Mondelez International, Inc. (MDLZ) Earnings Call Transcript & Summary

I'm Alexia Howard. I'm the U.S. food analyst for Bernstein, and welcome to our 38th Strategic Decisions Conference. I can't believe that we're actually back in person after 3 years. It's my great pleasure to welcome Dirk Van de Put and Luca Zaramella from Mondelez, the CEO and CFO, respectively. Dirk has been at the helm for the last 5 years, and obviously, the company has been proving very resilient so far through the pandemic and now through the supply chain issues that everybody is wrestling with.

So maybe just to kick things off, let's just start with a wide open question here, Dirk. You're coming up on your 5-year anniversary at the helm of the company. And the business is certainly seeing a marked acceleration in the top line since you took over. What have been the key milestones for you and the company over the last few years?

When I arrived, the company just had gone through a period where it was very focused on the margins and on the cost picture. And the big question was, could we make the shift from a cost and margin viewpoint to better top line growth? And I think that has been a milestone for us that we've been able to make that turn. And we've been able to increase our market shares and so on. That would be one thing for me. The second big milestones that I would say is that if you look at our portfolio of brands, we were -- before we were very focused on just our global brands, and there was a belief that we could sort of do well around the world by only focusing on global brands. We've changed that and we've given our local brands a significant role into the portfolio of the company. And I believe that's one of the reasons why you see that resiliency in the pandemic as well as in the current high inflationary period. I think we found the model that works for us, which is a model that is based on a decentralized approach, creating business units that have sufficient size and sufficient relation with the consumer that allows them to do what's right for their consumers, China, India and so on, versus a more global-oriented model. Another milestone has been, I think, a good incentive system that has allowed to reward the right behaviors. Marketing has significantly evolved. Our brands are closer to consumers, are more engaged with consumers and that has to see with a complete internal change as it relate to how do we relate to consumers. I think the financial algorithm is strong. It's a model that can repeat itself because every year, we increase our investment in our brands. And so it's -- for me, it's a very virtuous cycle that we have. So I would stop there, but those are, for me, the big things that have happened in the last 5 years.

Perfect. Actually, can I dig into the incentive system a little bit more? Because I know that was something that changed back in, I think in 2018 or so just as you first arrived. Can you talk about what shifted, so what people are focused on these days?

Yes, we -- there's a very balanced approach. Many people would say, well, you have too many factors that you keep into account, but we try to capture what's really important to be a successful company. And, a, we believe that you cannot be successful unless you have volume growth. Just driving things through price and mix I don't think is the right way. You want to see more volume being consumed by consumers. So volume is important. Of course, net revenue is important, but it has the same weight as volume for us. And then where we are putting more and more importance every year is gross profit. Gross profit dollars, not gross profit percentage. So that nuance -- 2 nuances, not that many people have an incentive based on gross profit, but I believe that's the most important line in the P&L. And so to get the organization focused on that and then see that line grow in real dollars, that was quite important for us. Then of course, there's profit. Cash flow, the typical things. And then a very big lever on market share. And so I think we -- if you look at where is the weight, the weight is on gross profit and market share. Those are the 2 real heavyweights in our incentive system. We also decentralized it. Before it was you were incentivized on your region or on the global results. We have now many more tools. So all these business units are now compensated purely from what they achieve locally, which motivates them, obviously more. Those are the changes.

Makes perfect sense. If we think about the goals and the agenda for the next 5 years, could we see margin expansion or profit growth that's faster than top line growth over the next few years as the benefits of operating leverage kick in?

Yes. And I think within a particular period at the moment with the inflationary cycle, we are trying, at this stage, and I'm -- I would say, if you talk about 5 years, this year and next year, things are going to be different. I don't know what's going to happen the year after that. But for these 2 years, I think what we are going to see is, and we are seeing it this year, obviously, very heavy pressure on costs, which obliges us to price. We price for cost, we don't price for percentage margin. So you will see our gross profit margin and our operating profit margin decline as a percentage of net revenue, but the absolute dollars will go up in a significant way. Over time, as the inflationary cycle fades away. Obviously, our objective is to gradually -- and I'm saying we don't incentivize for it, but we do expect our gross profit around the 40% mark. And we do expect our operating profit to be around the 17%, 18% mark. But that's going to happen over time. So yes, you will see that expansion, but I wouldn't count on it for this year and for next year, I would say.

Makes sense. You mentioned that you achieved a 4.7% average organic sales growth since 2019. This was at your Investor Day recently. Yet your revised sales growth guidance is just 3% to 5%. Is this conservative? Maybe that's for Luca.

It might be. Frankly, when you look at the last 3 to 4 years' performance around biscuits and chocolate, which I remind the audience is roundabout 80% of the portfolio, we are at 6% growth. And that is the outcome of our categories being quite vibrant, and will play a key role in driving our categories, particularly in emerging markets and in places in developed markets where we have and where we command high share of both biscuits and chocolate, but also because we have been gaining share. And one of the reasons why we are gaining share is because we have consistently invested in our brands. As we operate more portfolio changes, both on the way in and out in terms of acquisitions, the recent one being Ricolino which is a tremendous platform for us in Mexico, which not only gives us the opportunity to participate in a category that is growing extremely well in Mexico, but importantly, it gives us the opportunity to establish more chocolate and more biscuits through our core brands. Those opportunities will give growth accretion. And obviously, with the most recent announcement we made around gum and Halls, gum in developed markets, given the fact that gum and Halls had been growing slower than the rest of the portfolio, there is an opportunity for us as we operate all these portfolio changes. And as we get closer to that ideal situation where chocolate, biscuits and baked snacks are the overwhelming majority of the portfolio, absolutely, there is an opportunity to grow faster.

Makes sense. Well, actually, that's a lovely segue into this next question. So Dirk, what's your approach to adapting the portfolio over time to get to this targeted 90%, 10% split between biscuits and chocolate and the rest of the portfolio? And how are you thinking about acquisitions in terms of the scale, the financial characteristics of any deal that you do, the regions and product categories that you would go after?

Well, compared to 4 years ago when we made our first sort of strategic review at Investor Day, what has changed now is that we feel that biscuits and chocolates are a really great category for us. Biscuits, I mean, we expand that range including baked snacks. We believe those 2 and the territory that exists in between the 2, which we call chocobakery, we believe that area is the sweet spot for Mondelez. And it happens to be that those categories have accelerated their growth during the pandemic and still are growing quite nicely. So it's a sweet spot for us as a company. We are almost #1 in chocolate and we're by far, #1 in biscuits, and we are planning to increase that. It's what we know best. We have the brands and so on. So you will see us do a very determined move towards increasing our presence around the world in those categories, particularly in the countries where we know there will be heavy growth and there is opportunity for us to take a more pronounced position. And gradually, we will get out of the categories that are not growing fast enough and that kind of drag us down, or that we feel over time, we do not see that it's a strategic priority for us. So we want to be -- we said 90%, I mean, in my own idea -- well, eventually, it's 100%. It will never be 100%, but that's really where we're going. So what does it mean for the deals? It's firstly impossible to do a big deal, a global deal, with a company that's biscuits and chocolate, it will come with something else. So it's going to be bolt-on around the world. There are certain segments within biscuits and chocolates that are more interesting, health and wellness, premium, digitally oriented models. Those certainly will get the priority. And then as it relates to the size, anything below $400 million, $500 million in net sales is a little bit more difficult for us to really make a difference. So that's kind of the minimum size that -- we do less than that, but ideally, we do more Chipitas, more Give & Gos and so on. And we want it to be accretive at the top line and at the bottom line level, relatively fast here, too. And so those are kind of the criteria that we are utilizing.

That makes sense. And on the disposal side, Luca, have you made progress in figuring out how to dispose of the developed market, gum and Halls business? What percent of sales and profits does that represent these days?

So we are making progress. We have been working, as you might imagine, on these 2 projects that we see a little bit as separate because they are a little bit different in terms of multiple, we believe. Halls commanding a higher multiple than gum. But if you think about size, give or take, it is -- we are talking about $1 billion in revenue, 50-50 wholly split between gum developed market and Halls. We have seen good growth trajectory over the last couple of years, recuperating from the lows of COVID, so quite hopeful the business is on more solid footage than it has been during COVID because of obvious restrictions. And in terms of profitability, gross margin is higher than the average. But in reality, I think when you think about cash and the need that we have to potentially think about investments, et cetera, I don't think there is going to be a major impact to the company, quite frankly. We are going to work through carve-outs. We are literally doing them as we speak. So let's stay tuned. I'll give you more detailed information about the overall profit impact, EPS, et cetera, in the few coming months.

Makes sense. We've got a question that's come in from the audience through the Pigeonhole link, if anybody else wants to use that. Is it tougher to pass on pricing these days? What are you seeing in terms of the strength of the consumer? I assume that's mostly the developed markets.

Well, passing pricing has 2 hurdles. There is the trade and there is the consumer. Let me first talk about the consumer. The amount of pricing that the consumer has seen so far is relatively important. We monitor 2 things that are critical to understand what's going on from the consumer side. One is the penetration of our brands, meaning how many households are buying our brands. And second, what's the average quantity that, that household buys. Those are 2 key indicators that know if there's an effect from pricing. I would -- I'm going to use the word strangely enough, there is no effect so far, which is kind of weird in the sense that I personally -- and I'm not a young guy, have not done price increases of this magnitude except for the time I was in Latin America, and not had a volume effect. And so that is, on one hand, good news. On the other hand, it makes us a little bit suspicious. But so far, so good, I would say. But a lot more pricing to come because we already know that the cost increases we've seen this year will be as high next year. As it relates to the trade, obviously, as we all have seen, with what Walmart and Target announced, they are feeling some of the changes. I think they have their own cost pressures that they need to deal with. So I do believe that they understand that price increases need to happen. So I don't think there will be a refusal to increase prices. It's going to be more a discussion from -- about how is that going to happen, how is it going to affect volumes, how much investment are you going to put behind and how are you going to guarantee that after the price increase my traffic will still be the same, my volumes will still be the same. So it's going to be more about the mechanism than the actual price increase. But there's certainly going to be heightened scrutiny on price increases, that's for sure.

That makes sense. Yes. So let's move on to the A&C spend, the advertising and consumer spend within the P&L. Is there a point at which you see this moderating from the high single-digit range that it's been up for a while as you get better saturation and move more consistently into that 5% of sales range? How do you see that playing out?

I don't see, quite honestly, that happening anywhere soon, simply because I personally truly believe being a finance person, but that might come across as a little bit off. But I believe that investing in our brands is the best possible investment we can make in our company. If you look at the step-up in growth, there is clearly a component of us improving our top line performance, delivering more volume, delivering more share, delivering better revenue. That has been driven by distribution opportunities, particularly in developing markets. But it is undeniable that over the last 3 years, we have created more connections to our brands with our consumers. And when we look across, the work that we have been doing over the last few years, it has been on quality of communication. It has been redeploying funds between A&C overall budgets to more working media. It has been improving the mix of media, particularly exploiting digital platforms, et cetera. So there has been an opportunity for us not only to grow A&C, but also within A&C to grow even more return on investment and working media. As we look around, there is still opportunity for us to improve the sufficiency of spending, particularly across some of our local brands. And when we talk about chocolate and biscuits, I feel like, together with some selective capital investments, CapEx, that is the best opportunity we have in the company. We will continue investing in sales execution. We will continue investing in emerging markets to tap into more stores and making our products more available. But I think it will be a little bit myopic to think that we can stand down the A&C increase and then slower -- maybe having slower top line. So I believe that it is something we will continue doing. And if we want to deliver double-digit EPS, I think through those portfolio changes we talked about, ergo acquisitions that will deliver top and bottom line synergies or divesting slower growth businesses will provide the opportunity for us to step up our bottom line performance.

Makes sense. Can we talk about the strategy to expand into baked snacks and why you find that compelling? For example, I remember a few years ago, it was about chocolate in the U.S. and you seem to have backed off from that. So now baked snacks seems to be the next direction. How comparable is profitability for baked snacks versus the core biscuits business? And could this improve as you begin to scale or continue to scale that part of the portfolio?

Yes. And maybe I'll talk a little bit about the strategic rationale and then Luca can talk about the margins. For us, when we talk about baked snacks, you have to imagine this from the eyes from the consumer, which is a continuum of products. And when we talk about biscuits, cakes or pastries, and we have a few examples with us, you ask a consumer what is this, they don't quite know what it is. So you have to imagine we're not going to make birthday cakes or something like that. This is our brands, extending their product range from harder biscuits into a cake-type product, a softer type product, into what we would call a pastry, which is with a filling and so on. We already do that quite a bit with, for instance, with a brand like LU in Europe, or we've been doing that under our chocolate brands, where we have extended from chocolate into cakes and so on. If you look at Oreo, Oreo has softer versions now, soft cakes. We just launched in U.S., Cakesters. So that's the way you have to think about this. And I think there's a little bit of a misunderstanding what are we exactly trying to do. And so for the Oreo consumer, to see a Cakesters is quite natural. And so it's -- instead of different categories, you need to see it as a fluid continuum basically. And for the consumers, this makes a lot of sense. Luca, on the margins.

On the margin, they are fully aligned, if not better on what we have today. And I would also add that from a return on investment standpoint, those are quite compelling propositions because we largely leverage existing manufacturing and distribution footprints that we have. This is largely an unconsolidated sector of the snack market. It has higher growth. And obviously, there is an opportunity for us to play through our technology and to our brands, as Dirk just said. And so the return on investment is quite compelling.

Makes sense. I've got another question that's come through the Pigeonhole. Do you have a view on the rise of nationalization or the potential for the preference for local national brands, perhaps in the emerging markets to be preferred rather than the global brands that have obviously been a real engine for growth for you over the past several years? Do you see any evidence that, that's shifting? Or is there anything you can do to counter that?

It depends on the country. I would say, in China, we went from a period 10 years ago where it was kind of trendy to buy global brands. Now there's enormous sprout in their local brands. And the rest around the world, I would say there is certainly a growing preference for local ingredients, made with local wheat, made with local cocoa. Things like that play a big role for consumers. And I believe that local brands are usually a more anchored sort of relationship with the culture. I grew up in Belgium. Côte d'Or is my chocolate brand, no matter what you tell me. And we have many chocolate brands around the world, Côte d'Or remains the best chocolate for me. Why? Because that's what I grew up on. So there is this maybe not outspoken preference. Whatever was there during your youth is what you want to pass on to your kids, which plays a very emotional role for you. And in that sense, yes, there is a big preference for local brands. We had neglected them and we now have started to give them more investment, more innovation, renovating them, and we see very good growth coming through.

Great. Perhaps another question for Luca. On the level of cost inflation, we've talked about this so far. What level of cost inflation are you anticipating over the coming year and maybe into next year as well? What's driving that? What are the key components that are pushing up the input costs? And how can the company respond to such pressures?

In terms of inflation, we are seeing double-digit inflation, low double-digit inflation. So in the range of 10%, 13%, just to be precise, for 2022. As we take current spot levels throughout next year, we expect a very similar level of inflation, maybe not from a percentage standpoint, given the fact that the base is already inflated. But from an absolute dollar standpoint, the absolute amount of inflation that is going to go into our P&L, based on current spot rates for all the various commodities, et cetera, it is on a similar scale. It is predominantly related to energy costs and the ripple effect that energy costs have throughout our commodity basket. You might imagine, for instance, that packaging is highly correlated to energy cost. Transportation, obviously, is another element. But also ingredients and other raw materials that we buy. From a commodity basket standpoint, at this point, we see cocoa being fairly neutral year-on-year. But we see grains, on the other hand, we see edible oils and we see some ingredients having material inflation. And quite frankly, also some availability issues, which is something that we are closely monitoring and making sure that we have enough supply to be able to supply the market. And we are looking into flexible formulation to make sure that we can replace some ingredients and components that are in shortage with something that is more available. In terms of what are we doing, as we said, we want to price away the absolute amount of dollar of inflation that we are facing into the P&L this year. Some more pricing actions are coming. I can't give you the specifics of where they are, and there will be a carryover impact of our price into next year. So pricing won't be as high in percentage terms as it is this year. And again, I need here to make the disclosure, which is at current spot rates. So let's see what happens. But I don't expect the situation to materially improve into next year. We talk a lot about RGM. We have a lot of cases within the company where RGM is at best-in-class level. The amount of work we have been doing in some emerging markets, I think it is remarkable, both in terms of size, optimization, hitting price points, optimizing channel profitability, exploiting mix, optimizing promotional spending, et cetera. But there is still more opportunities around the world. And so RGM is really critical, and we are stepping up capabilities to ensure that we optimize also the level of elasticity into the P&L. So that's really what's going on, on the front of inflation.

Just a couple of follow-ups on that. You mentioned availability issues. You were able to just dig into a little bit more about where the biggest pain points are there and how easy it is to switch one ingredient out for another?

It is mostly around minor ingredients that though are critical to make our products. And so if you don't have some of these ingredients, you obviously have a little bit of a problem. And so we are trying to establish and we have been trying to establish a strategic relationship with some of our suppliers over time. And so we are working towards that. I have to say, at this point in time, it is not materially impacting our P&L, but it is something that we are monitoring very closely. There are some examples like around some edible oils, sunflower oils as one example, where given the sourcing countries, there has been shortages. And we are trying to see throughout edible oils, if we can replace those oils. But it is something that, obviously, with the supply chain strains that we have seen around the world, it has been a challenge, and it will continue to be a challenge most likely in the foreseeable future. So something we need to work on.

Great. And then just another quick follow-up. Are you able to talk about pricing dynamics in different regions? So the U.S. is obviously going through a big cycle that's probably going to moderate somewhat going forward. It seems like Europe has been very challenging on the pricing front and maybe Latin America is a bit easier. I mean how would you go around the world on the pricing dynamics?

You said it right. In fact, that's about what it is. And I would add to that, that places like India or some of the Latin American markets, the price points are very critical. They're more critical than in developed markets where the consumer has more flexibility. You also sell most of the time through supermarkets, so you can do more with pricing impacts. In emerging markets, it's -- a lot of the volume is sold in singles. And so the price point is critical there. So roughly to reiterate, yes, as Luca was explaining, the percentage pricing in the U.S. will moderate a little bit, but the absolute amount of pricing we have to pass is about the same. Europe and trade, in general, I would say, is -- I wouldn't say super open, but they are prepared to work with you on pricing. In Europe, we have to go through a similar pricing, a bit more pushback from trade and probably not yet as clear on the consumer reaction because they haven't seen as much pricing as we've seen in the U.S. Latin America, well ahead as it relates to pricing. Much more than we've currently seen in developed markets, very well received. Volume growth is very strong. But you have to take into account those are markets where consumers are used to see significant pricing every year. And the main thing about pricing, what's important is that relative pricing is a key and absolute pricing is a key. Relative pricing, everything is going up. So biscuits and chocolate on our brands are not substantially different from other biscuits and chocolate or from other product categories for that matter. So in that sense, elasticity is not influenced. Absolute price points are important. But we have a consumer that is not spending as much on eating out, on clothing, on traveling, so they're protecting their grocery basket. That's why you see a little effect from elasticity so far. So that's why Latin America is looking so good because the elasticity effect is very limited. And then I was talking about Asia, where it's more about playing with different brands and different sizes to keep those price points that you need to get. So more limited pricing so far, but volumes are very strong. And the overall cost effect is also slightly less in Asia.

Can we stick with Europe, this may be a very similar question, but Europe is your largest region. What impact do you see -- sorry, do you see any changes in the consumer behavior within your categories given the current inflationary environment? I think you talked about that being a little uncertain at the moment. And how does the trade react to the multiple pricing rounds? I think you said it's a bit of a challenge right now.

Yes, yes. So the consumer so far, also in Europe, another big reaction. Again, those 2 factors, penetration and quantity bought, very stable. And you have to take into account that during the pandemic, the quantity bought and the penetration have gone up, so we remain at those levels. Here and there, maybe a little bit of an effect, but that's like chocolate in Germany, but that's more due to the fact that we were out of a key client for 6 weeks, then there is a real consumer reaction for us. So consumer is pretty good. Trade, I would say, we're all going off script in Europe where, normally, there's only one price increase a year. And I think most companies are now discussing a second price increase. I would say an understanding that it needs to happen, but there's going to be a lot of discussion on how much and how. But the fact that there needs to be price increases, I think, is generally accepted by the trade. But that doesn't mean it's going to be a walk in the park. It's going to be an intense conversation with our retail partners.

We've got another question that's come in from the outside. Given Mondelez' distribution network, why did chocolate expansion not work in the U.S.? And will there be any new push here?

First of all, we plan to do much better with our baked snacks than we do chocolate in the U.S. But the -- and the reason why baked snacks will be better is we've already been doing it. We have the brands and we have the acquisitions that will give us that momentum. The issue with chocolate in the U.S. was we didn't have a brand. So we tried Milka and then tried Oreo. Chocolate on Oreo is a bit strange. We needed to make kind of an Oreo-covered chocolate in a way, which is not real chocolate for the consumer. And so it was limited volume. And it was very difficult to understand where do we go from there. So you had limited shelf space with a proposition next to what's in the market was a little bit vaguer and no real route to expansion. That's really the reason why we gave up on chocolate. I think we will do niche plays like our Hu chocolate, which is a vegan chocolate, is doing very well, growing very rapidly. It's very small. It's a niche play, but give it 10 years, and this could be the vegan chocolate brand in U.S. So that's more how we are going to play it. Can we get into premium in a significant way? Can we get into vegan and organic in a significant way? Maybe here and there, can we start to do a little bit more with our European brands also playing it more as a niche. That's more the strategy that we will follow with chocolate in the U.S.

Perfect. Can you give us an update on the HFSS, which I think stands for high fat, sugar and salt, restrictions in Europe, I think, particularly the U.K.? What impact do you see for Mondelez there? And how will this compare to other manufacturers?

Yes, first of all, to explain maybe a little bit for the others what it is. So it's -- yes, it's exactly high fat, sugar and salt products, which would be subject -- and this in the U.K., which will be subject to 3 limitations. First, where they would be sold in the store, not anymore at checkouts, not anymore at end aisles, not more -- anymore at promotional corridors. So you have to sell through the shelf and promote within the shelf. Second restriction is that you cannot do promotions which incentivize buying higher volumes. You can do a multipack, if it's correct price, but you can't do 30% extra or buy 1 and get 1 free. And the third one, which they have postponed a year, which is limitations on advertising, whereby you cannot advertise the brand and the product before 9:00 p.m. After that, you can. You can advertise the brand alone without showing the product before 9:00 p.m. So those are the 3 restrictions. They're aimed at reducing the consumption of those products. Important to realize is that's about 40% of the products that are being sold. Because of the system that they used to declare a product, HFSS, it affects about 40% of the products that are being sold in supermarkets. So that's a significant change in how the layout of a supermarket will have to be in the future. So at the moment, there's a number of tests going out to see what that does to consumer behavior. And I think gradually, what we are seeing is that there might be a slight effect on sales. The promotional way and the location and so on will have to change in a significant way, but we are discovering that, that is going to not have that huge of an effect. There will be an effect, I think, in the first 6 months and then gradually it will come back. For us, we're subject to that, just like anybody else. We are the biggest consumer brand in the U.K. with Cadbury. So if -- for instance, we've sponsored the Premier League and we have a number of activities which do not require the presence of the product, but which help the image of the brand. So I think we're, in that sense, in a more privileged position because of the strength of the brand. It's much more difficult for smaller brands now to carve out their space, where you need to show the product. I would say, the move towards HFSS-compliant products, which, in our case, largely means replace sugar by natural sweetener that is not considered in the HFSS sort of system, is going to go much faster. We're working very hard on that. And I think in general, what you will see is that, overall, I think we will be affected like -- just like any other company. Maybe a bit better off because of our size and the knowledge of our -- or the engagement that consumers have with our brands, but it's going to be a move that is the same for the whole category, to my opinion.

Are you able to talk about which sweetener -- because there does seem to be an awful lot going on in sweetener technology and alternatives, maybe a little bit more natural than the artificial sweeteners that we've been wrestling with for the last, however, long. Are you able to give us any taste for the directions you're heading?

Yes. So the difficulty in food versus beverages is that you can take out sugar in beverages and replace it with something which is 0 calories, and you're fine. In food, it doesn't work like that because sugar gives a certain calorie content. They have to replace the sugar by something, not just water and as a -- or a sweetener. As a consequence, because it gives consistence and everything, it's very difficult to get a calorie reduction. So some of the things we've seen is if we significantly reduce sugar and replace it by a sweetener, a natural sweetener, the product gets affected in a major way. And so you need to replace that by another bulking agent, which brings calories with it. So the calorie content is a bit of a disappointment for the consumer. It's not -- it's 0 sugar, but not 0 calories, and that's the issue. As it relates to sweeteners, I think we are in a stage where there are natural sweeteners which make it impossible to detect difference. We've made a 30% reduced Cadbury bar and consumers did not detect the difference. We just launched zero sugar Oreo in China, which is doing well. Very difficult to detect the taste difference. There's sometimes other digestible side effect if you consume a lot of it that we still are working on. But I think the technology and the thinking will now get into an acceleration because it's clearly something consumers want and that governments are pushing. So I'm expecting in the next 10 years to see a massive evolution as it relates to taking sugar out of our products.

Very interesting. Can we switch gears completely to free cash flow. Your guidance has been for about -- or at least $3 billion in free cash flow in recent years, and I think you talked about how it could eventually get a little higher. What would lead you to raise that formally?

Yes. On the face of it, it's true, cash flow has been ranging around $3 billion, $3.2 billion over the last few years. I think it's fair to say that, particularly last year, we were hit within cash flow by all the taxes implication of us selling down KDP and our coffee stake. And the tax being there was roundabout $400 million, $500 million, and so there was a material impact in taxation also driven by the JV IPO that we did 1 year earlier. And so when you adjust for really the tax impact of coffee, which is a technicality within the free cash flow statement, underlying cash flow is ranging from $3.5-plus billion. And so I think that is a testament to the work we have been doing as a company, optimizing our -- all levers of working capital. We run the company today at historically low overs on receivables. I think it is really best-in-class. We incent sales forces to collect money very quickly. We have done a tremendous amount of work around days payables outstanding, and we believe there is still further opportunities for us to be able to get to a better working capital. And finally, inventory, which, obviously, these days with cost escalation might not be a bad thing to sit on higher inventory. But reality is we expect material improvements in our inventory going forward, and we are investing in digital technologies to ensure that demand and supply planning is done appropriately, and we believe there is still opportunity. So the answer is, yes, we expect cash flow to improve. Obviously, there will be a slight impact due to the divestiture of potentially gum and Halls, and there, depending on the structure we're going to set up for the deal, we will have more or less of an impact. But reality is as we make acquisitions and as synergies come to fruition, I expect to be able to offset that impact. So the straight answer is, yes, you will see improvement. I think it is fair to say when you really look closely at free cash flow, we have been above the $3 billion mark, even if on the face of it, it was last year.

Got it. Another couple of questions that have come in from the floor. You touched upon bolt-on M&A in biscuits, et cetera, but you didn't talk about savory snacks. Do you see potential for synergies in expanding more into savory? Could we see transformational M&A in this area?

I would say, never say never. But we do believe that we have a strategy at the moment that work for us. And now if you think biscuits, you have to understand savory biscuits, it's underrepresented in our portfolio. But as we talk about baked snacks, we believe there's a huge opportunity to have savory baked, I mean, crackers and so on, think Ritz took in Europe. There is an opportunity there because it's not fried and so on. So we know that we have to develop the savory side of the biscuits. But overall, this chocolate biscuit baked snacks and the space in between, that's what we want to be in. If a huge opportunity would present itself, I'm not saying that we wouldn't do it. There's a few countries around the world where sometimes the sweet part of snacking is not as appealing. China will be one of those, where things of the magnitude and the strategic importance, we might make an exception as it relates to that. But in general, we try to stick to what's important for us.

Great. Could you give us any insights with regards to expanding sales in Africa? There's a huge demand for better personal health by increasing calories in that area. Could you talk about Africa in general?

Yes, we've been working quite a bit on Africa. We do not want to change our strategy, again about that universe of biscuits and chocolate. Obviously, chocolate is a little bit more difficult because of the temperatures and so on. So our strategy, apart from South Africa, is very biscuits oriented. And there is some candy in there. We clearly have an opportunity to develop the rest of Africa. And biscuits, to my opinion, can play a nutritional role. They're often part of a diet in many developing countries. And so I do see a role there. Might need to increase the calorie content a little bit as said, but we would evolve towards biscuits, which have high calorie content. The issue is distribution and price points. And so we, at the moment, adapting a strategy of going to the bigger cities and try to develop there the right distribution, which allows us to be at better price points than trying to cover all the countries. It's very volatile. So cash flow and payments and so on are often a challenge. So you have to tread very, very carefully. But we do believe that in the next 10 years, you will see some significant growth coming from Africa for us.

Great. Sustainability is becoming a more important priority for investors over time. How do you think about how best to make progress here? And what are the biggest areas of focus? And how does it impact margins?

So we just -- we announced our new strategy in 2018, and it's based on 3 very simple buckets of strategy work. One is growth, the other one is execution and the third one is culture and people. We've just, in our new long-term plan, we've elevated sustainability as the fourth pillar of our strategy, recognizing the importance that it will play for ourselves, because it's very important for the people in the company, for most of our stakeholders, investors included, but also consumers and governments and NGOs. So we have elevated it to that level, which means that it needs to be an integral part of our strategy, and everything we do needs to drive our overall sustainable footprint. We cannot do everything. So we've opted for a strategy where we want to focus very clearly on where we can make a difference, i.e., where we play a significant role and us changing things will have an impact on that area, and also focusing on what will make the biggest difference for the company. In short, that boils down to moving our operations and our supply to zero carbon footprint. 70% of our footprint is coming from our ingredients. So we are working on sustainable supply chain for our 3 key ingredients, which are cocoa, wheat and palm oil. Those supply chains are not just important from a sustainability standpoint that's related to CO2, but it's also related to substandard living conditions, deforestation, child labor and so on. So it's wider than -- but it happens to be that both are connected for us. So CO2 and then focus on those 3 ingredients. The other area that's very important for us is packaging. We are in flexible packaging, which cannot be recycled like typical drink containers. So we need to stimulate and develop chemical recycling, it's called, which allows you to reduce the plastic to its basic form and reuse it then into our products. And apart from that, we are also very focused on human rights and making sure that human rights are respected throughout our supply chain, as well as health and wellness and gradually improve our portfolio. I know that those 2 last ones are not necessarily always seen as part of sustainability. But for us, they're part. And those 5 areas that's really where we focused.

Perfect. I think we're practically out of time. Thank you so much for all the insights. I really thought so I learned a lot. I really appreciate the time. Hope to do it again at some point down the road. Thank you.

Thank you.

Thank you.