well. I'm just wondering if you're also taking extra steps to monitor it at the same time.

Yes, yes, we are aware that the distribution expansion needs to be very well monitored. So what we're putting in place is a direct connection because we use mainly distributors to make this happen, is a direct connection to their system. So we can read what they sell per store and what the sell-in is, how much the replenishment is. So we monitor that very carefully. We go slow in some of the cities where we're doing the expansion so that we make sure that we can see that setting up the whole distribution system is profitable and that it can be maintained. So we've had no surprises so far. I've done this many times in my career, and I've had surprises, but so far things have gone quite smoothly. I think our teams around the world know what to do. They're on top of it. We usually accompany these distribution expansions with very heavy activation in the cities that we are doing this. So we feel pretty good that we have a very controlled way of doing it. And, like I said, so far we've had no surprises whatsoever with this.

And a follow-up on that. In some of these markets, you've introduced more digitized tools to enable small retailers or distributors to order or reorder and also monitor their performance on promotions, I think. Has that improved your ability to keep track of distribution and monitor sales because the tools are better than they were ten years ago to monitor all this?

Yes, we are still in a relatively experimental phase with that. We are mainly focusing our efforts in Latin America, particularly in channels where we currently lack significant coverage. For instance, bars in Brazil are typically not areas we cover directly or indirectly at the moment. However, we have started to establish a presence there and are observing how that is progressing. These tools assist retailers in ordering directly and help us understand store sales. Additionally, we can monitor promotions. While this tool for tracking our distribution is likely complementary to other systems, we prefer to monitor distribution through our distributors at this stage. They will place orders via this new app, and we will then deliver through our usual distribution system or utilize a third party for that purpose. Therefore, our standard monitoring of distribution does not solely depend on the new app.

I got it, thank you.

Thanks.

Our next question comes from Steve Powers with Deutsche Bank.

Thank you for the question, Luca. Based on the EPS guidance and the free cash flow guidance of over $3.5 billion, focusing on the $3.5 billion suggests a free cash flow conversion of 75% or less. I wanted to confirm if that’s the message you wanted to communicate. If so, could you explain what factors might be affecting that free cash flow conversion? Alternatively, is there a higher free cash flow conversion rate we should consider as a target? I would appreciate your insights on this.

Thank you for the question, Steve. As we think about the free cash flow and net income conversion into free cash flow, it is important to realize that the dividend payout of the joint ventures that we have is not 100%. And so that is a little bit of a factor as you consider the conversion. The other one, I would tell you, is we're going to have a slight uptick in CapEx, particularly as we need to invest in places like India. I mean, you look at the volume over the last five years in India, it has been stellar, and we are very happy, but we are at a point where we need to put down a little bit more capacity. Same goes for Latin America and Oreo, and obviously, we integrate platforms like Ricolino, et cetera. The other one that will come into play in terms of capital expenses for '24 is SAP HANA. And so I think that's another element you have to consider. I think the number I would like you to focus on is what we deliver in '23, which, net of the taxes we paid for coffee, is around about $4 billion. And so there might be some one-time payment coming our way. And so we need to make sure that we have enough headroom. But I want to reassure you that in terms of free cash flow, we are very happy. We have best in class, I believe, cash conversion cycle. We continue to be very disciplined in terms of lowering overdue across the board, and inventories are coming down. And so we feel good about the cash flow generation of the company.

Very good. Very good. Thank you for that. And it sounds like you're going to talk a little bit more about this at CAGNY. But to the extent you can talk about it now, just the prospects for volume recovery and organic growth acceleration in North America. I guess, how quickly do you think that is likely to manifest in '24? Is that going to be a slower build, or do you think we should expect some results sooner as you leverage some of the commercial investments, it sounds like you made in the fourth quarter?

Yes, I think you said it right at the end there. In the fourth quarter, if you think about it, on one hand, we had a good year, and we were coming with a price increase, which, by the way, has been agreed in the U.S. in the beginning of the year, so no need to push in volumes from our side. Then we had the Clif system integration changeover, and so we needed to bring our inventory down and manage it very tightly. And then we talked about the Give & Go holiday kits that we stopped selling because the margins were not interesting for us. So if I exclude those and look at the rest of the business, the volume mix performance in Q4 was, in fact, quite good. So we're expecting a good volume mix performance right away in Q1 of next year. It is really a one-off situation in Q4. So we don't really necessarily feel like there is a slowdown in North America. It's not going to be massive volume growth, but it's going to be positive volume growth in the beginning of the year. So that's where we are. It's not going to be a slow build-up. We will continue where we are without the exceptionals that we had in Q4.

Okay. Very good. Thanks, Dirk. I'll pass it on.

Thanks.

Thank you.

Our last question comes from Alexia Howard, Bernstein.

Good evening, everyone.

Hi, Alexia.

Hi.

Hi. So, two questions. First of all, on innovation. I'm just wondering if you can give us a quick status update on whether the pace of innovation is likely to pick up going forward. It feels like with the pandemic and the supply chain disruption, it's been very hard to do innovation over the last several years. Do you anticipate a pickup going forward? And then I have a follow-up.

Yes, we are going through a bit of a change in the way we look at innovation. If you think about our business around the world, we have quite a rhythm of small innovation, new flavors, new sizes of packs, as we do PPA and RCM. But that leads to hundreds of small projects which do drive our business. But we are gradually eliminating probably close to half of those small projects because, in fact, over time, they don't have that much of an impact on the business. Since overall, our business is doing well, we can afford to do so. And we are shifting our focus to bigger innovation projects. So the ones that I would mention is, first of all, making healthier versions of our mainstream products. So I'm referring to, for instance, what you've seen so far, an Oreo gluten-free or Oreo zero sugar in China, gluten-free in the U.S., doing quite well. And you can expect that we will continue to expand those efforts across other brands. Then we are entering quite significantly in cakes and pastries. And there you can expect us to push quite hard. And so you could see the OREO Cakesters or the Oreo Airy Cake in China. And these are all significant innovations that have the potential or tens of millions of dollars of net revenue per country. We're pushing hard on premium chocolate, so we launched, for instance, the Toblerone pralines, or we have done some big innovations on our core chocolate tablet. So these are bigger innovations that require more work, higher potential, but we are reshifting our efforts towards those. So I don't know if I would call that what you were asking, Alexia. Do we see picked up the pace of innovation? I think the impact of innovation on our growth will increase in the coming years, but it's not driven by more innovation, it's driven by better innovation, I would say.

Very helpful. Could I follow up? Do you have any insights on the current state of the American consumer? Other companies have mentioned down trading, vulnerability, and channel shifting. I'm curious if some of the challenges you're encountering in North America are influenced by these consumer trends.

Yes, everything you're saying is true. Let me explain it a little bit. I would say the consumer, as it relates from a behavior standpoint, as in the fourth quarter showed the biggest shifts, and I can explain a little bit the shifts that we've seen. But from a mindset perspective, from a confidence perspective in North America, probably the best in the last 2.5 years. So what they're doing is still reflecting sort of the tension they're under, but they are expecting the economy to improve and that better times are ahead for them. So what are they doing? We see a little bit more of an elasticity effect. And the way they react to that is they're waiting more. We see particularly light buyers waiting for promotion. So not buying with the same frequency, but buying more when it's on promotion. We see them downsizing, going to smaller formats and buying more of those. We see shifts in channels. They go to club channels, e-commerce channels, that's the one we see winning. And then we have a number of sort of mechanical effects that we're seeing, particularly the snap reduction in the U.S. And so we see less disposable income for a certain group of consumers. But overall, I would say we expect that that gradually will improve because of that mindset change that I was saying. So the overall volume expectations as the year goes by in the US, we're expecting to accelerate and to get better. That's a little bit our view on the US consumer at the moment.

Great. Thank you very much. I'll hand it back to you.

All right, thank you. Well, thank you. I think that was the last question. As we said, we feel very good about '23. It was a great year for us. We are entering '24 with good momentum. I think we're prepared for everything that we are seeing ahead of it. And as I said, there are some issues that we have to look at. But despite all that, and including those effects into our forecast for the year, we think that we're going to have a strong year. We'll see how the client disruption goes in Europe. So we have to wait a little bit to see how the first quarter goes by. But overall, we think we will have an on to the higher side of our algorithm year at this stage that we can forecast. Again, thank you, and happy to answer any other questions that you would have through our IR department.

Thank you, everyone.

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