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Mondelez International Inc  (NASDAQ:MDLZ)
Q3 2018 Earnings Conference Call
Oct. 29, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Mondelez International Third Quarter 2018 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Mondelez management and the question-and-answer session. (Operator Instructions) I'd now like to turn the call over to Mr. Shep Dunlap, Vice President, Investor Relations for Mondelez. Please go ahead, sir.

Shep Dunlap -- Vice President, Investor Relations

Thank you. Good afternoon and thanks for joining us. With me today are Dirk Van de Put, our Chairman and CEO, and Luca Zaramella, our CFO. Earlier today we sent out our press release and presentation slides which are available on our website mondelezinternational.com/investors.

During this call we'll make forward-looking statements about the Company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K and 10-Q filings for more details on our forward-looking statements.

Some of today's prepared remarks include non-GAAP financial measures. Today we will be referencing our non-GAAP financial measures, unless otherwise noted. You can find the GAAP and non-GAAP reconciliations within our earnings release and at the back of the slide presentation. And with that, I'll now turn the call over to Dirk.

Dirk Van de Put -- Chairman & Chief Executive Officer

Thank you. Shep, and good afternoon. We delivered very solid results for the third quarter. We continued to build momentum on the top line while increasing both adjusted gross and operating margin. And we delivered another double-digit increase in adjusted earnings per share. Our third quarter organic net revenue grew 1.2%, which includes 60 basis points of headwind for one-time malware effects last year and it was supported by positive volume growth.

We also delivered adjusted EPS growth of 18% at constant currency and solid free cash flow, which is now $1.1 billion year-to-date. As I laid out at our Investors Day last month, we are excited about the growth potential of snacking. Vibrant categories like chocolate and biscuits are growing faster than other areas in food.

I want to thank many of you for attending and giving us an opportunity to share our vision and priorities around growth, execution and culture. Mondelez is well positioned to lead the future of snacking, thanks to our unique portfolio of iconic global and local brand, and our advantaged geographic footprint. Nearly 40% of our revenues come from fast growing emerging markets, which we expect will disproportionately contribute to future snacking growth.

In the third quarter, emerging markets continued to show strong momentum and delivered an increase in revenues of 6%. This was driven by positive volume and pricing, with particular strength in Russia, India, Mexico, China, Southeast Asia and Africa. Excluding Argentina, emerging markets grew 4.5%.

In North America, as we discussed with you before, we are working to address several issues in our business, which, as expected, continue to impact results. On the biscuits consumer side, overall consumption and our share were positive, with key brands such as Oreo, Ritz and belVita performing well, but we have more work to do to improve our service delivery.

Over the past couple of years we've already made significant changes in North America and we are now producing around 60% of our volume on advantaged assets in the region. We are continuing with additional end-to-end the investments in capacity, systems and people, and we are seeing the progress. However, it will take us time to fix and as such progress will not be linear.

Turning to our long-term growth strategy, I would like to share with you the progress we are making toward our strategic growth priorities, but before I do, let me remind you what they are. First, we are accelerating consumer-centric growth. Second, we are driving operational excellence in everything we do. And third, we are building a winning growth culture.

Our long-term goal is to deliver volume-led top line growth that translates into high single-digit adjusted EPS growth and attractive free cash flow generation. Unlocking further growth requires us to put the consumer at the heart of our work. We will do so by further contemporizing our brands, capitalizing on untapped growth opportunities in channels and geographies, and overhauling our marketing and innovation agenda.

Let's look at innovation in a bit more detail. As I explained at our Investor Day, we are implementing a more agile innovation model founded on the test, learn and scale principle and grounded in local consumer insights. A good example of this is the recent introduction in Europe of Joyfills, an innovative product platform that we're launching under the Oreo, Cadbury and Milka brands at the same time. Our European team has taken this idea to market in record time, creating an entirely new product format for consumers to munch on. Imagine it as a crispy, B-size biscuit with creamy filling that offers a light but indulgent treat. Early indications are positive and we're looking forward to seeing more.

Over in India, our recently launched Lickables product continues to do well with consumers, helping deliver 90 basis points of chocolate share gains year-to-date in a market where we already have strong leadership. And here in the US, Oreo, which is already posting a mid single-digit growth in the third quarter, is getting ready for the launch of the biggest Oreo cookie yet, the Most Stuf edition.

While we are driving the test, learn and scale model in local markets, we are simultaneously dialing up our overall commitment to innovation with a platform called SnackFutures, which will be dedicated to unlocking future snacking growth opportunities around the world. SnackFutures will bring together internal and external talent to drive three mandates: inventing new businesses and brands in key strategic areas; reinventing smaller brands with untapped potential; and creating ventures with early stage entrepreneurs to seed new businesses. We are excited about the potential of this platform to help us drive the future of snacking. We will share more with you in the coming weeks about this.

Another route to drive additional growth is M&A. Our recent acquisition Tate's Bake Shop performed well in the quarter, growing strong double-digit above our expectation as it continues to ramp up distribution in the US. We remain excited about this platform and the opportunity we have to scale the business while preserving what makes it unique.

Turning to the second pillar of our strategy, we remain highly focused on driving operational excellence in all facets of our business. In recent years we have focused mainly on productivity improvements and we continue to make progress in this area. In the third quarter, we drove productivity even further, which helped us deliver a 110-basis point increase in our adjusted gross margin to 40.6%. Beyond this, we are also looking to drive end-to-end improvements in our processes and systems to help make us more efficient and specifically to iron out the operational challenges that are impacting North America.

Finally, we remain committed to changing not just what we do, but how we do it by building a winning growth culture. As such, we are altering our ways of working to provoke a shift in mindset and behaviors. Starting January 1, we will shift to a new local commercial structure that will drive greater consumer focus and reduce the complexity caused by organizational overlap.

But we will continue to manage our operations by region to leverage regional operating scale. We are creating 13 geographic business units, each reporting into one of our four regions. This move clarifies accountabilities and we are aligning our incentive structure to drive greater ownership of local business results.

We believe this change will enable volume-driven top line growth and absolute profit dollar growth. With the roll out of the new structure in the regions, we will create a more agile company that can react faster to local consumer preferences, without losing the benefits of our scale and global expertise in marketing, manufacturing and innovation.

We have also announced today that Hubert Weber, Executive Vice President and Region President of our European business has decided to retire from the Company at the end of January. Hubert has led our European business during a period of exceptional change, delivering a strong track record in terms of profitability and setting up this important region for future growth. We thank him for his 29 great years with the Company and wish him all the best.

Hubert will be replaced by Vinzenz Gruber, currently President, Western Europe, who brings extensive marketing and commercial experience, as well as strong leadership credentials, both from within this Company and outside. We are confident Vince will step in right away and continue to build on the great momentum we have in our European business.

During our Investor Day, I also talked about our purpose, which is to empower people to snack right. The purpose we believe we can fulfill by providing the right snack at the right moment, made the right way. We already seeing compelling evidence of our new purpose in action. Our ambition to produce snack the right way, for instance, is manifested in our recently announced commitment to ensure that all our packaging is recyclable by 2025. And we strongly believe that if we make our products the right way, our consumers will continue to choose our beloved and iconic brands for years to come.

In summary, our third quarter results were solid. Our year-to-date momentum continues and we are well set to deliver our commitments for the year. The underlying strengths of our snacking categories, particularly in emerging markets, together with our early progress on our strategic initiatives, gives us confidence that we are on the right track to generate attractive long-term total returns for shareholders.

Now, I'd like to turn it over to Luca.

Luca Zaramella -- Chief Financial Officer

Thanks, Dirk, and good afternoon. We performed well across a number of financial metrics and continue to see good revenue and volume momentum, as well as solid margin performance that is consistent with our outlook.

Organic net revenue increased 1.2%. This top line performance includes a headwind of 60 basis points related to the lapping optimal way recovery. Emerging market performance stands out in the quarter, as it was broad-based with strong volume growth. China, India, Mexico, Russia, South East Asia and Africa, all delivered good results. These results reflect solid execution by our commercial teams, as well as robust market dynamics in our categories.

On a regional basis for the quarter, Europe's organic net revenue increased 0.2%, though underlying growth was better as these results included approximately 150 basis points of headwind related to the malware incident. Russia posted mid-single-digit revenue growth and share gains in both chocolate and biscuit, and Germany delivered solid growth in biscuit where the Milka-branded chocobakery portfolio continues to fuel strong performance.

AMEA grew 4.6% with broad based growth across all key areas. India and Southeast Asia continued to execute well with high and mid-single-digit growth while China delivered its fifth consecutive quarter of growth fueled by biscuit and e-commerce. We also saw strong double-digit results in Africa.

Latin America grew 4.6%. Although the region was impacted by inflation-driven growth in Argentina, we continued to see good momentum in Mexico which grew mid-single-digits behind both gum and candy. Brazil declined low single-digits in the quarter. We are addressing price gaps and that also made steps around innovation that will help to improve the trajectory of our business in Brazil.

North America declined 2%. While we saw positive US biscuits category and share dynamics, we continued to face a number of operational challenges which impacted volume. As Dirk mentioned, we are making investments in people, processes, systems and capacity to address our operational issues and expect improvements moving forward, although it will take time and progress will not be linear.

Let me describe what the nature of the issue is. While we have invested significantly in North America over the last several years, creating a state-of-the-art greenfield plant in Salinas, Mexico and installing new lines of the future in existing plants in the US and Canada, around 40% of our volume is still made online that do not provide full reliability.

To compound the situation, volume demand growth is putting more pressure on our network. We are making the necessary investments to stabilize the US factory network while enhancing our capabilities through people and systems as far as supply and demand planning are concerned. We are seeing some progress already, but installing capacity where needed, stabilizing some of the lines, improving our systems and adding capabilities will require some time.

Now let's review our margin performance. In Q3, adjusted gross profit dollars grew more than 4% on a constant currency basis. Positive pricing, net of commodities and productivity savings drove the margin expansion. We are benefiting from favorable cocoa cost, which was partially offset by continued freight and logistics cost inflation. We also continued to maintain pricing discipline to protect our margins in the medium to long term and have already announced and taken pricing in a number of countries this year, including our US business while striking the right balance with volume and overall profit.

Adjusted operating income grew by 4% on a constant currency basis with margins of 17.1%, up 40 basis points as a result of higher gross margins. There were several items in other income and expense line that were unfavorable when compared to prior year, partially muting the gross profit margin expansion. Cost savings in the SG&A line continued to provide upside to inflation.

On a regional basis, gross margin expansion and cost execution drove margin improvements in three of four regions. Europe grew 110 basis points to 19.8%. North America decreased by 90 basis points to 20.6%, driven by higher conversion costs in US factories and customer service and logistics costs. Latin America increased by 30 basis points to 18.1% and the AMEA improved by 120 basis points to 14.2%.

Now, let me take a moment to discuss category highlights. The snacking categories continued to display good dynamics and solid growth, building on the past four quarters, with growth of 2.7%. We remain encouraged by the overall (inaudible) categories.

Overall, we have or gained share in 60% of our business. Year-to-date, our biscuits organic net revenue grew more than 3%. Approximately 75% of our revenue grew or held share in this category, including our US, France, China, Germany businesses. In chocolate, our business continues to perform well, growing 3.5%. India, Australia and Brazil, all posted growth during the quarter. Approximately 40% of our revenue grew or held share in this category, including Germany, Russia and India.

Gum and candy growth was flat, reflecting soft but improved results in developed market. About 40% of our revenue in this business gained or held share, including China.

Now turning to earnings per share. We delivered another strong quarter of adjusted EPS growth, which increased 18% on a constant currency basis. These results were driven by favorable operating gains, taxes and share repurchases.

With respect to capital deployment, we returned approximately $800 million in capital to shareholders in Q3 and $2.6 billion year-to-date. During the quarter, we repurchased approximately $500 million in stock and paid more than $300 million in cash dividends.

Turning to free cash flow, the third quarter was a solid quarter of cash flow generation as working capital management and higher cash earnings drove results. Year-to-date we had generated $1.1 billion in free cash flow. Our team remains focused on closing out the year and delivering our full year 2018 target with a strong Q4.

Now let me spend a minute on our outlook for the year. Overall, we now expect our top line outlook for the full year to be approximately 2%. We are encouraged by our top line results as emerging market trends and overall category trends remain solid. We are maintaining our outlook for the year with respect to our adjusted OI margin, adjusted EPS and free cash flow. As you think about Q4 modeling, second half operating margins should be roughly comparable to the first half of this year.

With that, let's open the line for questions.

Questions and Answers:

Operator

(Operator Instructions) We will take our first question from the line of Bryan Spillane with Bank of America.

Bryan Spillane -- Bank of America -- Analyst

Hi, good afternoon, everyone. Two questions from me. One, just specifically in the quarter, it looked -- I think relative to where we were, you ended up delivering much better in gross profit dollars, but the SG&A was a little bit higher than we expected it to be. So, if you could just walk us through, was that more marketing, did you (inaudible) you better than expected and spend more back or was there other sort of noise that we should just think about that flow through SG&A in the quarter? And then I have a follow-up.

Luca Zaramella -- Chief Financial Officer

Thank you, Bryan. So I'm quite pleased with the gross profit growth, more than 4% gross margin, as we said, up 110 basis points. So, delivering on our commitments. It didn't translate fully into OI margin as last year we had a few positives into the other income line and this year we had a few unfavorable items in the other income line that resulted in unfavorable comparisons. But in terms of overhead specifically, I would say that we did a good job in the quarter continuing the cost savings you have seen so far this year and we have been offsetting inflation.

And as far as A&C goes, in general it is in line with last year. So, no major changes, but we have unlocked some more investment, specifically in the quarter in a couple of places where we see good momentum and there would be more to come in Q4. So it was not A and C in total in the quarter, it was not overhead cost, it was the -- some unfavorability this quarter in other income lapping favorability last year as we had asset sales and little bit of insurance claims that were refunded.

Bryan Spillane -- Bank of America -- Analyst

Okay. And then as a follow-up to that, Dirk, it's early, you're beginning to make early progress against your strategic plan and is that's unfolding, could you just sort of give us an idea of how you're thinking about spending levels for 2019. And how should we should think about that as we're looking at our models and looking at the opportunities going into next year?

Dirk Van de Put -- Chairman & Chief Executive Officer

Yes. Bryan. Well, first of all, maybe a little bit on the strategy in general, we have a number of premises in our strategy as we announce it in September. The first one was that snacking is a great place to be in food these days and the quarter confirmed that with 2.7% growth of our categories worldwide, even if we had a significant heat wave in Europe which obviously impacts chocolate sales. And then the other premise was that emerging markets will continue to drive growth and they were particularly strong in this quarter with 6% growth. So we feel good about those two premises, they were confirmed.

And then as it relates to the other three strategies that we laid out, accelerated consumer-centric growth, we continue with our new marketing playbook. We did a number of innovations that were launched, I talked about a few and we keep on being focused on M&A. Operational excellence, we talked about gross margin, also the new organization we are putting in place, the recyclable packaging . And then as it relates to the culture, again that new organization which pushes accountability closer and the new incentive plan that will reward profit dollars and volume growth.

So, we are on track. We are making progress on all these three strategies and I can go deeper into detail if you would like to. But overall, what we're expecting for the spending next year and we're still of course finalizing the plans, but we expect those to be in the four big areas. The first one would be, of course, A&C. The second one in overall capabilities of the Company, the third one in quality and the fourth one in route to market. The specific levels are probably a little bit early to comment on, but we're expecting those four areas to see a significant increase next year.

Bryan Spillane -- Bank of America -- Analyst

But fair to say that still incorporated in the guidance that you gave us for '19 back in September?

Dirk Van de Put -- Chairman & Chief Executive Officer

Yes, no change there.

Operator

Our next question comes from the line of Ken Goldman with JPMorgan.

Ken Goldman -- JPMorgan -- Analyst

I'd like to ask one quick one and then a broader one, if I can. For the fourth quarter or for the second half, I think you said that you expect your operating margin on a pro forma basis to be roughly the same as in the first half of the year. I think that implies maybe an operating margin in the fourth quarter lower than the annual average, maybe something like 16.3/16.4% basis. Can you confirm that I'm doing my math there very quickly, I just want make sure because as we think about the modeling?

Luca Zaramella -- Chief Financial Officer

Ken, as you think about our margin year-to-date, OI margin is roundabout 16.8%. I think as we guided the full year to approximately 17%, I would say Q4 is roundabout in line with the year-to-date number.

Ken Goldman -- JPMorgan -- Analyst

Okay. And then I'll follow up on that. My broader question is, I just wanted to ask about pricing in the US. I think the number you had over 1% was the best in few years this quarter and the comparison was relatively difficult. So can you just help us understand a little bit about the balance between list pricing, how much is list pricing driving the success versus lower promotions. I really just want get a better idea of how sustainable this pricing is because it's obviously a very sensitive topic for many CPG companies in the US today.

Luca Zaramella -- Chief Financial Officer

I think we have work to do in the US, quite honestly, but I think pricing and the right balance between volume and pricing is something that we feel quite good about. If you look at the US market and what we have done in biscuit not only this quarter, but over the last few quarters, I think you see in consumption terms, a nice balance in biscuits between volume and pricing. So going back to your specific question, we implemented pricing earlier in the year, which was a line pricing increase on some of our local brands and that is coming in effect now.

We have optimized promo spending and again I think we found the sweet spot in some of our brands where I think that where some inefficient promotions in place, and as I said, we are pleased seeing volume and pricing growth in the marketplace in consumption terms. And we introduced some price back architecture. So, we really use the full array of tools to implement pricing in the US.

In addition, as we said, we have announced that regional pricing across biscuits, gum and candy, and that pricing will be effective as of Q1 next year and it will be for the vast majority line pricing. I think based on what we see these days, quite happy with the share gains and the balance, as I said. So we have confidence in the fact that this is the right move. And I think as you look at the sustainability of the category and the ability we have to invest, I think clearly given the inflationary pressure we see in some commodities and logistics cost, this is right thing to do.

Operator

Your next question comes from the line of Andrew Lazar with Barclays.

Andrew Lazar -- Barclays -- Analyst

Good evening, everybody. Just two quick ones from me. First, to reach 2% organic top line for the full year, I suggest around 1% organic top line in the fourth quarter, obviously slower than the 2.3% rate year-to-date and even down sequentially from the third quarter of 1.8%, if you exclude the malware impact. So I guess I'm trying to get a sense, is there something specific that you see as slowing the organic down in 4Q or really just sort of thinking conservatively at this point?

Luca Zaramella -- Chief Financial Officer

We are clearly encouraged by the top line evolution and we see clearly momentum, specifically across emerging markets. We are happy with the volume and pricing balance. Categories, as we said, are quite vibrant specifically in emerging markets. Having said that, I think we want to be thoughtful about the fourth quarter.

As you know that in the US there might still be some challenges, even if we see improvement clearly, in Q4 in October, specifically. So I think it is just us wanting to be thoughtful about about the fourth quarter and I think we see light to that 2% even in Q4, but honestly around about 2%.

Andrew Lazar -- Barclays -- Analyst

Thanks for that. And then when you think about the 2% to 3% organic top line growth forecast for 2019, what is the at least currently your category growth expectation that's sort of built into that number? Really what I'm trying to get at is, how much in the way of share gains are really needed at this stage in your best guess to hit that 2% to 3% for next year?

Dirk Van de Put -- Chairman & Chief Executive Officer

Well, we see the categories, we see them at the moment growing at 2.7%. In our strat plan we had foreseen that they would be around 3%, us aiming at 2.5% for next year means that we do not see any market share gain for next year. We're largely aiming to stay in line with the market.

Operator

Your next question comes from the line of Alexia Howard with Bernstein.

Alexia Howard -- Bernstein -- Analyst

Good evening, everyone. Can I ask about the product strategy here in the US. I've been looking at the Nielsen data and it seems as though the big launch of the chocolate product a couple of years ago seems to be being undone, gum seems to be getting a little bit better sequentially, I don't know whether you're putting more investment in there, as you also trying to migrate one of those brands into the mint segments.

Obviously, you still got the cookies strategy going strongly. I think there may have been some innovations that didn't quite work in crackers. Could you just give us a sort of quick summary of what you're actually focusing on and what the strategy is product category by product category here? Thank you.

Dirk Van de Put -- Chairman & Chief Executive Officer

So, maybe I'll start with chocolate. Yes, we entered the US chocolate market, which is highly competitive and we know that it will take some time, but we're trying to leverage the power of the Oreo brand there. I think it's a good example of extending our brands to play in adjacent categories, but obviously it is going to be a niche type of play and we see very positive indicators as it relates to Oreo chocolates, very strong consumer response with highest repeat rate of any recent innovation in the category.

So overall, we think we feel pretty good about it. We just are going through the second year after the launch and I think it's normal to see a little bit of a decline there. As it relates to gum, yes, the gum market itself has been doing better. We are seeing a very nice category growth coming back in the US and you see a little bit of a better performance from us driven also by a new innovation called Trident Vibes, which we have also launched in China under the Stride brand and we are seeing good results there with an early share taking off 1.2 points.

And then as it relates to cookies, I would say that the crackers are relatively flat as we see our shares, but in the rest of the cookies segments we are seeing quite interesting growth. Oreo is around mid-single-digit, belVita is up quite nicely, Ritz which is doing well. So as you saw there, we're doing quite well in our cookies approach, but overall I would say there are some wins and some losses there, but overall we feel pretty good about how things are going.

We didn't mention candy but Sour Patch Kids is doing quite well in the candy segment. So, yes, there some ins and outs, but overall I think if you look at all the categories, we're increasing our market share.

Operator

Our next question comes from the line of Chris Growe with Stifel.

Christopher Growe -- Stifel -- Analyst

Hi, just had a question for you, if I could. I wanted to ask around the chocolate category. You have seen cocoa cost come down, are you seeing more competition emerge in that category? I thought you were holding or gaining share only 40% of the category, yet the sale was strong in the category and for your business as well. So I'm just curious how the competitive dynamics is shaping up in that category?

Dirk Van de Put -- Chairman & Chief Executive Officer

Yes, the category growth is strong, it's about 3.6%. Our revenue growth was 3.5%, so quite close. Yes, we have 40% of holding or gaining share. That is largely due to, I would say the some areas, Australia-New Zealand, we lost some share in France, Sweden, but overall, if I look at the performance, I don't think it's particularly something that we're concerned about. We've seen big competition showing up. For instance, in chocolate, the overall growth is still quite strong in mid-single-digits overall, but the emerging markets are growing high single-digits and the developed markets, maybe took back a little bit in the third quarter, but overall I think we feel pretty strong about our chocolate performance.

Christopher Growe -- Stifel -- Analyst

Okay. No areas of price competition emerging as costs go little more favorable in cocoa?

Luca Zaramella -- Chief Financial Officer

No, I don't think there is really anything to worry about. We are lapping a quite high share number. Last year in Q3 we gained quite a bit of share across the board. So I think about that as phasing, it will come back.

Christopher Growe -- Stifel -- Analyst

Okay. And I just have a quick question to follow-up on North America and it's that we have seen the prior year, obviously had the comp issues, but I have seen of late the consumption data weaken a little bit, yet still very strong in cookies, I would say. Can you just react to that and give a little bit feel for how that should shape of in the fourth quarter given some of the lingering issues you've had in that division?

Dirk Van de Put -- Chairman & Chief Executive Officer

Yes. The lap for cookies versus last year, there was a big buildup for the hurricane last year. So, yes, the overall category growth was a little bit slower, but we attribute that largely to a very tough comparison for last year. Year-to-date, we see the category at 1.9% with our share being up 0.7% in the last quarter. Our share grew a full point.

We expect the category to be coming back to higher levels as we don't have a lap affect anymore. So we have no particular indication that the category would be slowing down.

Operator

Your next question comes from the line of Steve Strycula with UBS.

Steven Strycula -- UBS -- Analyst

Hi, good afternoon. Two-part question. I wanted to ask about Latin America and three of your bigger businesses there with Brazil, Mexico and Argentina, given the inflation that we're seeing in some of those markets and volatility around elections, can you talk about how you're managing each of those businesses from both a pricing and volume strategy and comment on how some of the key competition, whether it's particularly local competition if it's following? That will be very helpful. Thanks.

Dirk Van de Put -- Chairman & Chief Executive Officer

Yes. Maybe I'll comment a little bit and then hand it over to Luca, specifically on pricing. Overall, in Latin America we continue to see very positive organic growth and I think we are managing well through the emerging market volatility. The revenue growth in Q3 was driven largely by Argentina and Mexico, and Brazil declined. I'll leave it up to Luca to comment a little bit on Argentina and the situation there.

Mexico, we are very positive, we made a very solid performance, mid single-digit and gum and candy continue to be very strong. And then in Brazil, yes, we had a decline which was in line with expectations, but the good thing there is that we are addressing some of the chocolate price gaps that we've had in the beginning of the year and that is helping us to regain some market share in chocolate.

So we feel pretty good about that. Overall, I would say as it relates to management, Mexico, we don't see a particularly. Argentina, we're seeing high inflation. Yes, we need to be very vigilant. And then, again, Luca will comment on that. But Brazil, we feel pretty optimistic about next year in Brazil. We see indications that things will improve and we are counting on a positive sales growth in Brazil for next year. Luca?

Luca Zaramella -- Chief Financial Officer

So, specifically in Argentina, it is roundabout 2% of our revenue. And given the high inflationary environment, we are managing it quite frankly a little bit differently than the other two countries that Dirk had mentioned, Brazil and Mexico. It is a disciplined approach the one we are taking to protecting cash flow and value. In fact in the quarter and consistently throughout the year, we did double-digit pricing that drove revenue. We are happy with the way we are protecting cash flow and value in that country.

In fact I can tell you that our margin in the quarter was in line with last year. So, it is a fine line between understanding how to price, protecting cash flow and also with a look of not losing too much scale in the country. As you know, it is tough to see it, but I think potentially one day that is a country with sound economy that could grow and be a good business for us. So it is a fine balance, but it is a different way of managing it that we have compared to others countries in Latin America.

Christopher Growe -- Stifel -- Analyst

Thanks, Luca. I have a quick follow-up, if I can. I wanted to ask about the different moving pieces with the coffee business, how you've recasted financials there. What should we be using as a 2017 baseline for all of the coffee equity income from last year and then ultimately not got specific guidance, but how would you generically guide for the full year 2018, again, given the change in reporting you guys put out there. Thank you.

Luca Zaramella -- Chief Financial Officer

It is a tricky question to guide to on coffee because clearly KDP a publicly traded company and that is one of the reasons we decided to go on the lap. There was on 8-K earlier in the month where you can find the details by quarter. But simply said, the impact of moving us to a lag, it is not going to be material in the year.

So I can give you more details maybe separately and take you through some of the highlights of the 8-K, but think about consistency with what we said before in the context of double-digit EPS and the synergies that KDP is going to deliver.

Operator

Your next question comes from the line of Robert Moskow with Credit Suisse.

Robert Moskow -- Credit Suisse -- Analyst

Dirk, I think you mentioned a new pricing that's going into effect in first quarter across multiple categories. Can you remind us what markets those price increases are going into effect. And if it's in the US, what was the pitch to the trade for raising price, is it to offset commodities or freight and did you make any kind of product quality improvements to help justify the increase? Thanks.

Dirk Van de Put -- Chairman & Chief Executive Officer

Yes. Well, I'll first comment on North America. As we explained before, in the middle of the year we did an increase spread between the line price increase, price back architecture and promotional optimization on the local brands that we have. And then we are doing a price increase across the line at the beginning of next year. We will do more of the same as it relates to those three mechanism of increasing prices, but it's a bit more line price increase that the beginning of the year. We believe that it's the right move for us, seeing the overall environment and the way our categories are behaving at the moment. It will allow us to make the right investments in our brands and in our categories.

So, at this stage we think that is probably the best way to do it. Of course, there are cost pressures also related to this as it relates to freight and some commodities. The trade is well aware of that. So they understand that, that is some of the reasons why we're doing those price increases. Around the world, I would say it's a little bit the same story although less pronounced. We're doing some price increases in other countries, but it is not of the magnitude that we have to do in North America.

Robert Moskow -- Credit Suisse -- Analyst

Okay. I wanted to follow-up on chocolate in Europe, whether that is included in the price increases in the first quarter or no pricing?

Luca Zaramella -- Chief Financial Officer

We cannot comment on specific pricing actions. As we said about pricing, the vast majority of pricing, it is coming in effect in emerging markets excluding Argentina. We are pleased with what we see there. I think if you look and extract Argentina from the number of emerging markets, you see a growth that is 4.5%. It is underpinned by pricing, but there is also a nice component of volume.

So, I think about pricing being in effect in emerging markets, pretty much on the vast majority of those markets and we're watching closely volume dynamics because we don't want to lose momentum and we want to preserve that operating leverage, that is the foundation of the plan we presented at the Investor Day.

Operator

Your next question comes from the line of David Driscoll with Citi.

David Driscoll -- Citi -- Analyst

One quick clarification, I think you said that the first half operating margin, which I think was 16.7% and the second half operating margin will be same as first half, but then the full year guidance is like 17%. Can you just clear that up for me just for and I hate to be so particular on basis points, but it almost sounds like the two pieces of guidance would mathematically come out with a number below 17%. And maybe that is the right answer, but can you just clear that up right now.

Luca Zaramella -- Chief Financial Officer

Yes. As I said on the year-to-date basis, the margin is 16.8%. I think it was roundabout 16.7% in the first half. As we guided to approximately 17%, see Q4 pretty much in line with both the first half and and the Q3 year-to-date number, so it will be approximately 17%, a little bit below and in line with the full year guidance we gave.

David Driscoll -- Citi -- Analyst

Okay. That's fine. And then on the US pricing that you have going into January 1, what was the size of the price announcements that you've made implementing on January 1?

Luca Zaramella -- Chief Financial Officer

We are not getting into specific details, but as we said, it would be across the three categories, biscuits, gum and candy. And it will be different by brand and we have looked into potential, you know, elasticity impact and we are trying to strike right balance between preserving the volume and pricing momentum that we see in the marketplace these days and preserving margins going forward.

David Driscoll -- Citi -- Analyst

Final one from me, volume was positive on a year-to-date basis, but negative in the third quarter. When you move into the fourth quarter, does volume turn positive again leading us into 2019 with the expectation of positive volumes?

Luca Zaramella -- Chief Financial Officer

This quarter comps are clearly affected by the malware additional shipments last year, but I can assure you that the underlying dynamics are pretty much unchanged versus the previous quarters. I think you should look at the year-to-date volume and pricing balance. And as you look at that, I think what you see is that growth is half attributable to volume and the other half is pricing. Think about those dynamics continuing in Q4, but don't look at Q3 and draw the conclusion that volume will solve because we are lapping malware last year and I think, again, as you look at the dynamics of the emerging markets, Europe and Latin America, it is quite frankly in line with what we have seen so far this year.

Dirk Van de Put -- Chairman & Chief Executive Officer

And then I would like to add that, for 2019 we have studied the elasticity of our price increases quite carefully, so we don't provide any specific guidance on split between volume, mix and pricing. But we are working toward that goal of the volume, that growth over the long term and we feel that the current dynamics we are seeing of the positive volume, mix year-to-date that we can continue that into next year.

Operator

And our last question comes from the line of Rob Dickerson with Deutsche Bank.

Rob Dickerson -- Deutsche Bank -- Analyst

Great, thank you. So I guess just to (inaudible), excuse me phrase, is just in terms of 2019 and as we discussed the price increase across the categories, the expectation would that there would still be a balance between the pricing and the volume or are we thinking even though the goal, obviously, the target is to have volume-driven top line, longer term, maybe in '19, it's a little bit more tilted to pricing upfront. Is that fair? That's my first question.

Dirk Van de Put -- Chairman & Chief Executive Officer

Yes. As I just said, we are counting on the same, good balance between volume, mix and pricing to continue into next year. We will see how things play out, but at the moment we are planning for something similar to this year. As we said, we have means of playing around with promotional spending and that allows us to play around with how much we will get from volume. So I wouldn't expect that it's going to be a huge change for next year. At this stage, we feel pretty confident that the current formula is working for us that we can extend that into 2019.

Rob Dickerson -- Deutsche Bank -- Analyst

Okay, fair. And then just housekeeping items and that's all I have -- from the Investor Day, I believe you said the expectation was essentially to next year favorable trends in terms of GDP improvements, which would drive that 3% category growth. It seems like snacking maybe -- all then maybe driven more by biscuits, in Q3 came in a bit, it sounds like you have the category growth is a bit below what the strat plan showed as you said. So I guess the first question is, is there anything that really changed in terms of biscuit growth trajectory into '19, is that partially driven off of different GDP expectations.

And then just secondly and simplistically, it looks like the currency effect for next year that you mentioned in your Investor Day was the same, that you put out today, but it did seem like the currency complex changed a bit over the past two months. So I'm just curious if there are any go-forward currency shifts relative to two months ago for '19.

Luca Zaramella -- Chief Financial Officer

Yes, let me start maybe with the ForEx impact. The ForEx impact is very nice as we had for Investor Day but it happened to be a coincidence, there were various puts and takes and I can tell you that in general with the profit component of emerging market, EPS was improved, but we had the Euro zone that lost a bit. So it happens to be the same. It was refreshed as of last week. So the number is the same, but it is a coincidence.

In terms of categories, I think the guidance we gave you in terms of top line for next year, which is 2% to 3% calls for a category dynamic that is in line with what we have seen this year and in line certainly with the 2.7% on a year-to-date basis. There might be puts and takes, but that is where we see the category, the snacking category playing out for us this year and next year.

Dirk Van de Put -- Chairman & Chief Executive Officer

So in closing, I am proud of the work of our teams across the business and the results that we are currently seeing. We are very encouraged by the progress in our emerging markets, which were particularly strong this quarter and of course where we see this significant amount of our future growth to be derived.

Europe remains a solid business for us and there is work to do in North America, but I'm also confident in the opportunity for that business to start growing. I would say that our new long-term strategy is generating excitement in our business. We are building from a position of leadership in our markets and we are taking steps to further strengthen our capabilities and capture opportunity as we explained.

I'm here thinking particularly of the change in our commercial model, which is more consumer-focused and we'll drive greater local accountability. I'm also excited about the test, learn and scale approach that we're taking in innovation and then our increased focus on M&A, and Tate's is a good example of what is more to come.

And we also mentioned that we are planting the seeds for future growth with the launch of our new SnackFutures platform of which we will inform you more in the coming weeks and there is a overall incentive structure is changing. So we feel good about this quarter and good about the coming quarter and next year. So, I look forward to sharing more of our progress with you in the quarters to come.

And thank you for your interest in the Company.

Operator

This concludes today's call. You may now disconnect.

Duration: 64 minutes

Call participants:

Shep Dunlap -- Vice President, Investor Relations

Dirk Van de Put -- Chairman & Chief Executive Officer

Luca Zaramella -- Chief Financial Officer

Bryan Spillane -- Bank of America -- Analyst

Ken Goldman -- JPMorgan -- Analyst

Andrew Lazar -- Barclays -- Analyst

Alexia Howard -- Bernstein -- Analyst

Christopher Growe -- Stifel -- Analyst

Steven Strycula -- UBS -- Analyst

Robert Moskow -- Credit Suisse -- Analyst

David Driscoll -- Citi -- Analyst

Rob Dickerson -- Deutsche Bank -- Analyst

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