Andre Maciel: Sure. And good morning. So yeah, as you pointed out, we were able to deliver a very solid cash flow conversion in 2023, above 80%. And we do expect a small progression also as we head into 2024. We still going to be in the 80s territory because we do expect another year of solid CapEx investment like we have been doing in the last two years. There’s a lot of good investment opportunities for us in the organic business. Yeah, and we have some taxes step-up that we also mentioned it’s affecting earnings as well. So those two factors go against that. But on the other hand, the working capital should expect to continue to improve as a consequence of the investments we have been making.
Carlos Abrams-Rivera: The one thing I would add too is as we go into — those of you joining us in CAGNY, we’ll be able to unpack to a little more of our investments we’re making. I mentioned quite a bit about innovation, about how we are going to continue to invest in our brands, making sure they are superior to our competition. So I think you’ll see a little more details that from myself and the team when we’re together in Florida.
Stephen Powers: Okay. Very good. We will see you there. Thank you.
Carlos Abrams-Rivera: Thank you.
Operator: Thank you. One moment for questions. Our next question comes from Ken Goldman with JPMorgan. You may proceed.
Ken Goldman: Hi. Good morning. Just curious, there’s some early indications that maybe as an industry, quick service restaurants, seeing some fraying at the edges in terms of consumer demand, mainly under the weight of higher prices. I’m just curious if this is something you’re seeing as well. And to what extent, if at all, does your outlook maybe potentially factor some kind of slowdown there.
Carlos Abrams-Rivera: Yeah. In our business, frankly, a lot of our business can is, is really focused on front of the house. And we’re actually seeing solid performance for our away-from-home business, both in the U.S. and as well as outside the U.S. And if you think about the fact that outside the U.S., we use that channel very much as a way for us to drive awareness and build their brands. That continues to drive positive growth for us. In the U.S. as well, we see that even within the context of QSR, we continue to see progress and improvement. But at the same time, we’re also expanding into new channels that allows us to continue to drive the growth, whether that is from our vending opportunities into new hospitality areas. So, we also are having a little bit of a broader view of how we define our away-from-home business to go into new spaces that we know are margin accretive and not be dependent on just one channel in order for us to drive the growth.
Ken Goldman: Understood. Thank you for that. And then the gross margin increase you’re expecting this year despite a little bit of lingering inflation. Can you just remind us what some of the key drivers will be of that? Is it simply a continuation of would help 2023 in terms of COGS efficiencies and some revenue growth management assistance?
Andre Maciel: Sure. So, we expect gross margin to expand again and is part of our long-term algorithm, we feel proud of what we have done so far. Remind that we always have been pricing to offset inflation in dollar for dollar, and that’s what we have done in the last two years. However, in 2024, we are expecting to price approximately at 1% level, which is below the inflation that we’re expected at 3%. But — so the main driver is really coming from the gross efficiencies. We have been delivering ahead of what we outlined to you a couple of years back. So 2023 are very solid year, almost 4% of gross efficiency as a percentage of COGS. And in 2024, we expect another solid year. So, this gross efficiency is helping us, not only to offset a component of the inflation, but also is helping us to expanding gross margins and investing a little more in the business on the SG&A side. And that’s something that you should expect to see from us.
Ken Goldman: Great. Thank you.
Andre Maciel: Thank you.
Operator: Thank you. One moment for questions. Our next question comes from Pamela Kaufman with Morgan Stanley. You may proceed.
Pamela Kaufman: Good morning.
Carlos Abrams-Rivera: Good morning, Pamela.
Andre Maciel: Good morning.
Pamela Kaufman: I was hoping that you could double click a bit into the drivers behind your Q4 results in North America and how you’re thinking about those factors going forward? You pointed to weaker consumer demand, but also discrete headwinds like the inventory deload and lapping the trade accrual. So, how are you thinking about North America consumer demand in ’24? And can you explain what drove the one-time dynamics? Was it a specific retailer or specific categories where you saw a deload? And maybe you can explain the effect of the trade accrual. Thank you.
Carlos Abrams-Rivera: Let me start and give you a sense for how we see the consumer today. And then maybe, Andre, you can go deeper into the specifics about the Q4 and how we are — how we see that playing as we go forward. But I guess the place that will start would be that what we’re seeing in the data is regardless of the income levels that consumer is looking for value and they continue to be under pressure. And what we see is low income consumers are actually shopping more at places like Dollar Stores, higher income consumers, more club stores. But mostly, we are seeing them looking for overall, smaller trips to stretch their dollar further. So for us, it continues to be about how do we continue to deliver value in different ways to that consumer who are very much focused on value through intentionally investing in our brands making sure we have a longer value offerings and increasing the distribution in different channels to be what we have done in the past.
And let me just be specific before Andre give you the details on the Q4. And if I think about club channels, we have introduced a number of brands into club from Capri Sun to Lunchables Classical Pasta Sauce. In fact, we also tested new innovation in our club channels. And in 2024, we’ll have 20% higher number of offerings into club that we did in 2023. Now if I think about the enterprise points in the category and the SKU that we can have in kind of areas around Dollar Stores, we’re actually making sure that we’re driving things like improving on assortment of barbecue and mustard or crab of mayo and salad dressing as well as new items around Taco Bell and our partnership that we have in order for us to drive expanded use of our Mexican initiatives.
So if I think about Dollar Store, we actually have today over 300 SKUs. And year-over-year, we’re going to be increasing about another 10% versus what we had in the past. So, we are making sure that we are in the right channels with the right assortment and continue to invest in our innovation in order to make sure that we could absolute consumers looking for value independent of where they’re looking for different occasions, different formats, different shopping behaviors. And now, Andre, if you want to give a little more context on the Q4.
Andre Maciel: Sure. So North America net sales declined 3%, and approximately 140 bps is linked to the trade accrual release from last year into — probably 2022 and from inventory deload year-over-year. But in fact, it’s not that we saw a deload happening in 2023, that in Q4 2022, as we started to recover, services start to ship ahead of consumption. So we are lapping that effect. So there’s nothing really on that regard affecting 2023, it’s just a lapping effect. Now the sellout was negative, and it was softer than what we anticipated. We underestimated the impact of SNAP in Q4. It turned out to be more than 150 basis points stronger than we thought. If you remember, there was a concentration of emergency allotments at the end of 2022.
So, on a year-over-year basis, there is benefits declined close to 40%, which is substantial. And that’s what affected a lot of sellout. We should continue to see some of that in Q1. So, on a year-over-year basis, Q1 ’24 will still be about 20% less SNAP than last year. So, we’re still going to suffer a portion of this effect. But on the other hand, our market share has improved in Q4 as we anticipated, which is a very good sign. We are living — exiting the year with the best share performance of 2023. So that give us a lot of good momentum heading into this year. Hope that helps.
Pamela Kaufman: Yes. Thanks. Just a quick clarification. So, are you saying that SNAP was a greater headwind in the fourth quarter than the prior two quarters? And why do you think that is?
Andre Maciel: Yes, Absolutely. Yeah. Because there is a concentration of emergency allotments considered in Q4 of — in ’22. So, there is SNAP a benefit in Q4 ’22 were actually higher than Q2 and Q3 2022.
Pamela Kaufman: Okay. Thank you.
Andre Maciel: And this itself is not a surprise. I mean, we just underestimated the elasticity of that.
Pamela Kaufman: Understood. I’ll pass it on. Thank you.
Andre Maciel: Okay.
Operator: Thank you. One moment for questions. Our next question comes from Robert Moskow with TD Cowen. You may proceed.
Robert Moskow: Hi. Thanks. A couple of questions. Those of us analyzing your commodity exposure see a lot of deflation running through on the ingredient side, maybe even the packaging side. And your guidance is for inflation to be positive. Can you walk through some of the components that we can’t see, maybe it’s conversion costs or things like that, that make this a — continue to be an inflationary year? And then my second question was, you have a $25 million write-down for, I think, systems related to your modernization efforts. Can you go into a little more detail as to what caused that write-down? Thanks.
Andre Maciel: Sure. Good morning, Robert. Good to hear from you. So on the inflation side, as we said in prepared remarks, we do expect inflation again into 2024, low single digits on the 3% territory. Even though ingredients as a whole, we see quite a few commodities that are deflationary. We still have the impact of maybe tomatoes and sugar affecting us negatively. So, there is a little net increase in terms of commodity inflation. And then — but the biggest bulk of the inflation is really coming from labor. We continue to see a relevant higher than pre-pandemic level on wage increase as well as transportation making 2023, the transportation costs were quite low, and we are seeing some signs of rebound on the transportation cost side.
So, this is where inflation is mostly coming from. On the second part of the question about the $25 million. So not 100% of that is the system write-off, even though it’s the majority of it. And this has to do with us deciding not to maintain investment in a certain technology that we think will not be relevant for the future. So, we decided to stop that investment and redirected issue, something that we think will be more relevant towards future agenda [ph]. As you know, technology is front and center of our strategy. And we have continued to make decisions to make sure that we can turn it into a competitive advantage to us. So — and if this might require us to make decisions in between a quarter that we do not initially anticipated because we saw that that’s the right thing for the business for the long-term.
We’re not going to hesitate to do that.
Robert Moskow: Okay. Thank you, Andre.
Andre Maciel: Thank you.
Operator: Thank you.
Anne-Marie Megela: Operator, we have time for one more question.
Operator: Thank you. And our last question comes from John Baumgartner with Mizuho Securities. You may proceed.
John Baumgartner: Good morning. Thanks for the question.
