Mondelez International Inc

NASDAQ:MDLZ

Earnings Call Analysis

Mondelez Reports Strong Q3 Growth Amid Cocoa Price Challenges

In the third quarter, Mondelez reported organic revenue growth of 5.4%, driven by strong performances in North America and Europe, where consumer sentiment improved. The company generated adjusted EPS growth of 28.6% and robust free cash flow of $2.5 billion year-to-date. Emerging markets also saw growth, although with some volume declines due to geopolitical factors. Looking ahead, Mondelez anticipates high single-digit EPS growth for 2024 but faces challenges from rising cocoa costs, expecting them to push margins down in Q4. The acquisition of Evirth bolsters its stake in the growing cakes and pastries market in China, aligning with long-term growth strategies.

Strong Performance Amidst Challenges

In the third quarter of 2024, Mondelez International reported a commendable growth in organic net revenue of 5.4%, driven by a positive volume mix. Developed markets achieved growth in the mid-single digits, particularly thanks to robust demand in North America's biscuit sector and a recovery in Europe following successful annual pricing implementations. Emerging markets also contributed modestly, growing at a similar rate despite ongoing challenges in specific regions due to brand boycotts.

Financial Highlights and Free Cash Flow

The company generated $2.5 billion in free cash flow year-to-date, showcasing sound financial management. Adjusted gross profits surged by 11.2%, reflecting effective pricing strategies and strong product demand. Importantly, adjusted EPS saw a substantial increase of 28.6%, indicating strong profitability amid a challenging economic landscape.

Strategic Acquisitions Fueling Growth

Mondelez's acquisition of a majority stake in Evirth, a key player in the cakes and pastries sector in China, highlights its commitment to expanding into high-growth categories. This move is expected to enhance its presence in a rapidly growing segment valued at approximately $95 billion globally. The partnership with Evirth allows Mondelez to leverage its strong brand portfolio alongside Evirth's innovation capabilities to capture a greater market share in the cakes and pastries space.

Consumer Trends and Market Dynamics

Despite inflationary pressures, consumer loyalty remains strong for Mondelez's iconic brands such as Oreo and Ritz. In the United States, private label brands are losing their market share, showcasing consumers' preference for recognized names. The company continues to adapt its pricing strategies, introducing new product formats particularly in key price segments, allowing it to cater to varying consumer needs and preferences.

Outlook and Future Guidance

Looking ahead, Mondelez maintains an optimistic outlook for 2024, affirming that it expects to see high single-digit growth in EPS, supported by ongoing investments in brand visibility and market presence. While the company foresees pressure from cocoa prices in the immediate future, it anticipates that its proactive pricing strategies and operational efficiencies will help mitigate these impacts over time. Analysts predict an overall strong performance in North America and Europe, especially as the company starts to lap prior year disruptions from geopolitical issues.

Challenges Ahead: Cocoa Pricing and Economic Factors

Despite the positive outlook, Mondelez faces challenges from elevated cocoa prices that could exert downward pressure on margins in the near term. The company's strategy includes maintaining flexible pricing with targeted promotions to minimize volume declines and protect penetration rates. Future performance will significantly rely on how cocoa prices normalize and the elasticity of consumer demand in various regions.

Sustainable Growth Strategies

Mondelez continues to focus on long-term sustainable growth, aiming for 90% of its revenue to come from core categories—chocolate, biscuits, and baked snacks—by 2030. The company is investing in sustainability initiatives, including recyclable packaging for its popular LU biscuits, aligning with broader consumer demands for environmentally responsible products.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and welcome to the Mondelez International Third Quarter 2024 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Mondelez management and the question-and-answer session. [Operator Instructions] I would now like to turn the call over to Mr. Shep Dunlap, Senior Vice President, Investor Relations for Mondelez. Please go ahead, sir.

[Shep Dunlap, executive]

Good afternoon, and thank you for joining us. With me today are Dirk Van depot, our Chairman and CEO; and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides, which are available on our website. During this call, we'll make forward-looking statements about the company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties.

Please refer to the cautionary statements and risk factors contained in our 10-K, 10-Q and 8-K filings for more details on our forward-looking statements. As we discuss our results today, unless noted as reported, we'll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results. In addition, we provide 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 strategy update followed by a review of our financial results and outlook by Luca. We will close with Q&A. I'll now turn the call over to Dirk.

[Dirk Van de Put, executive]

Thanks, Shep, and thanks to everyone for joining the call today. I will start on Slide 4. I'm pleased to share that we delivered strong top line growth with positive volume mix. Developed markets grew mid-single digits, led by solid progress in North America biscuits as well as recovery in Europe following successful implementation of our annual pricing.

Emerging markets also grew mid-single digits despite continued boycotts of Western brands in certain markets. Strong profit dollar growth enabled us to continue our track record of robust free cash flow generating $2.5 billion year-to-date. We expanded our presence in the fast-growing cakes and pastries category by acquiring a majority stake in Evirth, a leading player in cakes and pastries in China, and I'll provide some additional color on this exciting partnership in a few minutes.

We remain diligent in driving progress against our long-term growth strategy, focused on our core categories of chocolate, biscuits and baked snacks. These core categories continue to show strong consumption and on top consumers remain very favorable to our iconic portfolio as such generating significant headroom opportunities. These strong fundamentals, combined with our advantaged geographic footprint, keep on giving us confidence that we are well positioned to compound long-term sustainable growth.

Turning to Slide 5. You can see that organic net revenue grew 5.4% this quarter with adjusted gross profit dollar growth of 11.2%, enabling us to continue investing in the business. A&C spending is up mid-single digits, helping to drive continuing consumer and customer loyalty to both our iconic global brands and our local jewels. And adjusted EPS grew 28.6% this quarter, and we have generated $2.5 billion in free cash flow through the first 9 months of the year.

On Slide 6, we are pleased to see that developed markets are beginning to recover, with solid revenue growth and an increasing healthy volume/mix in the third quarter. Unlike many of our peers, we are seeing continued consumer uptake of our core snacking categories. In North America, we are seeing volume growth start to rebound as inflation cools, and we continue to expand distribution in areas like Club. Similarly, in Europe, revenue grew 8.1% in the third quarter, following significant disruption earlier in the year as our annual pricing took hold.

Unlike many of our peers, both volume/mix and net revenue are beginning to turn the corner. Consumers are continuing to embrace chocolate and biscuits as everyday indulgences. And our revenue growth management strategies enable us to meet every consumer's needs with a broad array of product formats, pack sizes and price points to meet their definition of value.

Turning to Slide 7. You can see a bit more context on how and why our snacking categories remain durable. In North America, consumer confidence remains stable despite continuing concern with overall grocery prices. Biscuit category volume is improving to flat to slightly up over the last 3 months. In the United States, private label volume share is declining, demonstrating that consumers remain loyal to their favorite brands and that our price pack architecture is working.

As a result, our 2 largest U.S. brands, Oreo and Ritz are gaining share year-to-date. Meanwhile, in Europe, elasticities are moving slightly higher but remain modest. We continue to see solid category value growth in both biscuits and chocolate with private label share declining over the past 3 months. Some consumers are shifting to smaller packs of chocolate for everyday snacking. And again, our RGM and price-pack architecture enable us to offer an appropriate range of choices.

As we head into the year-end festive season, seasonals are also looking solid. In emerging markets, modest elasticities continue. Consumer confidence is stable in India, Brazil and Mexico. While the overall China economy remains challenged, we're seeing optimism beginning to return as stimulus policy take effect. Overall, our combined emerging markets value and volume share is improving in both biscuits and chocolate.

Turning to Slide 8. It's important to reinforce that while the external environment remains volatile, we remain focused on accelerating our long-term growth strategy. We're continuing to reinvest in our brands, expand distribution, drive M&A and scale sustainable snacking. We remain on track to deliver 90% of revenue through our core categories of chocolate, biscuit and baked snacks by 2030. And our teams continue to deliver strong progress against our strategic agenda.

For example, our Oreo brand launched in August, an innovative collaboration with Coca-Cola, our largest global brand activation to date. These 2 iconic brands joined forces in a 360-degree marketing campaign encompassing digital, social, celebrity and in-person activation to unite our strong fan bases and build buzz around 2 high-profile limited editions, a Coke-flavored OREO cookie and an OREO-flavored zero sugar coke. These types of investments not only enable us to stay top of mind for consumers, but also to strengthen partnerships with key retailers.

Along with these marketing activations, we are continuing to strengthen store availability, visibility and execution around the world. For example, in Brazil, the convenience channel is growing high single digits on a year-to-date basis with plans to further grow coverage in this channel with additional stores. We are also continuing to harness the power of acquisition to capture synergies and drive growth.

For example, in China, our acquisition of Evirth step changes our growth in the cakes and pastries category. I'll provide additional color in just a minute. Importantly, we remain committed to driving progress towards a more sustainable snacking business through our continued focus on our environmental and social sustainability agenda. For example, we recently introduced new recyclable paper packaging for our legendary LU biscuit brand in France, Belgium and the United Kingdom.

Now let's dig a little deeper into the cakes and pastries category and our recent announcement in China. As you can see on Slide 9, the global packaged cakes and pastries category is valued at about USD 95 billion. Mondelez currently holds the #3 global share position. And because this category is highly fragmented around the world, we see significant opportunities for bolt-on M&A as well as organic growth.

We already have delivered strong growth in this category through our 2020 acquisition of Give & Go, the leading manufacturer of frozen-to-fresh brownies, cookies, cupcakes and related bakery products in North America. And our 2022 acquisition of Chipita, a leader in croissant, bake rolls and related snacks, anchored in Central and Eastern Europe.

In China, as you can see on the right-hand side of the slide, the packaged cakes and pastries category is valued at about USD 14 billion. Within that category, the frozen-to-chilled segment is growing double digits, currently estimated at $1.5 billion. Chinese consumers increasingly seek fresh premium options with innovative and sophisticated taste profiles to meet a growing range of snacking occasions.

On Slide 10, you can see that's why we are excited about the expansion of our existing partnership with Evirth, the Chinese leaders in the fast-growing frozen-to-chilled baked snacks category. We have worked with Evirth for several years to develop, manufacture, market and sell cakes and pastries, featuring some of our iconic brands, including OREO and Philadelphia. Our recent purchase of a majority stake will enable us to further accelerate growth through continuous innovation, leveraging the combination of our high-value brands with Evirth advanced R&D and technical expertise.

Chinese consumers increasingly are seeking fresh premium products with demand growing especially fast among younger generations in mid-tier cities. Evirth has a strong presence among key customers, including Club stores, and our expanded partnership will enable us to scale distribution broader and faster. Before I turn the microphone over to Luca, I'd like to share some preliminary perspective on our approach to 2025 in light of the widely known cocoa cost headwind. Chocolate remains a great category, and continues to generate significant consumer interest.

Consumers count on our iconic brands, including Cadbury Dairy Milk, Milka, Toblerone, Cote D'or, Marabou, Freia, Lacta to celebrate special occasions to share with family and friends and to unwind with the moment of mindful indulgence. As we will continue to invest in our brands, we remain confident that consumer loyalty will not only endure but continue to grow even as we execute the necessary short-term pricing steps. Our primary focus is to continue to build the health and the growth of the chocolate category as a whole and our brands, in particular. While we remain relentlessly obsessed with consumer value, we do anticipate some upticks in elasticity in certain markets, and we might need to adapt to more aggressive RGM and promotions. And while the temporary cost increase of cocoa will put pressure on our margins, we will continue to invest in tools that strengthen brand loyalty and accelerate growth, such as visi-coolers to improve visibility and accessibility as well as continued strong investments in working media.

We expect the majority of our portfolio to grow both top and bottom line, consistent with our algorithm. And we believe we are taking the right steps to position the chocolate business for attractive and long-term sustainable growth. We remain confident that we are well equipped to appropriately manage input cost headwinds and to emerge stronger.

With that, I'll turn it over to Luca to share additional insights on our financials.

[Luca Zaramella, executive]

Thank you, Dirk, and good afternoon, everyone. Q3 was a strong quarter across our key financial metrics, including top line, gross profit dollar, A&C investments, earnings growth and free cash flow. Revenue grew 5.4%, with strong pricing execution and positive volume/mix growth. Developed markets grew 5.6% with a volume mix increase of 1%, driven by both North America and Europe. Total revenue for emerging markets grew 4.9% with a volume mix decline of 1% driven by Western brand boycotts in EMEA and the lower volumes, mostly in Mexico.

Moving to portfolio performance on Slide 14. Biscuits & Baked snacks grew 3.3% for the quarter. Several brands delivered robust growth, including Oreo, Ritz, belVita, LU, 7Days and Club Social. U.S. Biscuits delivered solid growth in the quarter with a good balance from both pricing and volume/mix. Chocolate grew plus 9.2%, with strength in both developed and emerging markets. Volume/mix was down minus 1.2%, driven mostly by challenges in Latin America, whereas most of Europe came back strongly after customer disruption.

Cadbury Dairy Milk, Milka, Toblerone and Freia, Marabou all delivered strong growth for the quarter. Gum & Candy grew 5.6%, driven by continued momentum and strength in key markets, including Brazil and U.S. candy. Volume/mix in this category was slightly positive. Let's review market and share performance on Slide 15.

We held or gained share in 35% of our revenue base with solid results in chocolate as well as in Gum & candy.. This trend was partially offset by our U.S. biscuits business, which accounts for approximately 25 percentage points of revenue. We expect total share metric to improve moving forward as Europe gained share in Q3 following customer disruption in F1. The U.S. still has work to do, but we have seen shareholding in the last 3 months and believe new price packs in Q4 should help drive further improvements.

Moving to regional performance on Slide 16. Europe grew 8.1% in Q3. Execution was strong in key markets such as the U.K., Germany and France, all delivering significant growth. We saw a slight uptick in elasticity resulting from pricing, but consumer sentiment remains relatively stable. OI dollars were up more than 46%, including significant A&C investments and due in part to pricing versus favorable [ cocoa phasing ]. North America grew 3.7% against a strong compare of nearly 10% in the prior year.

Solid performance in growth channels, distribution gains and impactful brand activations like the Oreo Coca-Cola partnership drove Q3 growth. New price pack for Oreo, Ritz and Chips Ahoy! that will provide better representation in the $3 to $4 range are just beginning to hit retail shelves now. North America increased 6.5%, EMEA grew 5.8% and China posted strong results with high single-digit growth, fueled by continued investments in brand building across Oreo, Chips Ahoy! and Stride, coupled with ongoing distribution gains, adding approximately 80,000 new outlets on a year-to-date basis.

India was down slightly in Q3 driven by a decline in biscuits where inflation has led to a more competitive promotional environment. On the flip side, chocolate continues to perform well, especially within the low unit price segment, which grew mid-single digits. Australia, New Zealand and Japan delivered another strong quarter of growth, driven by RGM, strong activations and innovation. Boycotts in the Middle East and Southeast Asia remain a headwind to results. We expect this dynamic to persist for the foreseeable future. However, it is largely embedded in the base beginning Q4.

The overall impact to the region was approximately 2 percentage points worth of growth. EMEA increased OI dollars by more than 15% with meaningful A&C increases. Latin America grew 2% in the quarter. Brazil and Western Andean posted growth, while Mexico was down modestly. Note that Argentina pricing has been capped at 26% unlike Q3 last year, where the country contributed more than 18 points to LA growth. Latin America OI declined 4.8% due primarily to lower volumes in Argentina and Mexico.

Turning to Page 17. In Q3, we saw strong double-digit gross profit dollar, NOI dollar growth. Top line growth, pricing execution and ongoing cost discipline has fueled these results. In addition, cocoa is still relatively benign in Q3, thanks to our effective coverage strategies. In Q4, this dynamic will reverse with meaningful pressure to profit as cocoa catches up to market levels.

Next to EPS on Slide 18. Q3 EPS grew more than 28% in constant currency on the same drivers as OI. We continue to generate strong free cash flow, as you can see on Slide 19. We delivered $2.5 billion to date, which includes a payment of nearly $400 million in the quarter related to the EU commission matter. We have repurchased $1.2 billion in stock year-to-date and will continue to be opportunistic for the remainder of the year and into 2025.

Before moving to our outlook, I'll provide some additional context on cocoa. Cocoa Costs have decreased since all-time highs and future signal eventual normalization, albeit the market is still showing signs of nervousness due to tight physical availability ahead of the new crop. At this stage, the new crop outlook remains positive with significant recovery compared to last year. Both consensus and our internal outlook forecast a surplus aid increase stocks into 2025. We're still a few weeks to go before post harvested. We believe this is good news. We also continue to employ a flexible hedging structure that would allow us to risk manage next year.

Moving to Slide 22 and our approach to pricing and cost as we move into 2025. In terms of pricing, we will continue to utilize all the tools in our RGM playbook to minimize volume declines and limit elasticities, thus protecting penetration and frequency of consumption. We will keep price points, especially for entry level and low unit items. We will also improve our participation at multiple price levels, offering consumers more choices. Additionally, we will continue to reinvest in our brands, primarily through working media.

Cost management is another area of focus. We plan to take a targeted approach to managing costs by focusing on nonworking media, overheads and productivity. We will not take shortcuts or make temporary moves that disturb the business but rather focus on areas where we can make lasting changes. We will also not sacrifice key investments or product quality. Net, we are confident that we have a strong plan to navigate the headwinds presented by cocoa next year. We will focus on what we can control and will remain agile as needed to ensure the long-term health of this category, while positioning ourselves to emerge stronger when cocoa prices settle at more sustainable levels.

Turning to our outlook. Our outlook for 2024 remains unchanged. We continue to expect [ on algo ] delivery for revenue, earnings per share, growth and cash flow. Just a word on EPS. We continue to expect high single-digit growth of a 2023 base that includes developed market gum. When you look at year-to-date margins, 2 things are clear, aside from strong operating performance. First, we procure cocoa at much better prices than the market; and second, we priced the replacement cost. Thus, profit growth has been quite good. On the other side, Q4 is a bit of an anomaly. As we procure cocoa for Q4 close to peak, if not at peak prices, while at the same time, we will not yet have the benefits of either additional pricing or planned cocoa savings initiatives in Q4.

While next year cocoa will be significantly higher than the average of 2024, it is projected to be lower than Q4 2024. Most of our other key assumptions remain consistent with what we shared with you on our last call. with the exception of interest expenses, which is now estimated at $250 million for the year. Although it is premature to get into specifics around our '25 outlook, I would note a couple of items. The majority of our business, which is not chocolate will be on algorithm. We expect peak cocoa pricing to be reflected in the first half of 2025 while chocolate margins should improve sequentially versus Q4 2024.

Our plans around pricing, RGM and cost management are expected to be significant and help provide room for reinvestment. However, where we sit today, it is tough to see a path to earning growth in 2025 unless Cocoa adjust down from the current future curve and/or elasticities are much more benign than our current planning assumptions. [ algo ], there will be additional pricing.

But as we said a few times, we believe cocoa in 2026 is going to normalize. And we would have a meaningful rebound of our chocolate profit to allow for us to get back on track with our algorithm. Clearly, we do not control cocoa prices. But in the unlikely event that they will not normalize by 2026, our gradual approach to pricing seems still to be the best approach to take. Overall, we feel good about the fundamentals of the business, our growth opportunities, the investments we are continuing to make in the business and our plans to navigate this short-term cocoa dynamic.

We expect to emerge from this period of elevated cocoa prices even stronger and better positioned for attractive sustainable earnings growth. We will provide more details related to 2025 at our year-end call. Finally, a word on our sales of the JAB shares. We are happy overall with the return we realize on our coffee financial investments. Some of the proceeds will be deployed immediately towards lowering our CP balance, but eventually will be deployed towards buyback and to support M&A. There will be a modest dilution in Q4 with a full year $0.08 headwind. We release an 8-K with more details over the coming weeks. With that, let's open the line for questions. Thank you.

[Operator]

[Operator Instructions] We'll go to our first question from Andrew Lazar with Barclays.

[Andrew Lazar, analyst]

Maybe, Dirk, first, I was hoping you could discuss the puts and takes in 3Q and maybe specifically how that shapes sort of your strategy in chocolate going forward in light of the challenges that cocoa is going to present next year?

[Dirk Van de Put, executive]

Yes. Andrew. Well, overall, I would say we feel good about Q3, the results and also the dynamics that we see in there. So as you can see, we have a strong top line growth. We have positive volume/mix. And the consumer, I would say, in most places is holding up well. Developed markets came back with solid balanced growth in North America and also Europe strengthening again. And the emerging markets remain solid. There's a few pockets of softness there, but we have clear plans to address that. We continue to invest in working media in our brands. And our bottom line was very strong with good free cash flow results. So we can't complain, I would say, about our core. And I think the feeling that the top line will continue to be robust into next year is certainly there because we feel that overall, the business is quite healthy. .

And we have very good activities planned for next year. Yes, chocolate is a challenge, but we are quite clear on which principles we have and what vision we have to deal with the cocoa challenge. Our first focus is to protect the health of the chocolate category, which is a great category. Our second one is, of course, within this category to hold or gain market share and taking an overall long-term approach to how the category will develop and how our business will develop.

We have to price next year, but we are very conscious of making sure that we protect key price points and certain thresholds. So we're doing a lot of work on our low unit pricing in emerging markets or entry-level pricing in developed markets, and we're launching a bunch of new sizes in our chocolate business. I think our RGM plans are well thought through. We just went through everything with all the different business units that we have. And I think the work that has been done is very strong. And we've really thought through how we think the category will evolve in the coming months. We are planning to continue to invest in our brands. But we did look at all the nonworking media and are aiming for some significant efficiencies there.

And then of course, we will also work on our other costs, particularly overhead costs next year so that we can deliver what I would call a reasonable financial results overall. The rest of our business is business as usual. Maybe a few more things in the sense that we are not taking any shortcuts for short-term gains next year. We do realize that there is additional pricing, and we will have some extra pressure. But overall, as I said before, we think chocolate is an outstanding category, and we are fully committed to it.

And the other maybe thing is things can go different as it relates to reaction to pricing. We have assumed normal elasticity, but that could be more or less or cocoa pricing is still very volatile. It could be more or less than we planned. So being agile next year in how we deal with those situations will be another critical thing for us, I believe. I hope that helps.

[Andrew Lazar, analyst]

Yes. No, very helpful. I appreciate that. And then just a quick follow-up, Luca. I realize, obviously, you're not prepared to provide detailed '25 guidance yet. But fourth quarter, as you mentioned, it's the first one where you'll see the impact of significantly higher cocoa cost. So I guess how does the 4Q implied guidance, which looks for EPS, I think down some 20% or so year-over-year, inform the way we should think about next year, whatever else you can share along those lines, knowing you're not going to provide the full thing yet.

[Luca Zaramella, executive]

Thank you, Andrew. I mean I will start by saying that we are clearly very happy with EPS on a year-to-date basis and that, I think, will help us understanding a little bit better Q4 next year. We have landed today, all pricing in line with our expectations. And we are, in general, priced to a level that is higher than our actual cost of cocoa for the first 3 quarters as our cocoa buying strategies have been clearly quite advantageous compared to in-market costs. .

As you rightly point out, the implied EPS for Q4 based on us reaffirming guidance is down year-on-year. But I said in the prepared remarks that I see that as a sort of anomaly. First of all, because cocoa costs for Q4 were locked in when cocoa was at peak value. And second, clearly, in the numbers in Q4, there is no effect of additional pricing or for that matter of the cost measures that we will put in place as of the beginning of 2025.

Bear in mind that in 2025, pricing will not flow through as of day one. And so it will take a little bit of time for profit to improve. And quite frankly, profit improvement is more towards the second half of the year. Please also consider as we talk about 2025, that cocoa costs are lower in the second half versus F1. On '25, I can tell you that we have done a lot of work in scrutinizing all our costs, and we will be removing sizable costs, particularly in the area of overhead and nonproductive media expenses.

We have increased the amount of productivities that we'll be delivering to our supply chain. And we have clearly a full slate of initiatives in that should limit elasticities. As I said, it is hard to see a path to EPS growth into 2025 unless cocoa adjust now materially and that is still a possibility and/or elasticities are more benign, allowing us to price more. We have seen, as of late, following the price increases we put in place in Europe, for instance, that elasticities have been fairly benign. So if we realize that volume is there, we might push price a little bit more forward in enough time to offset the cocoa impact that we will have inevitably next year.

[Operator]

We'll move next to Ken Goldman with JPMorgan.

[Kenneth Goldman, analyst]

I had one question on North America and then a follow-up. On North America, the comment was made that your categories are sort of bucking the, what seems to be a, larger, more challenged trend across snacking. And you did mention RGM as being part of it. I appreciate that. Just trying to get a sense what you're seeing as the other factors that is allowing or that are allowing your categories to do better than what we're seeing kind of elsewhere across that broader snacking continuum as someone once said.

[Dirk Van de Put, executive]

Yes, Ken, the I would say the category is growing modestly and is improving slightly. And I would say that overall, we see the consumer also getting more confident. But high prices remain certainly a big concern, high food prices, I would say and consumers clearly feel that their purchasing power is deteriorating, particularly, I would say, in the lower income consumers, they're the ones that feel most of the pressure. .

I would say that as it relates to our categories, first of all, we have recognized that the perception of value of the consumer has changed. If you go 2 years back, consumers were really shopping for the price per pack or the unit price. And so family sizes and party sizes became very important. Going forward or since a few months now, 2 quarters, I would say, many consumers that are below a certain income level have to shop by the total size of their basket. I would say that biscuits remain important for them. It is part of most shopping baskets.

And as a consequence, we needed to fit our products within that shopping basket and that meant that particularly the $3 to $4 price point has become very important. And so in Q3, we have worked with promotions to bring our products there. And going forward, we have launched a range of new packs on Chips Ahoy, on Oreo that will be sold at $2.99. And so we think that's the way we are bucking the trend really. So on one hand, categories that the consumer really doesn't want to do without. And so the overall category is pretty stable. And on top of that, we're starting to gain some market share because we are hitting the right price points right now.

[Kenneth Goldman, analyst]

And then for my follow-up, I wanted to make sure I understood the comment about next year, the majority of the portfolio growing within algo on the top line. Is the implication that part of the portfolio, the minority will not be within algo in the -- just trying to get a real sense of what the messaging was there about the top line next year, just given all the puts and takes about elasticity and pricing and so forth.

[Dirk Van de Put, executive]

Yes. It's basically related to our mix of different categories that we have. We have 70% of our business that is non-chocolate, and that is the part that we are expecting to be in line with our normal algo. And then the chocolate part will not be in line with our algo. That's what we were referring to.

[Luca Zaramella, executive]

On the bottom line, specifically.

[Kenneth Goldman, analyst]

On the bottom line. So that was a bottom line comment just to make sure...

[Luca Zaramella, executive]

Yes. I said that 70% of the portfolio is on algo. The remaining part, which is chocolate is not going to be on algo on the bottom line.

[Dirk Van de Put, executive]

We see a pretty strong top line for next year.

[Kenneth Goldman, analyst]

Yes, that's why I wasn't -- no, that's helpful. I appreciate it guys.

[Operator]

We'll go next to John Baumgartner with Mizuho Securities

[John Baumgartner, analyst]

Dirk, I'd like to ask about the growth plans for cakes and pastries. And if you could speak to your vision there, to what extent do you view the company as sort of a disruptor in the space where there's unique capabilities in biscuits and confection that you can sort of leverage in baked goods. And in light of Evirth in that frozen cake technology, the capabilities from that, to what extent is that a China-specific opportunity relative to one that can be expanded to Europe, North America, some other markets? Just maybe your thoughts on where you see your advantages competing in the baked goods space. .

[Dirk Van de Put, executive]

Yes. Well, cakes and pastries -- packaged cakes and pastries is a $95 billion category. It's much bigger if you include the nonpackaged, but that's not the area that we consider as where we want to play. It is a category that's already growing 7% CAGR over the last 5 years, and in fact, low double digit over the last 2 years. Per kilogram, it's higher value than the biscuits category. And the category is quite strong in some of the key markets where we play, the U.S., Europe, China, the opportunity is that it's a highly fragmented category.

We are #3 globally, but we only have a 3.5% share. So there is an opportunity to bring in known brands that come with a certain quality aspect and a certain positioning but also by offering soft cakes or pastries that are in line with that brand from the biscuits category. So an Oreo to play in that category, for instance, or some of our other brands. That is really the way we are thinking about it. Now there's different techniques in producing these products, Evirth particularly. We already have a company that goes from frozen to fresh in the store, which is Give & Go in Canada, which is a company that's been growing very fast.

And Evirth is similar but to the sense that they are much more into the cakes segment. In China, this category is really booming. These are quite sophisticated products. And I have to say that the quality that they can produce, thanks to their proprietary way of producing is quite exceptional. And so we think that, first of all, in China, this is a big opportunity. The business has been growing serious double digit for the last years. And we can see a long runway of possibilities. But we have started to think about, okay, how can we expand this to the rest of the world because the quality is so high. But for the time being, our first priority is to make sure that we get the strong growth that we would like to see in China.

[Operator]

We'll go next to David Palmer with Evercore ISI.

[David Palmer, analyst]

your comments on '25 were pretty clear in saying that you see hard to see a path to EPS growth in '25, and that would likely require a breakdown in cocoa or sustained benign price elasticity that could enable, perhaps, earlier price offsets to what you're seeing. I wonder, right now, obviously, you don't have that visibility into that. And I wonder what the reality would be when that reality would be that you could essentially feel like you could give a pretty narrow range of EPS outcomes for '25. And is it something that like by the first quarter earnings, you would have that sort of a time frame where you have pricing in place, you're seeing a reaction from that. Perhaps you're a little further into your cocoa price setting for the year. I'm just wondering about the timing.

[Luca Zaramella, executive]

Look, I think here, as I said, there are 2 elements that will come into play. One is cocoa prices. There has been some nervousness in the market as of late, but we believe that it is the result of the fact that the industry is still quite short and that the Ivory Coast has hardly sold any '24, '25 crop in the last month since they are waiting for the new crop to materialize. On the fundamentals of cocoa, the latest spot count is slightly below the 5-year average in Ivory Coast, same in Ghana, but it is well up versus last year. .

And the level of confidence that we have at this point in time is around about 85%, but it will be soon in the next couple of weeks, 3 weeks, 90%. Importantly, the Ivory Coast, [indiscernible] was up 25% already versus prior year, and that really points in the direction of good supply coming our way. So I expect to have clarity on cocoa prices, call it, in the next month or couple of months. I think the situation will be much, much clear, much more clear. Importantly, while will drive cocoa prices is the arrival in Europe, which will be most likely in January, February. And I think by then, we should really have a sense of cocoa cost. That is important because in our case, we haven't locked in cocoa prices yet. We want to take advantage of the potential decline of cocoa costs albeit we want also to be protected on the upper side of cost.

On the other side, on the level of elasticity, look, I think you know that it takes a little bit of time to implement price in Europe. And I think we're going to see in places like the U.K. where we don't have buying alliances, we are going to see the effect of elasticities much earlier. And quite honestly, from what we see today, they are already quite good in terms of not having a big impact. For the rest of Europe, we will have to wait towards the end of Q1, beginning of Q2. In emerging markets, as I said, we are going to price quite rapidly. But there, we will protect price points in the entry level. So a long way to say, cocoa cost should be clear by the end of this year, beginning of Q1 and prices, particularly in Europe, will be much clearer towards the end of Q1, beginning of Q2.

[David Palmer, analyst]

That's very helpful. And I guess I wanted to just pick your brain on just the U.S. snacking and Ken asked you about why cookies, perhaps, is doing towards the high end of the snacking category, which is historically weak right now. Obviously, you're global snacking player, and you participate in confectionery outside the U.S. in a bigger way, but confectionery in the U.S. is particularly weak. I'm wondering why you think confectionery in the U.S. is so weak right now? And if there's any sort of interesting juxtaposition you could create between those two what you see, for example, in developed market Europe with chocolate and the price receptivity for example, and the consumer versus what we see in the U.S., which seems to be pretty rough right now. .

[Luca Zaramella, executive]

Look, it's really tough for us to comment about the chocolate market in the U.S.A. because as you know, we have a small participation in that market and, b, because there are other companies that might have a much better point of view. What we can tell you is in Europe and in emerging markets, our brands have been built consistently over the years, in terms of distribution, support, price point. We have never pulled back $1 [indiscernible] in terms of advertising, we have been increasing consistently. Our marketing capabilities with our Chief Marketing Officer, have improved dramatically. The execution is there. So I think in our case, at least, we have been consistent in executing and investing and increasing distribution of our brands to out. And look, we are lucky to have our brands maybe, but those have been built by people at Mondelez, and we are very proud of them.

[Operator]

We'll move next to Peter Galbo with Bank of America.

[Peter Galbo, analyst]

Yes. Luca, I just wanted to actually circle back on your comment on '25 EPS, the path to difficult growth. Just for real clarity, does that also include the dilution from [ JDE ] or is that on a like-for-like basis, just so we're crystal clear?

[Luca Zaramella, executive]

No, I was quoting like-for-like. We will issue in due time an 8-K, you might imagine by looking at the multiple of [ JDE Peets ] even when we got 30% premium to the unaffected stock price. You might imagine that, that multiple is lower compared to ours. So even if we had to buy back our stock there will be some sort of dilution, which is not something that I meant to comment upon when I was telling you that we don't see a path to EPS growth into next year. .

[Peter Galbo, analyst]

Got it. Okay. No, that's helpful. And just to go back to Europe, I think you were expecting a bit of pipeline sale in the quarter post the customer disruptions. Just curious if you can unpack that a bit more. Just did they come in where you kind of thought it would? Is there an expectation of more of that just in the fourth quarter? Any additional color would be helpful.

[Luca Zaramella, executive]

Look, there was not much -- I mean, there was pipeline building, particularly at the beginning of the quarter, but it was a pipeline for back-to-school activities. I can tell you, for instance, that, that impact is not really material at all. Again, quite frankly, in the case of the U.K., we have in plan to ship some Christmas already in Q3 that didn't happen. It's going to happen in Q4. So all in all, I wouldn't call the pipelining effect in Europe as material.

[Operator]

We'll go next to Chris Carey with Wells Fargo Securities.

[Christopher Carey, analyst]

So Luca, this is a follow-up question then I'll just ask one quick other one. But on the confidence around cocoa, in the coming 3, 4 weeks relative to just your expectations for next year, can you just talk about how much flexibility you might have to respond from a productivity standpoint, say, if those expectations get worse over the next months or obviously, we know if they get better, that's obviously helpful. But just as you think about the the ability to manage through different variability and maybe hold to the expectations that you have for next year as you sit here today? Just how much flexibility do you have to respond within your early budgets if say things get worse from the overhead or the productivity or the other things that you mentioned.

[Luca Zaramella, executive]

So we have clear coverage strategies. I think at this point in time, we have a good part of our 2025 cocoa needs covered and all protected. And the way you have to think about it is we put in place futures for and about half of the needs that we have. And when we put that in place, I was very clear that we covered mostly the second part of the year as the structure is inverted. And so you have a benefit by going further out. The rest is covered through mostly collars and which would allow us to really participate if the market had to [ adjust down ], but at the same time, protecting the upside exposure. So we have quite a bit of flexibility, I would say, on the -- should the market adjust. The pricing plans there is a big part of RGM, I would say. I think 1/3 of the pricing next year is going to be done through RGM, that is maybe a little bit less flexible, but the rest provide us with some flexibility. So if we see elasticities being more benign, we could thump up the pricing there or for that matter, we see more severe volume reaction we could lower prices a little bit more. So we have built that flexibility into the plan.

[Christopher Carey, analyst]

Okay. And then just one quick follow-up on a couple of regions. Latin America volume has decelerated a bit here through the year. We've been hearing that from another -- a number of your global peers, just around hitting kind of tougher comps relative to last year. Can you just comment on the underlying of the business right now? And then on the China piece, you mentioned you're seeing some optimism there. Is that something you're seeing? Or is it just optimism at this point? So that's it for me.

[Dirk Van de Put, executive]

Yes. Well, on Latin America, I would say, overall, we still feel pretty good about Latin America. It is true that volume has started to go into negative territory, but that is driven largely by Mexico in our case. Brazil, we still see a very strong performance and also in what we call [ WACAM ], which is largely everything else except Argentina. So it is really concentrated in one country. And there, it's largely because we have some pricing adjustments that we need to do, particularly in the candy and the chocolate categories. But for instance, gummies and Oreo are doing quite well in Mexico. So I wouldn't feel that Latin America is particularly a major problem area for us, but it certainly has slowed down versus what it was in the previous quarters.

[Operator]

We will take our final question from Tom...

[Dirk Van de Put, executive]

No, sorry, sorry. excuse me. Sorry, I still needed to talk about China and why we see optimism. So overall, we have a very good performance in China. Businesses are doing quite well. We have a mid-single-digit volume mix growth. We have high single-digit net revenue growth. So despite the economic slowdown, we feel pretty good. And I wasn't talking about our optimism. I think there's some consumer optimism because the government has released some economic boosting policy, which we are monitoring. And we think that is going to affect overall consumer thinking and consumer buying. We think our category biscuits will be stable with some big shifts in channels towards snack change and club warehouses, which are, for instance, out of the Nielsen scope. So that is something that is on top of what you can see in the data. So we think overall, driven by a strong category and the distribution gains that we have we're probably more optimistic about China than most other companies. But we do feel an underlying trend that the consumer is getting a more positive territory. .

[Operator]

we'll move to our final question from Tom Palmer with Citi.

[Thomas Palmer, analyst]

I wanted to ask first on organic sales growth. The guidance would seem to imply an acceleration in the fourth quarter, perhaps even versus what we saw in 3Q. Could you help frame the regions in which this improvement might be most apparent? And then just to confirm, this would be volume driven? Or are there some pricing actions to consider in the fourth quarter with then more coming in 2025.

[Luca Zaramella, executive]

As far as pricing is concerned, at this point in time, we are done. And so there is no sequential additional pricing coming into effect in Q4. I think you're going to see strong performance in North America. We are going to see strong performance in EMEA, which, by the way, we start lapping the boycotts that started last year in Q4. And then I think in Europe, you are going to see strong results as well. Latin America, we have been a little bit more conservative, but I think there should be a little bit of an improvement there too. Look in the end, if you do the implied growth rate for Q4 in light of us the affirming guidance on top line, which is, as we said, at the high end of the 3 to 5 algo, you should get to a Q4 that is a little bit higher than what Q3 has been.

[Dirk Van de Put, executive]

Okay. I think that was the last question. Well, thank you for attending the call. Strong quarter, and we hope that we will do well in 2025 also, and I hope you've got convinced that our plans are in place to make that happen. Talk to you next time. Thank you.

[Luca Zaramella, executive]

Thank you, everyone. .

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's program. Thank you for your participation. You may disconnect at any time.