Good morning, and thank you for joining JDE Peet's full year 2023 earnings call. My name is Laura, and I will be your operator for the call. For the duration of the presentation, all participants will be in listen-only mode, and the conference call is being recorded. Following the presentation, there will be an opportunity to ask questions. If you do have a question, please press star one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing star two to cancel. At this time, I would like to turn the call over to our first speaker, Robin Jansen, Director, Investor Relations for JDE Peet's.
Thank you, Laura, and good morning, everyone, and welcome to JDE Peet's earnings call related to our financial performance of 2023. With me are Fabien Simon, CEO, and Scott Gray, CFO. In a moment, Fabien will take you through the operational and financial highlights related to our business performance in 2023, followed by our outlook for full year 2024. After that, Scott will tell you more about the financial performance in 2023, and after that, we will be happy to answer your questions. Our press release was published at 7:00 A.M. CET this morning. The release, as well as the slide deck related to this call, are also available for download from the investor section on our website. A full transcript of this conference call will also be made available in that same section on our website as soon as possible after this call.
Before I hand over to Fabien, I'd like to direct your attention to the disclaimer regarding non-IFRS measures and forward-looking statements on slide 3. We would kindly like to ask you to read this information carefully. With that, I gladly hand over the call to you, Fabien.
Thank you, Robin. Welcome, everyone, and thank you for joining the call today. Looking back at 2023, I am pleased with the progress we have made on many fronts and how we successfully navigated another dynamic environment. Our achievements in 2023 not only reflect our resilience and agility to perform in an increasingly complex world, but it reflects as well the positive results of the transformation we initiated at the back end of 2020, when we committed to profitable growth in a quality and sustainable way. Throughout the years, our people and partners across the globe worked tirelessly to pursue our company's purpose to unleash the possibilities of our category and the power of our brands. Their ongoing effort and passion enabled us to deliver profitable growth while maintaining the high quality standard that consumer and customers expect from us.
2023 clearly marked an inflection point for JDE Peet's. We closed the year with the strongest organic semester of the company since we became public. We delivered in H2 on organic sales growth of +4.3% on the back of positive volume momentum in H2, and the Adjusted EBIT increased organically by 5.5%. We delivered well against the commitment we set at the start of the year, while coping with persistent high inflation and operating in an unusual declining category that was still adjusting globally following the pandemic. When taking a closer look at our financial results for the full year, you can see that our performance, excluding Russia, is now back to the long-term profitability algorithm that we committed to in 2021. In parallel, we remained very disciplined to deliver on the capital allocation priorities we set.
We reduced further our net debt, and despite meaningful currency headwinds this year, we achieved a net leverage of 2.7 times, very close to our optimal leverage, with EUR 500 million of free cash flow generated in H2 2023. I referred earlier to the transformation we started three years ago. Since then, we closed 5 operating facilities, and we reduced our SKU by more than 20% and our workforce by 10% on a like-for-like basis. This was achieved while delivering our best customer service level, lowest consumer complaints and historical highest employee engagement in 2023. JDE became as well, during this time frame, an investment-grade company with strengthened capital structure. This overall transformation enabled us to become simpler, more focused, and to regain cost competitiveness, which was reinvested to fuel our long-term goals.
We reinvested in working media that in 2023, almost doubled in absolute versus a low level of 2020. We invested in R&D, in product innovations, in coffee appliances, and in sustainability. We as well built new capabilities like digital or e-commerce. That reset agenda is now behind us, and we are very pleased to have become a leaner and well-invested company with brands and consumers at the higher end of our priorities. As a consequence, our competitiveness in the premium side of the coffee category increased greatly and explain why in 2023, we are likely among the rare branded scale players in coffee, which can claim gaining market share globally in our geographies, in single serve, in instant, and in beans.
At the same time that we strengthen the company fundamental, we step change our sustainability credentials, and we are pleased to have turned an historical laggard company on sustainability into a recognized leading one. One of the latest recognitions we received in 2023 is the inclusion into the Dow Jones Sustainability Index, which, to our knowledge, puts JDE Peet's as the only company operating at scale in coffee & tea globally in such an important index. Because our organic core business was getting back in shape and supported by a robust capital structure, we could now amplify the company performance with discipline in organic moves. We are entering 2024 with two transactions to be completed in the first quarter.
One, we discussed in our previous earnings, which is Maratá Coffee in Brazil, and the second that we announced in January of this year, which is a global CPG license of Caribou Coffee, and I will come back on those two later in my presentation. Finally, on the highlights, we want to share that we are planning a capital markets day at the end of April in our aluminum capsules factory in France, where we will zoom in on a number of interesting topics and developments for JDE Peet's. Let's now move to the next slide to take a closer look at various elements of our operational performance of 2023. Over the course of 2023, we saw an improvement in our volume mix performance, resulting in +1.8% growth in H2, compared to -3.3 in H1.
This was a result of recovery in Europe, share gains globally on the most attractive segment in nascent major channels, and acceleration in some faster-growing channels that are either tracked or on track, such as online, clubs or hard discounters. As we expected, inflation persisted across a large part of our cost base throughout 2023, as certain input costs, such as green coffee, labor, and freight, actually witnessed further inflation. As a result, we saw a high single digit increase in our cost of goods sold on top of the 30% COGS inflation we had to deal with in 2022. But again, in 2023, we are disciplined in pricing for commodity inflation and in revenue management optimizations. Despite the negative category trend, we increased the absolute gross profit from strong efficiencies, simplifications, and premiumizations.
In H2 alone, our absolute gross profit increased by almost 5% versus year ago. Importantly, this was achieved without any compromise on the income quality, which we know can be used in the industry by lower, cheaper quality blend. Similarly, we self-funded additional investment in sustainability. Our compounded effort on sustainability in recent years are paying off. As you can see on the right-hand side of this slide, the part of the green coffee we buy today that is responsibly sourced quadrupled over the last three years, from 21% in 2020 to 84% in 2023, including 98% responsibly sourced into Europe. As part of this effort, we had 63 active projects at the end of 2023, through which we have reached more than 110,000 additional smallholder farmers during the year.
When it comes to reducing our greenhouse gas emissions, we have also made progress in 2023, with a reduction of 6% in Scope 1 and 2, and 10% in Scope 3, which consolidated into 9.3% reductions for 2023 alone. Sustainability is embedded across all layers and functions of the organizations and plays an integral part in innovations and new product introductions. One example I would like to call out here is the launch of a new breakthrough, home recyclable paper pack for our soluble coffee range, which is the first of its kind in the coffee market. This new packaging generates the lowest carbon footprint within our existing range and is aimed to foster a more sustainable ecosystem in the soluble coffee market.
At the same time that we managed 2023 well operationally, we did not lose sight of our strategic imperatives to become more global, more digital, and more sustainable. Let me now go to the next slide, slide 7, to share a selection of the most important achievements there in 2023. First of all, we continue to morph into a more global enterprise. Although we are all grounded in Europe and with a solid performance there in 2023, Europe now represent less than 50% of the total company volume, with a meaningfully lower weight of roast and ground than two years ago. In emerging markets, we continue to grow at a faster pace than in developed markets, with a combination of market momentum, but more importantly this year, like last year, on the back of market share gain in the vast majority of our countries.
In China, we keep growing double-digit, thanks to our premium portfolio. In the U.S., the category was softer in 2023, but we remain optimistic about its long-term growth prospect. This is why we set up a new venture there, which is a launch of L'OR brand and Barista appliance, that I will cover in a minute. We also advanced in our aim to become more digital in an increasingly channel-blending environment, where consumer facing and relationships are key. Our targeted digitalization efforts and investment resulted again in double-digit organic growth in e-commerce, and digital marketing now makes up about 40% of total working media spend.... and to enable a true omni-channel approach in Europe, like we already successfully applied in all other regions, we combined in 2023, our out-of-home and CPG Europe segment into one European segment.
At first, it enabled simplifications and cost efficiency, but this is as well a growth agenda for our brand. And next to that, we have initiated multiple automation and AI pilots in our supply chain, in marketing, and across our back offices as part of our ongoing digitalization and efficiency ambitions. Third, when it comes to our long-term commitment to deliver sustainable growth that creates both shareholder return and societal value, we have made strong progress in ensuring our supply chain is inclusive, regenerative, and authentic through our Common Grounds sustainability program. This year, we embedded our advanced carbon accounting tool that we developed in 2022 to measure automatically our CO2 emission per cap across the organization, as an additional measure used on how we optimize our operations, prioritize our portfolio, and drive innovation forward.
Next to that, we are with the support of our partner and NGO, Enveritas, leading a global effort to fight coffee-related deforestation. We are leveraging a very unique combination of satellite imagery, artificial intelligence, and on-the-ground verification to measure the extent of coffee-related deforestation. This innovative new program, which is aligned with the EU's regulation on deforestation-free product, will ensure continued access to the EU market for the millions of smallholder farmers we work with around the world. As you can see on the next slide, slide 8, the progress we've made in sustainability has not gone unnoticed by the ESG raters. Over the course of 2023, we received updated ESG rating from S&P Global, Sustainalytics, and ISS.
In all three cases, we improved our scores and rankings, resulting in leading position in the respective categories and in special mentions by each rater, as you can see on the right-hand side of this slide. Within the CSA rating of S&P Global, which is probably the most extensive ESG assessment that currently exists, we were called out as the biggest mover in the food product industry, comprising of 260 companies. Let's now go to the next slide, slide 9, to provide you with some more color about our positions, initiatives, and achievements in the portion espresso category that continues to offer long-term growth opportunities. Since we democratized the access to aluminum capsule in 2016, 2017, we became the undisputed leader in this segment in modern trade.
But in 2020, there had been some external concern raised about the ability for JDE Peet's to keep leadership and pace of growth, given the new entrants of a well-known global coffee shop brand into modern trade. Four years down the road, I would like to bring some data and insights of JDE Peet's performance there. In 2023, our aluminum capsules grew by 10%, with a high mid-single digit growth in volume mix, and over the last four years, we delivered a double-digit compounded organic growth. We kept as well our leadership in modern trade, and our L'OR brand is about two times bigger than our next best competitor. This is a result of innovations, quality activations, and offering a portfolio of choices appealing to consumers. And our capsule technology and variety of offering is well recognized, and we continue to attract partner brands.
After Illy or Tim Hortons three years back, we have now just announced, last week, a new partnership with Costa Coffee, the U.K.'s favorite coffee shop brand, whereby JDE Peet's will manufacture, distribute, and sell Costa Coffee branded aluminum capsules in Great Britain from September-October this year. The other concern raised since 2020 was JDE Peet's ability to keep operating an espresso pack long term, especially following a competitor move to a closed system with a new, not retro compatible espresso appliance. And we worked diligently and with a great sense of urgency on this matter since H2 2020, as it would have caused indeed a reverse for us. We innovated and invested behind a new proprietary espresso appliance, L'OR Barista, with one of the variants you see on the left side of this slide here. The consumer feedback went above our expectations.
For obvious, competitive, and confidential reasons, I can't disclose the exact number of L'OR Barista we sold since 2021, but I can mention that it is over 1 million machines. In 2023, about 50% more L'OR Barista were purchased than in 2022, which was already a very good year. We launched now L'OR Barista in 14 markets, and in the latest consumer panel, L'OR Barista is reported to be the fastest growing single-serve espresso appliance in 2023 in our core market outside of the U.S.... That meaningful strategic evolutions explain why we were successful to sustain our double-digit compounded growth rate for aluminum capsules. We believe that the category continues to offer long-term growth opportunities.
Not only do we have the technology, brand portfolio, and leadership in modern trade on the capsule side, but we now have as well, a compelling coffee appliance platform for consumers. Over the last three years, we have regained our freedom to long-term growth in espresso, and are now confident in our ability to capture our fair share in one of the fastest segments for in-home coffee consumptions going forward. While we confirmed long-term freedom in our established espresso markets, we realized that there was a nascent, but possibly a meaningful future espresso-based market where L'OR is not present, which is the U.S. We noted that the fastest growing single-serve segment there is aluminum capsules. But we were realistic that entering there would require a new infrastructures, go-to-market, brand equity, and appliance capabilities.
We therefore decided to set up a new venture in 2023 to test at scale the opportunity of L'OR Barista in the U.S. market online, on both Amazon and a dedicated new direct-to-consumer channel. It's fair to say there as well that we were quite positively surprised by the consumer response. Our L'OR Barista coffee appliance received a best seller badge during the important holiday season in December, and on the capsule side, JDE reached a double-digit level of market share in 2023 on Amazon. When we look at the month of January of this year, this continues to progress further. Next to those initiatives, we are amplifying growth and globalization inorganically, as described on the following slides. As shared earlier, we have proceeded with 2 transactions, one in Brazil and one in the U.S.
Two very important markets for coffee, in cups and in value. In Brazil, the acquisition of Maratá will enable JDE Peet's to extend its footprints in the north and northeast part of the country. We will become a stronger number two player nationally in Brazil, from below 22% to, sorry, below 20% market share today, to above 25% market share. In addition, we are expecting synergies on the short term, and over time, premiumization opportunities from category development. The transaction has been successfully closed in January. The second is a global CPG license agreement and the roastery acquisitions of Caribou Coffee. Caribou Coffee is an iconic premium brand in the Midwest, and has expanded its retail coffee stores footprint in the U.S. and in the Middle East, with more than 800 stores now.
Stores that will remain under Caribou's leadership. Three years ago, we declared the U.S. as a key priority for JDE Peet's, and we are very excited about these transactions, which will expand further our portfolio of pure premium player in the U.S. with Peet's, Stumptown, Intelligentsia, as well as L'OR Barista we have just discussed. I do believe that we have now the perfect portfolio of premium brands and technologies in our hand, to double the size of our U.S. business in revenue organically in the next five to six years. Some additional financial detail on both transactions can be found on this slide, and the purchase considerations can be found in the subsequent events of our financial statements. Before I hand over the call to Scott, I would like to share our outlook for 2024 with you.
While we expect the environment in which we operate to remain complex and to continue to pose challenges, we have entered 2024 with both momentum and optimism, as we believe the progress we have made over the last three years positions us well to deliver on our medium-term algorithm. We expect our organic sales growth to come in at the lower end of our medium-term target of 3%-5%, with a mid-single-digit organic growth in adjusted EBIT when excluding Russia's performance. Also, including Russia's performance, we expect our organic adjusted EBIT to grow low single-digit in H1 and mid-single-digit in H2, as an ongoing trajectory forward.
Our net leverage is expected to be around 3 times at the end of 2024, taking into account the Maratá and Caribou transactions, and a free cash flow that is expected to exceed the level of 2023. Lastly, we continue to aim for a stable dividend. So with that, I will hand over the call to Scott, and I will be back when we start the Q&A.
Thank you, Fabien, and good morning to all of you. Let's go to slide 13 to take you through the most important financial highlights of 2023, and after that, I will go, as usual, into a bit more detail on our sales, adjusted EBIT, the performance by segment, as well as our performance related to profit and cash, and then an update on the status of our balance sheet. I will then finish with a quick reminder of our capital allocation priorities and the board's dividend proposal. Our overall organic sales growth of 3.9%, as mentioned by Fabien in his business highlights, was driven by an organic sales growth of 3.3% in-home and 6.4% away from home.
In terms of profitability at a total company level, our organic adjusted EBIT growth was +1.1% versus last year. If we were to exclude Russia from our performance, simply to isolate the impact on performance, the organic adjusted EBIT would have increased by more than 6%. For full year 2023, we delivered underlying earnings per share of EUR 1.51. When it comes to cash and debt, we generated EUR 522 million of free cash flow, and our net leverage stood at 2.73x. Let's now move to slide 14 to take a closer look at our sales.
Our organic sales growth of 3.9% was driven by pricing of 4.7%, as we continued to pass through the necessary pricing to offset incremental inflation, while volume mix was close to flat for the full year at -0.8%, with a strong improvement from a decline of 3.3% in H1 to a positive, + 1.8% in H2. The organic sales growth was broad-based across geographies, brands, and channels, as you will see in a minute on the following slide.
The negative foreign exchange impact of 3.7% was mainly driven by the depreciation of our main currencies versus the euro, such as the Russian ruble, the Turkish lira, the U.S. dollar, the Ukrainian hryvnia, and the South African rand, which together with a minor change in scope, reduced our underlying sales growth and led to reported sales growth of 0.5% to EUR 8,191 million. Let's now flip to slide 15 to have a look at our sales performance by geography, channel, brand, and category. Developed markets delivered 3.7% growth, while emerging markets grew at a higher rate, with 4.6% organic sales growth.
Channel-wise, our in-home channels grew sales by 3.3%, while our away from home channels increased sales by 6.4% organically, partially reflecting a normalization of the balance between in-home and away from home consumption in the aftermath of the pandemic, which, as you recall, had a bigger impact in H1. To put the normalization into context, in-home is still growing organically at a 4-year CAGR of more than 6%. Brand-wise, our global brands grew by 8.5%, while our regional and local brands together delivered 2.7% growth organically.
When looking at sales performance from a category point of view, sales of single-serve, beans, and other premium categories like premium instants, together increased by 6.4%, while the rest of the brand portfolio grew by 1.1% organically as we continue to see premiumization across the business. Let's now go to slide 16 to look in more detail at our adjusted EBIT performance. Our organic adjusted EBIT increased by 1.1%. What you see in the bridge on the slide is that at total company level, we were able to increase the level of gross profit compared to last year, despite continued inflation headwinds impacting our cost of goods sold. As noted by Fabien, we had a strong organic improvement of our absolute gross profit in H2 of almost 5%.
As anticipated, total SG&A increased moderately, reflecting continuing investments behind our strategic growth opportunities, such as our appliances and through working media, but also due to the ongoing effects of persistent, broad-based inflation, which we continue to mitigate with a strong focus on cost control throughout the organization. Fluctuations in foreign exchange decreased adjusted EBIT by 4.1%, of which the majority was driven by the Russian ruble, but also by other currencies, mainly in the LARMEA segment, such as rand, hryvnia, and Turkish lira, but also the Australian dollar, while changes in scope and other non-organic items, including M&A, divestitures, and new business ventures, decreased adjusted EBIT by 5.1%, resulting in a reported adjusted EBIT growth of -8.1%. On the next slide, slide 17, you see an overview of the organic sales and adjusted EBIT performance by segment.
Looking at the performance per segment in 2023, you can see that all four segments delivered positive organic sales growth. When it comes to profitability, the picture is a bit more mixed, with both Europe and APAC delivering strong organic growth, while Peet's had a slight decline and LARMEA was down due to performance in Russia. When excluding the performance in Russia, the organic adjusted EBIT growth of LARMEA was positive. Let's therefore now take a closer look at each segment one by one. Europe witnessed a strong sequential improvement in volume mix from -8.6% in H1 to a + 5.2% in H2 in 2023, due to both better performance in the latter half and the difference in the comparative base of last year.
The rebalancing between in-home and away-from-home consumption stabilized in H2 as we effectively exited the post-pandemic normalization period, and most of the negative side effects of some of the intense price negotiations with retailers faded out. For the full year, Europe's organic sales growth of 4% was driven by an increase in price of 4.6% and a decrease in volume mix of 2.4%, with strong performances delivered by countries such as France, Switzerland, and most Eastern European markets, and by brands including L'OR, Jacobs, and Senseo. The organic adjusted EBIT increased by 8.6% to just over EUR 1 billion as a result of higher gross profit and efficiencies from the new omni-channel organization. On a four-year CAGR, the organic adjusted EBIT declined by 2.7%.
In LARMEA, organic sales growth of 4.7% consisted of 2.7% volume mix and 2% price growth. Most markets in LARMEA continued to perform well, which was partially offset by the brand transition of our main international brand in Russia to a local brand, and by declining prices in Brazil due to lower green coffee prices. The adjusted EBIT of LARMEA decreased organically by 21.1% to EUR 147 million, reflecting a high base of comparison, transactional forex impact, and the brand transition in Russia. Excluding the performance in Russia, as I just mentioned, the organic adjusted EBIT growth was actually positive, and on a 4-year CAGR, the organic adjusted EBIT growth of LARMEA remains positive at 6%.
In APAC, the organic sales growth of 2.1% was driven by a 4.9% increase in price and a 2.8% decline in volume mix. Within APAC, top-line performance was geographically broad-based, with notable strong performances in countries such as Malaysia, Thailand, and New Zealand, and from brands including Campos and Old Town. The adjusted EBIT for APAC increased organically by 15.2% to EUR 135 million in 2023, supported by supply chain efficiencies, less OpEx, including less A&P and SG&A, but also the impact from SKU rationalization. On a 4-year CAGR, the organic adjusted EBIT growth of APAC is 2.8%. At Peet's, the away-from-home business continued to benefit from the ongoing rebound in away-from-home consumption, with same-store sales and ticket size up in Peet's U.S. coffee retail stores.
While the in-home category in the U.S. was softer, Peet's CPG business held market share. In China, Peet's continued to deliver strong double-digit organic sales growth. Peet's adjusted EBIT declined organically by 1% to EUR 141 million in 2023 as a result of relatively low volumes, due to the rather soft overall performance of the category in the U.S. and due to higher A&P spend to support brand and product activations. Based on a 4-year CAGR, the organic adjusted EBIT growth at Peet's was 11.3%. Let's now take a look at our underlying profit in absolute terms and per share on the next slide, slide 18. As you can see on this slide, our underlying earnings per share benefited from stronger organic operating performance in 2023, notably in H2, further supported by lower net financing costs and lower underlying taxes.
Our adjusted net financing costs further improved by EUR 27 million, mainly thanks to our active interest income management and the higher rate environment, while keeping a low cost of servicing debt. Our stronger overall operational performance, with a 7.8% improvement, was, however, more than offset by the net effect of fair value changes of derivatives and gains and losses in FX, translational FX results, and changes in scope. The fluctuating results from derivatives and FX revaluation naturally belong to the P&L of each reporting period... As was the case in H1, those were net positive in 2022 and net negative in 2023, explaining the year-over-year negative impact on our EPS. The vast majority of the negative changes in the 2023 P&L are non-cash items.
Let me now share a bit more detail on our free cash flow and net debt developments on slide 19. In 2023, we generated EUR 522 million free cash flow with a stronger H2 performance. This is a lower level compared to our rolling average levels on a full year basis, and is primarily due to the normalization of working capital that we anticipated and already called out at the start of the year during our full year 2022 and H1 2023 results calls. As we explained before, our working capital has benefited in 2021 and 2022 from historically high levels of broad-based inflation across raw material inputs, including elevated coffee prices.
Next to that, inventories also increased as a result of building higher safety stocks for business continuity and the delays in the supply chain, further benefiting payables due to the additional spend. As global supply chain dynamics improved during the latter part of 2022, we began gradually lowering our safety stocks, and thus we've been buying less green coffee in 2023. This led to a net cash outflow from working capital as anticipated. We had a strong H2 free cash flow delivery despite the working capital impact, as the seasonality of our free cash flow is generally more weighted to the second semester. When taking a multiyear view, as we always do, and averaging the last 12-month periods of free cash flow of the last 3 years, our average free cash flow conversion rate equals 71%.
Looking at the net debt bridge on the right-hand side of this slide, it shows that our net debt position decreased by EUR 160 million, as despite our working capital adjustment, we maintained discipline across all the lines while simultaneously continuing to invest behind our strategic growth priorities. On the next slide, slide 20, you see the overview of our debt and leverage evolution. For the first time since the IPO, our net debt is below EUR 4 billion. Also, despite the aforementioned currency headwinds, we finished the year with net leverage at 2.73 times, which is slightly above our optimal leverage range. As explained by Fabien in our 2024 outlook, we project a net leverage of around 3 times by the end of the year.
For the first six months of the year, however, we obviously expect our reported leverage to stand higher than 3x. This is primarily because the full cash outflows related to the acquisition of Maratá, which closed in January, and Caribou, which is expected to close around the end of Q1, will fully be reflected in H1, while only a couple of months of EBITDA will be factored into our reported net leverage calculations. Secondly, because of the seasonality of cash flows, as we often generate more free cash flow in the second half than in the first half, therefore, our deleveraging expectation to around 3x by the end of the year will naturally be back half loaded. Let's now move to the next slide, slide 21, and have a closer look at our debt maturity profile.
Following our EUR 1 billion bond issuance in November 2023, our cost of debt is 1.16%, which remains one of the most attractive cost of debt within the broader consumer sector, maintaining our competitive position in the high rate environment. Our total liquidity was EUR 3.5 billion at the end of 2023, a higher number than usual, given that the full net on proceeds conservatively remained on the balance sheet over year-end. Correcting for the bond proceeds, our year-end liquidity is EUR 2.5 billion. Our committed and fully undrawn revolving credit facility of EUR 1.5 billion does not mature until 2028. Before moving to Q&A, I'd like to briefly remind you of our capital allocation priorities, which remain unchanged, and share the board's dividend proposal with you. Therefore, moving to slide 22.
Our capital allocation framework guides us as we create long-term value. Our first capital allocation priority is to reinvest in our brands and the growth opportunities within our business. Our second priority is to deleverage, as we target an optimal leverage of around 2.5 times. Our third priority is to continue to pursue inorganic growth opportunities, but always in line with our highly selective business and financial criteria. Our fourth priority is to use excess cash to contribute to shareholder remuneration through stable dividend flows that we expect to sustainably grow over time... And while our leverage is above our optimal leverage of around 2.5 times, we do not prioritize share repurchases. If you look at the actions we have taken over the last 3 years, you will see that they are very consistent with our capital allocation priorities.
Lastly, based on our capital allocation priorities, our dividend policy, and our financial performance in 2023, the board will propose to the AGM in May to pay a dividend related to full year 2023 of EUR 0.70 per share in cash, to be paid similar to last year's dividend, in two installments of EUR 0.35 each in July 2024 and January 2025. This brings me to the end of our prepared remarks, and with that, I will now turn it over to the operator so we can start the Q&A.
Thank you. Ladies and gentlemen, we are now ready to take your questions. If you wish to ask a question, please press star one on your telephone keypad. That's star one on your telephone keypad to ask a question. Please remember that you are limited to one question and a follow-up per round. We'll take our first question from Patrick Folan with Barclays. Please go ahead.
Hey, good morning, Fabien, Scott, and Robin. My first question is just on the free cash flow guide. Can you give some color on what the better than EUR 522 million of this year means, considering consensus way above that? Just good to get color there. And I think just on the follow-up, can you give some color maybe on where COGS could land next year, considering green coffee prices have gone up with Robusta? How should we think about that COGS basket? Thank you.
Maybe, Patrick, good morning. I can start maybe with the second part of the question, and Scott can take the first part. Related to inflation for next year, what we are seeing at this stage is a low single-digits COGS inflation for next year. I think low single-digit, maybe mid-single-digit. But we stay very vigilant. We know we are pricing in a category where there are some volatility on the green coffee side, so of course, not much impacting us first part, but more the second part of the year. And when we look at the latest development of Arabica and Robusta, we are talking about 10%-30% increase versus the back end of 2023.
If we see that confirmed, we will, of course, most likely, do exactly what we have done in the past, being very disciplined to price for this commodity inflations. We are entering some important season on the coffee side. That's why it's a bit too early to call out what the evolution will be. But other than that, for the rest of the portfolio, of course, we have a good visibility, and today, a low single digit is what we are seeing, which confirm what we've said over the last couple of years, which is inflation was coming, will be sticky, and we are not yet in a deflationary environment, but more in a disinflationary environment that we see for 2024.
Yeah. Thanks, and I'll take your first question, which was actually on the cash flow outlook. So yeah, I mean, as we included in our 2024 outlook, we do expect our free cash flow to be greater than 2023. We do have a bit lower coffee prices in H1, and so that also adds a bit to our seasonality. And we'll start to return to a more normal cash conversion level, so that's what we would expect. And it's important, I mean, just like Fabien mentioned, in terms of the COGS, we need to see how coffee prices also evolve for the latter part of the year, so that's something we're monitoring.
For 2024, we'd expect our free cash flow to certainly be higher than 2023, and it will definitely meaningfully contribute to our deleveraging around 3x, and that's why we also guided that. So obviously, that's gonna be a strong contribution there. And going forward, we also have absolute confidence in our future cash conversion as we look at... And as you see, in terms of the second half performance, where you still had a drag from working capital, you can just see the amount of free cash flow that we naturally generate even in that environment. So we have absolute confidence in the cash conversion going forward. So I'll leave it there. Thank you.
Just, sorry, just—
Thank you. We'll now move on to our next question from Jon Cox with Kepler. Your line is open. Please go ahead.
Yeah, good morning, guys. Sorry, I just want to come back to that free cash flow question. Are you still targeting a 70% conversion ratio? You seem to be avoiding mentioning that number, and I'm wondering how close you'll be to it this year. And my second question, as a follow-up, being a bit cheeky, the profitability of the Europe business, do you think we're now around ground zero? Because obviously, that's come back a long way over the last few years. Do you think now we're gonna see more meaningful progression in that European margin going forward? Thank you.
Yeah, good morning, Jon. Again, I can take the first one. Yes, thank you for highlighting the strong progress that we have been making in Europe. It's something we have been committed to, and we are that we have delivered. It has been the combinations of one, our recovery in out-of-home, and we said back then, it's gonna take us three years to go back to the profitability we are in out-of-home, and the job is almost completed. We are almost back. It has been coming from the reset of the organizations quite aggressive on the cost side, but as well on the portfolio side.
In H2, in Europe, we have had as well, really seeing after a very difficult negotiation we have had on the back of 2022, and we are very disciplined in the participation in promotion or the execution in promotions to ensure we would really go after more value accretion, accretive agenda. But as well, we have continued to work on cost efficiency. You know, we lately announced, for instance, the closure of our process factory in the U.K., which helped to contribute on the cost side in Europe. And we have been continue to gain market share on the most relevant category. And we like the starting point, and if you look on a four-year basis, we're almost back to where we were.
So yes, what we see going forward is, as I said, we are now back to our long-term agenda. The reset of the investment has been made, and we want, going forward, every segment to contribute to the company, generating the mid-single digit going forward, and Europe will be part of it. So we indeed expect, going forward, further improvement from our European business.
Yeah, and thanks, Jon. And just to add a little bit to cash flow. So, the answer to your question is, we are committed to the 70% cash conversion that we have as part of our long-term algorithm. And, and as you know, we look at that on a cycle of a few years average. So our long-term algorithm remains unchanged, including on the cash conversion. Our cash conversion, best guess at this time will be below 70% in 2024, but higher than 2023, certainly. And again, the payables are just dependent on price and the level of coffee purchasing, so that's what we monitor. But, but we have confidence in our, in our, free cash flow conversion.
Thank you.
Thank you. We'll take our next question from Jeff Stent with BNP Paribas Exane. The line is open, please go ahead.
Good morning. Two questions, if I may. The first one, could you give us some guidance on the expected development of the new venture costs in 2024, and whether or not that will be a drag on profit year -on- year? And secondly, on gross margins, you know, by my math, they're now about 600 basis points below pre-COVID levels. Is that something you ever expect to recover? If yes, any guidance, and if not, why not? Thanks very much.
Good morning, Jeff. Thank you for your, for your question. So starting with the, with the new venture, we've, we've explained transparently what the new venture is about, which is, in a, in a simpler term, to replicate our successful aluminum capsule agenda in Europe into the U.S. And we think it's gonna be, a very exciting, growth and profitability agenda going forward. Of course, when you enter in such a large market where you have to set up everything, online platform, even go to market, because unlike Europe, where our, where our partner, Philips, is distributing in the U.S., we have to do everything ourselves because they have no capability with it either, we have to invest.
When you invest, if you look at the history in a new appliance, the payback is about 10-15 years. For us, it's gonna be a fraction of that. Why? Because we are leveraging on an existing technology, on an existing platform, behind which we have scaled already in other geography. And the year one is the year where you have the biggest investment, so we are really expecting that going forward to be lower and lower year -over -year. But we are expecting already next year, because it's a premium approach, to have the gross profit margin on that product in the U.S. to be higher than total company. So it's really some phasing of investment which had to be made as we place machine and build the equity of the brand.
We are very, very excited about that opportunity. Your second question is about gross margin. You know how much, in our industry, gross margin can be a very misleading indicator when you have the volatility of green bean and pricing in the pass-through category. So I always try to stay away from it, at least on the short term. That's why we are really measuring our indicators in a very transparent way. We have been presenting today, for instance, our absolute gross profit, and you can see it's growing at a higher pace than our top line in H2, which is the agenda we want to go after as we premiumize, as we get operational leverage back. And as far as percentage, we know it will come back, but it's not in our control.
The percentage will come back when green coffee will normalize, and we know it will. You can't have forever an Arabica at an historical 20-year high. You can't have forever a Robusta on 15-year high, or an Arabica, which has been cruising at a much higher than historical level. When it's gonna come back, we'll be very disciplined on the way we will pass through, and then automatically, the margin percentage will come back, and it can come back quickly and at a very high level. We have seen that in the history, I mean, at the time the company was private. It is exactly the same thing that we see happening going forward, so we are absolutely not concerned about the percentage, which we know will, will come back.
Thank you.
Thank you. We'll now take our next question from Bing Xu with Redburn Atlantic. Please go ahead.
Hello. Thank you for taking my question. I have a question on the category outlook. Can you provide some color on the in-home coffee category, please? 'Cause you mentioned in the, in the presentation, you've seen the coffee category to exit the post-pandemic normalization. Is there any other factors we should be mind of, of going to 2024? For example, have you seen much consumer behavior change, or have you seen much of the changes to competitive landscape as the industry face more, some volume pressure? So any color on the category will be helpful. Thank you.
Good morning, Bing. Yes, thank you for the question. We have been talking in H 1 that indeed the category was still evolving in a post-pandemic way, where consumer have been really a bit more away from home. And that's why the category has been adjusting to it. And that's why in H 1, the category globally, and talking here volume, because value can be misleading with pricing, was in decline by about 3%-5%. But we have seen already in H 2, some recovery. In the U.S., it's still a bit negative, but low single digit level, and outside of the U.S., we are closely approaching almost a stabilization, if we look at the last moving quarter, almost to zero.
Which really confirm what we have always said, which is that consumer have not drunk less coffee, they were just a bit less at home. And consumer have not been drinking less coffee because there have been some inflations because of the commodity side. It's, it was purely a post-COVID adjustment. So we feel that the category is getting back on track. U.S., a bit later than other geography. If you look from a more behaviors on the consumer side, we see a bit of a difference between the U.S. and the rest of the world. What we see in the rest of the world, brands are back. If I look private label is stabilizing, and it is today lower than what it was pre-COVID.
While in the U.S., there is a bit more bifurcation, premium, super premium growing and private label growing. In between, a bit more challenging. We are very fortunate to be positioned on the premium, super premium side. That's why with our Peet's amazing brand in the U.S., we have been holding our market share because we are positioned on the good side of the category, and that's why we were very excited as well with our Caribou acquisition to stay focused on the premium side of the market. We believe that we are more in normalized way. What we don't know for the U.S. is how it will totally evolve going forward.
I have a bit of an intuition here, is in the U.S., a lot of coffee players are actually multi-category player, and coffee category was a bit more difficult category to manage over the last 2-3 years. And it is not unlikely that they are, they have been putting most of their investment effort, innovation, activations outside of coffee, but favoring the other category. And we know that with, as coffee and consumer are coming back, it will normalize, and that should support, in my view, the coffee category. If we look from, what consumer, when they are at home, consume, we see the trend remains the same.
When you go after coffee in home, you want a better coffee, you want a more convenient way to get of, to get your coffee, you want to replicate your out-of-home experience in home. That's why we see the category which are bean, single serve, premium instant, are the ones that are growing at a higher pace than the rest. But this is a trend we have been seeing now for 10 years, and we don't see any sign of that changing. Your second . No, I think I've answered the question, but you know, maybe-
Yes.
Okay.
Thank you.
You're welcome.
Thank you, and we'll now move on to our next question from Tom Sykes with Deutsche Bank. Please go ahead. Tom, would you like to check your mute button, please, Tom?
Apologies. Yep, sorry, schoolboy error. So just trying to unpick some of the one-offs that may have been in the adjusted EBIT line in H2. Just for the scope, going back to the scope, first of all, will the definition of that remain the same in full year 2024 versus 2023? And are you, does that include all of the revenues and costs from the U.S. rollout, or are you booking some revenues and costs not through the scope line? And then perhaps kind of lumping Central, and maybe even Russia together, the Central line looked high in H2, and obviously Russia profitability was weak. Is there anything one-off that you would pick out in the combined cost base of those two, or should we take H2 as a sensible run rate, please?
Sure. Let me start on those items, and then I'll pause and let Fabien add where I missed something. So on, maybe first on the scope on the new business venture and whether the definition will be the same in 2024. There's no change in the definition. I mean, we had the same definition actually in 2022, so the same as 2023, and it would be the same case for 2024. However, and we had the adjustment that started in the back end of 2022 and carried forward.
I think on that particular adjustment related to the U.S., it even phased out in the last couple of months of the year because it's an organic scope adjustment, so it's just, looking at the, the prior year periods. Actually, in scope, we don't see anything, notable, in 2024 because in that example of that new business venture, that's past the, the first year of that rollout. So I don't know if anything you want to add on?
Yeah. So it's gonna be back on the organic, so we don't expect anything there. If anything, we expect positive, because on scope next year, we are gonna include the acquisitions of Maratá and Caribou, because they don't fall in organic in the first year. Your second question was on Russia, Tom. You know, on Russia, we have been very transparent since the beginning about our positions. And in particular, for H2 of this year, that we would move even more into local -for- local organization, with transitioning our international brands out of Russia.
which I think is the right things to do because there is a uncertainty, unpredictability in Russia, but as well, it's a way to protect the equity of our brand Jacobs. But as well, more and more putting the company focus into the rest of the organization, and as the rest will grow at a faster pace over time to continue to even reduce the weight of Russia in our business. And overall, there is the exposure of Russia for the shareholders. That's why we guide. We are transparent this year to show our results with and without Russia, and we are back without Russia to our long-term algorithm. That's why even next year we will stay in our long-term algorithm without Russia.
But the impact of transitioning to local portfolio, higher cost of running business, in, in Russia, has had an impact in H2. We don't expect incremental impact in H1 next year, but the effect of this H2 impact will just carry over in H1, because it was not on the base of H1 of 2023. After that, we don't expect really incremental effect. The only thing we don't know that can turn positive, can turn negative, is the currency. Nobody can anticipate and predict what it will be, but we think that now it's passed, and we think it was really the right things to do.
Yeah, absolutely. And then on your other question, Tom, I believe, related to central cost, I think your question, I guess, is around the unallocated, is that correct?
Yes, that's right. Thank you.
Yeah, absolutely. So on that, so I think the kind of perceived increase in cost, or I would say like the negative EBIT impact there, is a year-over-year reported comparison, so it's not an organic, and it's a reported. And you really need to look at absolutes of that one, which is kind of the central balancing. So I think... Well, the unallocated bucket includes some central SG&A cost, including headquarters, operations, R&D, for example. There are also some other non-people related central costs that are not allocated to the segments. And also, there can be some restructuring things that are one-offs that go there, that don't necessarily go to an adjustment item because those roles may stay in place and have some double run during the restructurings.
I think there are also some central, one-off benefits in 2022, so that's why the, the year-over-year comparison has some one-off central cost in 2023. So that causes that variance. And I think, for example, like if you look in 2023, we had some. I'll give you some, we had some negative one-off impacts from our captive insurance company, for example, due to the various supply chain issues we had, in 2023 in Europe, Asia, and the U.S. So while there is an impact in the segment, there was also some central cost impact. And it's important to note that the 2023 unallocated EBIT is, is quite similar to previous years, so it's just that one year-over-year comparison.
I was just looking at, in fact, I think on a reported basis, the four-year CAGR is less than 2%, and an organic basis is exactly flat over the last four years. So it's, I believe in 2021, that was EUR 306 million, so quite comparable to what you see in 2020. You just got to look at some context because that can be a little bit skewed on the year-over-year due to those items. So-
Sure.
Quite a bit of detail-
Right.
But hopefully that addressed your question on the unallocated.
Yeah, it's great. Thank you very much.
Thank you. We'll now move on to our next question from Robert Jan Vos with ABN AMRO. Please go ahead.
Yes. Hi, good morning, all. A couple of questions. When I listened to Fabien's comments on COGS inflation and you used the term disinflation. All in all, is it fair to see, based on what you now know today, that pricing will be lower in 2024 compared with 2023? That's my first question. My second question is, the supply chain financing was EUR 431 million at the end of last year. Can you, Scott, maybe share with us what the amount is at the end of 2023? Thank you. Those were my questions.
Yeah, good morning, Robert. I, I can take the first one. Yes, indeed, today we see disinflation, so lower, lower price increase than what we have had in the past, which naturally will lead to a lower price, and that's why our organic sales growth is normalizing to a more balanced contributions between pricing and volume mix. But again, as I've said, we know green coffee is volatile. If we see, of course, an increase persisting, we may go back to a bit higher than what we see. But today, it is correct that we are expecting a lower level of price increase than in 2023.
Yeah, in regards to the question on the supply chain financing, so there was a small increase in 2023 versus 2022, and it's somewhat comparable to 2021 level. I believe that the amount that will be, and we'll disclose that shortly, but I can give that to you. I think it's gonna be 400, around EUR 490 million. And the increase in 2023 versus 2022 is mainly due to inflation and just the mix of the spend, so nothing structural there. It's just really the fluctuation of that bucket.
All right. Thank you.
Thank you.
Ladies and gentlemen, we are now approaching the end of the call. We will now take our last question from the line of Feng Zhang with Jefferies. Please go ahead.
Hi. Two questions. The first one is a technical one. So volume growth in Europe was -2.4% in full year 2023. H1 was -8.6%, H2 was called out at 5.2%, but if we using the full year, the implied H2 will be just 3.7%. Can we just get some clarification if there's any restatement made on sales base or growth definition? And the second one is about the growth in the grounds business in Europe. You mentioned before that the weight is getting much smaller than two years ago. Are you actively reducing the exposure by cutting SKUs? Or are you saying the SKU cut of the 20% was mostly just in APAC? Thanks.
Yeah. Maybe I'll take the first one, and it was a little bit difficult to hear you, but I think I got the point of the question, the volume was low. But on Europe, in terms of the volume, as you were looking at the semesters, and there was no restatement there that we did in Europe. So anything was just on the year-over-year comparison, but no adjustments there. And we have adjusted the base, of course, on our organics and also on when you look at the volume mix for the omni channel combination of bringing retail and out -of -home together, so it's just bringing those segments together. But again, it is a like for like base and no restatement items in Europe. Fabien, I'll let you take the second one.
Yeah, and I can answer on the SKU and roasting brand in Europe. We have been communicating in our Capital Markets Day at the beginning of 2023, our agenda on on SKU rationalization. Back then, we were at a 10% reduction, and at the end of 2023, we landed at 20%. So we have really doubled our effort in in one year, and it affected mostly our European and Asian business in category of roast and ground, in particular, a bit of tea, and it affected as well our out -of -home professional organizations.
Per category, I mean, every, every category has contributed to it, but it could range from 6-7 on the lowest to 30-35 for the highest category. Indeed, roast and ground in Europe has been a big contributor to this one on top of APAC, while APAC was mostly on the professional side. What I can share, because it's an important, important measure, is two years ago, roast and ground in Europe was representing more than a third of our business, in on the in-home side.
Today, we are more approaching like 25%, which is well below the market, and it's important because we continue to premiumize our portfolio, but it's as well a way to reduce our exposure to the volatility of coffee, which always hits more countries and categories where roast and ground is more exposed. And that's why we feel we are cautiously optimistic to a question which was asked earlier on our ability going forward to continue to improve our profitability in Europe.
Thank you very much, and I would now like to return the call to the speakers.
Thank you, Laura. Ladies and gentlemen, thank you very much for attending today's earnings call and for taking part in the discussion about our results. If you have any additional questions, please do not hesitate to contact the IR team. We're happy to answer your questions, and again, thank you very much and enjoy the rest of your day.
Thank you. Thank you very much.
Thank you. This now concludes JDE Peet's earnings call. Thank you all for attending. You may now disconnect your lines.