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The Kraft Heinz Company  (NASDAQ:KHC)
Q3 2018 Earnings Conference Call
Nov. 01, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day. My name is Latif, and I will be your operator today. At this time, I would like to welcome everyone to The Kraft Heinz Company's Third Quarter 2018 Earnings Conference Call. I will now turn the call over to Chris Jakubik, Head of Global Investor Relations. Mr. Jakubik, you may begin.

Chris Jakubik -- Head of Global Investor Relations

Hello, everyone and thanks for joining our business update. We'll start today's call with an overview of our third quarter and nine month results, as well as our view on the path forward from Bernardo Hees, our CEO; and David Knopf, our Chief Financial Officer. Then, Paulo Basilio, President of our US Zone will join the rest of us for the Q&A session.

Please note that during our remarks today, we will make some forward-looking statements that are based on how we see things today. Actual results may differ materially due to risks and uncertainties and these are discussed in our press release and our filings with the SEC. We will also discuss some non-GAAP financial measures during the call today. These non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the end of the slide presentation available on our website.

Now let's turn to slide two and I will hand it over to Bernardo.

Bernardo Hees -- Chief Executive Officer

Thank you, Chris, and good afternoon, everyone. Three months ago, we said that we expected organic growth from Q3 onwards driven by a stronger, more incremental marketing and innovation pipeline, leveraging investments in category management and go-to-market capabilities and supported by incremental merchandising spend and best-in-class customer service. Today, we believe, and are confident, our Q3 results show that the turnaround of our top line performance is firmly under way. Not just in terms of headline organic growth, but also real volume growth.

The transitory factors that negatively impacted first half sales are fading as expected, and we saw further improvement in consumption trends in most countries and most key categories. In fact, on a global basis, more than half of our categories saw consumption growth in Q3. In our categories in United States, are going to a trend bend, with aggregate consumption across our categories, improving nearly 2 percentage points in Q3 versus Q2. Excluding planters club entity, they are flipping from negative to positive.

Our market shares are also improving. Across the total Company, Kraft Heinz is holding or growing share in more than half of our categories, including very strong market share gains in our Rest of World markets. And finally, we continue to see solid performance in non-measured channels, including e-commerce and global food service. Breakthrough innovation and strong in-store activity, distribution gains and whitespace expansion are coming together. Overall, while we did provide solid end market support for these activities and pricing in Q3 was down versus the prior year, it's important to note that our commercial growth is positive.

Commercial profitability or the profit contribution from price, volume and mix is positive and growing. Execution is improving, and our pipeline is getting stronger, both in terms of innovation and go-to-market initiatives. At the same time, third quarter profitability was held back by several one-off factors, including commercial investments, the unfavorable impacts of bonus accrual versus 2017 and supply chain inflation as we expected, but also, by our decision to prioritize customer service as you saw volumes ramp-up and for goals, some degree of profitability in the short term.

In the end, we are confident pushing commercial growth higher, given the greater visibility we have on both retailer support and consumer interest in our programming as well as below-the-line for favorability from both tax and lower-than-expected interest expenses that we see coming through. And as David will discuss, we are equally confident that profitability will improve going forward, as one-off negative factors from Q3 fall away. But before I hand it over to David, I think it's important to recognize that the commercial growth you're now seeing, and I believe that are in the path to sustainable, profitable growth, and driven by the fact that we are adapting the Company with speed. And doing these two investments in both, our people and in-house capabilities.

On the slide 3, we show this fixed goals from the post integration framework, we introduced early this year. During the third quarter, we continued to make good progress in each one of those areas. More important, the different investments and in-house capability we have built are now coming together for measurable, sustainable gains and making our brands more relevant than ever. For instance, look at our efforts in data driven marketing and brand building and innovation, we can see in United States that our ratio of quality impression to built our is impression these high at 75%, significantly outpacing the industry average, earn it and median (ph) impression, I expected it to be up 9% in 2018 versus the prior year. In year-to-date, we have had $14.5 billion PR impressions versus $13.5 billion of all of 2017, all good numbers, but more powerful when you consider how these two areas come together to drive incremental gains.

For instance, again in the United States, our PR campaigns to generate awareness for the launch of Heinz Mayo, not only lead to strong share gains in Mayo, but gave birth to a new product, Heinz Mayochup, which just landed of the shelves of American retailers and we will be going to the UK next. This summer, Country Time rally people to save lemonade stands contributing to the strong gains we're seeing in our beverage mix business. And now our renovate all natural Capri Sun line up is taking ongoing in-school cafeterias through the hash tag SitTogether pledge.

The data driven insights and the in-house capability that drive these results are scalable and sharable across all categories and geographies. I mentioned on last call that you felt, that you had the strongest pipeline of activities in place. In our short history at Kraft Heinz and the numbers are starting to prove it. In a similar fashion, our efforts to reinvent category management by deploying tools like revenue management, assortment management and planograms are supporting and informing everything we do, as we expand go-to-market capabilities around the world. For instance, we have more than doubled our in-store headcount in United States, now fully trained Kraft Heinz employees armed with insights from our category management tools are helping to drive faster product velocity.

In areas where we have a greater in-store coverage, we're seeing better performance in our key power windows, lower rates of out-of-stock merchandising and brand activation to display and shelving initiatives. This will help us push our total dollars velocities ahead of category average, and in both meals and sauces, our combination of power house brands and optimize category management activities is driving to all our velocities 40% and 28% above their respective category average.

And we have been able to push strong incremental gains with innovation like Just Crack an Egg, which in the third quarter had velocities that outperformed its entire category. The old United States retail in foodservice, you are seeing the benefits from assortment management as we look to expand distribution and drive incremental gain in each region of the world, while reducing complexity in our supply chain. And in the digital space, our year-to-date e-commerce sales in United States are up roughly 80%. We are capturing our fair share. And in mainly focused categories like snack, nuts and condiments, we are significantly ahead of our fair share.

That being said, we still see a low run away for global growth. The dignity to further leverage our data-driven insight and category management knowledge and we're investing aggressively in the next generations of capabilities. These initiatives include deploying the next generation of our Kraft recipes website, a cornerstone of our relationship marketing effort, building easy-to-use mobile technologies that learn about you and your family, recommends meal plans and seamlessly connect you to grocers.

And establishing a venture capital fund that can invest up to $100 million in emerging debt companies to further strengthen our business model. From a capability building perspective, these initiatives can improve our ability to engage consumers in an environment characterized by expanding retail channels and fast-changing shopping patterns.

Finally, what make all of this come together is our effort to build best-in-class operations, as well as recruit, develop and align our people. In operations, we continue deliver against industry leading targets, we set for ourselves in quality, safety and customer service in all geographies where we operate. Cost is one area we are falling short this year. This is due to a combination of greater-than-expected cost inflation in United States, our desire to invest and protect customer service as we revamp up volumes, as well as it relate to the figures to delay some savings projects to avoid operational disruption.

That said, we believe we have the right people, the right training and the right level engagement to execute it with excellency in all areas going forward. Specifically, our employees recruiting remain strong with more than 85 candidates for each spot in our United States trainee and MBA program, and more than 400 candidates per spot internationally.

And our vertical promotion ratios are up versus prior year showing meritocracy in action. To summarize, we feel good about our commercial performance, sales and profitability and our ability to sustain this positive momentum. We continue to build and deploy new capabilities and adapt with speed. And while we have seen and accepted more volatility in EBITDA in the near term, we believe our investments will allow our brands to be there in a bigger way tomorrow.

I will now hand it over to David to provide more color on our results in our path forward.

David Knopf -- Chief Financial Officer

Thank you, Bernardo, and hello everyone. Turning to our results on slide 4. Total company organic net sales were up 2.6% in Q3, bringing year-to-date organic growth into positive territory. This was driven by 3.5 percentage points of volume mix growth in Q3 and bringing volume mix to essentially flat through the first nine months. Encouragingly, this performance was driven by volume mix growth in every reporting segment and led by consumption growth in a majority of US categories. Pricing was down 90 basis points in Q3 driven by increased promotional activity and key commodity related pricing in the United States, that more than offset higher pricing, mainly to offset local inflation and rest of world markets.

By segments, the US had a strong volume mix led quarter characterized by consumption led growth across the majority of categories. As expected, the change from positive first half pricing in the US to lower pricing in Q3 was primarily driven by combination of three factors. One, lacking carryover pricing from last year; two, increase in-store activity to support our commercial pipeline, including higher year-over-year support in natural cheese and ready-to-drink beverages; and three, passing through recent declines in some key commodities during the quarter, mainly bacon.

In Canada, while we saw solid growth in coffee and mac & cheese, sales were down as anticipated from a combination of select product discontinuations, higher promotional expenses in the current year as well as comparisons with prior year limited time condiments offers and activities that were not repeated. As we mentioned on our last call however, we do expect a solid pipeline of activities through our current return candidate to growth in Q4.

EMEA stayed in positive growth territory in Q3 as strong growth in Southern Europe and Germany where we continue to grow the Kraft brand more than offset some one-off headwinds in Middle East and in Russia, where we ran into destocking activity related to World Cup related promotional products. That said, we expect EMEA to improve sequentially in Q4 as the headwinds in Middle East and Russia fall away. And in rest of world, in addition to the strong contribution from pricing we've seen all year, Latin America drove strong organic volume mix gains from a combination of pasta sauce and condiments growth in Brazil as well as whitespace expansion across the region. And this more than offset lower shipments of canned seafood and cordials in Indonesia.

Moving to EBITDA, Q3 adjusted EBITDA was in fact lower than expectations we had outlined in our previous earnings call, resulting in year-to-date adjusted EBITDA now being down 7.2% on a constant currency basis. We certainly benefited from organic net sales growth, and in fact our commercial profitability with the profit contribution from volume mix and pricing combined was positive. Despite all the stepped-up merchandising activities we carried out during the quarter.

However, several factors -- factors that we do not expect to repeat negatively impacted both EBITDA growth and our absolute level of profitability in Q3. As expected and as we outlined in our previous call, year-on-year EBITDA growth was negatively impacted by a combination of the commercial investment programs we've talked about all year, the swing from overhead favorability last year to a more normal bonus incentive compensation accrual this year and the non-key commodity inflation we previously noted.

In addition to that, our absolute level of profitability in Q3 was negatively impacted by three factors. The first was higher-than-expected one-off operating costs in the US from our decision to prioritize customer service, delays on saving projects to avoid disruption, and buy more spot market freight during the quarter than we otherwise would in the normal course of business.

Second was, a disproportionate impact from commercial investments particularly marketing as we stepped up our investment levels in the second half of the year. And third, were some unanticipated one-off supply chain costs, mainly in the Middle East. Looking forward, we expect both EBITDA growth and our absolute level of EBITDA margin to improve beginning in Q4. Specifically, we expect to sustain our organic top line momentum. The one-off factors that drags Q3 EBITDA down should fall away, and on top of that, we expect to see a better year-on-year balance between cost inflation and savings.

Finally at adjusted EPS, we were down $0.05 versus Q3 last year, as lower taxes on adjusted earnings in the current period mitigated part of the adjusted EBITDA decline. I would also add here that, for the full year in 2018, we now expect an effective tax rate of approximately 20% versus 21% previously and incremental interest expense in 2018 should be roughly $70 million versus the $80 million we previously outlined. Which leads to our outlook on slide 5.

I'll start by reiterating what we said before, that we believe the pipeline and capabilities are now in place for us to push on more aggressive growth agenda from innovation that drives incremental consumption to distribution gains across channels and expanding our brands into geographic and category whitespace. We continue to believe we're in a strong position to deliver organic growth for the full year and sustain that momentum into 2019. We also expect a much better balance of top and bottom line growth going forward. 2018 has clearly been a year where results have been more or less dominated by number of transitory issues on both the sales and cost sides of the equation that we do not expect to repeat. At the same time we've essentially accelerated what would have been three years of commercial investments into 2018, push commercial growth even harder than originally planned, given greater visibility or the likely success of our pipeline, and this was largely offset by tax savings.

Going forward, we feel good about our ability to continue driving commercial growth and our ability to drive EBITDA dollar growth and industry leading margins as one-off factors fall away and the contribution from our savings initiatives accelerate. To close, I think it's worth repeating the thoughts that we've expressed all year, that we're developing capabilities to create brand and category advantage and achieve profitable growth; that we're investing aggressively now in order to see benefits sooner; and that these are the key factors shaping our near term results into 2018; and we believe will drive sustainable profitable growth into 2019 and beyond.

We think our focus on EBITDA dollars and our return-based discipline and sales, marketing and innovation will leave us well positioned to deliver top tier organic growth at industry leading margins. We have good visibility on considerably better, post integration cash flow, we have and will continue to strengthen our balance sheet and credit standing through both derisking and other activities such as divestitures of non-core assets when consistent with our strategic framework as we recently announced. And our ability to continue building brand and category advantage through differentiated capabilities will not only be a key enabler, but we'll make two plus two equal more than four in the event of a transformational deal.

Now we'd be happy to take your questions.

Questions and Answers:

Operator

Thank you. (Operator Instruction) Our first question comes from the line of Ken Goldman of JP Morgan. Your question, please.

Kenneth Goldman -- JP Morgan -- Analyst

Hi. Thank you so much. I'm wondering if you can help us quantify the magnitude of what you would consider one-time or non-recurring cost in the P&L, there's a lot of different costs, there's a lot of different things that drag down your EBITDA this quarter. I think some of them like marketing probably don't go away, some of them like maybe the customer service issues, maybe do go away. I'm just trying to get a sense of that, because it's difficult to maybe model ahead unless we have a better understanding of sort of what just happened?

David Knopf -- Chief Financial Officer

Hi, Ken, this is David. Thanks for the question. So, as it break the (ph) sounds, I think the first thing to reiterate here is commercial profitability for Q3 or the profit contribution from volume/mix and pricing combined was positive, OK, which is good, considering all the growth initiatives and stepped up merchandising activity that we had in the quarter. So we're very happy with that. Beyond that, there is four main drivers of the year-over-year decline, many of which were one-off in nature.

So first, we have the stepped up commercial investments that we previously outlined, look Q3, seeing the heaviest quarterly impact within the year. Second, we have the swing from overhead favorability, we mentioned last year to more normal incentive compensation accrual this year. So that is one-off in nature. Third, we had additional cost inflation that we previously noted, however, the impact was worse than Q3 from our decision to prioritize customer service as our volumes ramped up through the quarter, which in turn led us to delay certain supply chain savings projects and also by more spot market freight than we otherwise would have. So, a lot of those factors were in fact kind of one-off in nature with the quarter.

On top of that, we had some unanticipated one-off supply chain costs that were mainly related to the transition of the Middle East business to our European business. All that to say, we're not going to provide precise numbers around it, but we expect both EBITDA growth and our absolute level of profitability to improve significantly beginning in Q4 and into next year versus what we saw this year and in the first half.

Kenneth Goldman -- JP Morgan -- Analyst

Okay. And then can you, as a follow-up, just the prioritizing of customer service is a headwind. Can you just walk us through what that means in practical terms, I'm not quite sure I understand, in this case?

David Knopf -- Chief Financial Officer

Yeah, sure, Ken, this is David, again. So I'd say, some of the savings projects that we had anticipated for this year, were very much variable cost in nature. So things like yield and variable labor, so, and this is versus fixed costs that we've captured over the last three or so years. So we decided to delay some of those productivity initiatives that we're executing across our factories, and this is really to ensure that there was no disruption as volumes ramped up in the quarter and ramped up more than frankly we had expected. On top of that, the additional volume that we didn't anticipate above and beyond what we planned for came at additional costs, a lot of those costs are logistics or freight-related.

Kenneth Goldman -- JP Morgan -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Bryan Spillane of Bank of America. Your question, please.

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

Hi, good afternoon, everybody. Two questions from me, one just a follow-up to Ken's question. I think on the last earnings call, the expectation was the EBITDA split for the year would be roughly 50-50 first half-second half. So, given that we missed by, I don't know about $100 million or so in the quarter, I guess the question is the split for the year now more like 49 to 51 (ph) or is the split different there? Just trying to get a sense for kind of where things stood, relative to maybe where your fourth quarter expectations were, then I have a follow up?

David Knopf -- Chief Financial Officer

Hi, Bryan, thanks for the question. This is, David again. So as we said in the last call, as we pointed out and as we said today, we do expect both EBITDA growth and our absolute level of even our margin to improve in the back half and further improve in Q4, and this is based on the sustained organic top line momentum that we're seeing, the one-off factors that I talked about that drag the EBITDA this quarter which will fall away next quarter and a better year-on-year balance between cost inflation savings, relative to a specific question that we talked in the last quarter, I think given the unexpected one-off factors in Q3 that we experienced, it may be difficult to get all the way back to the 50-50 first half-second half type of the EBITDA that we targeted. But we should see a very good sequential improvement into Q4.

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

Okay. So order of magnitude, it's around that $100 million sort of mix in the quarter or is sort of, is the one-off piece that you may or may not be able to close the gap on?

David Knopf -- Chief Financial Officer

Yeah, I think around that range would be appropriate.

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

And then just -- and then just one other question, in terms of asset sales, I guess the asset sale in India, is that sort of indicative of a larger sort of strategy of maybe potentially selling more assets down the road. Just some color or some context around that as well? Thanks.

Bernardo Hees -- Chief Executive Officer

Hi, Bryan, here is Bernardo, what we -- like we always said, we like our portfolio, I think each brand has its role in a specific country and regions, but we do evaluate every business and brand on these own and see the returns and what you can do with that, right. In the India case, I think it was very clear for us that we didn't have really a competitive advantage in the milk market and the beverage portfolio we have in the country. It could not scale, right for the level, you wanted to.

And the value you're receiving from the proceeds are really higher than we could have been doing with the business. Like you said, I think there are other things to be considered within the portfolio in general and you always evaluate very careful on a case-by-case situation. I think an important side effect of that is really the fact that we obviously, with the proceeds are able to strengthen our balance sheet right and give us more firepower, especially in a moment where industry valuations are more attractive. Right. And that they think is a positive, in this case.

Operator

Thank you. Our next question comes from the line of Steve Strycula of UBS. Your line is open.

Steven Strycula -- UBS -- Analyst

Yeah. Hi. Thanks for the question. So, similar to the previous two, I want to dig into the $100 million EBITDA miss that we saw in the quarter. I would point, did you realize that things were tracking below plan, how did you react to it? And can you walk us through what are that $100 million actually washes away in the fourth quarter? And then I have a quick follow-up. Thank you.

David Knopf -- Chief Financial Officer

Sure. Steve, this is David again. Thanks for the question. So, we said that we expected Q3 adjusted EBITDA dollars to be down a greater order of magnitude than what we saw in the first half. So, that gets you to more than $140 million at the start, so kind of two big factors in the quarter that took us lower than what we had originally expected. Again, we had a higher-than-expected one-off operating cost in the US again to prioritize customer service. We delayed some of those savings projects to avoid disruptions, and we bought more on the freight market, which increased our logistics cost, than we otherwise would have given -- given the additional volume.

And then on top of that, the unanticipated one-off supply chain costs. But again, as I said, we expect both EBITDA growth and our absolute level of profitability to improve significantly into next quarter, but unfortunately we're not going provide any more specifics around the magnitude of that into Q4.

Steven Strycula -- UBS -- Analyst

Okay. And given what you've seen right now, is there any reason to think that EBITDA dollar growth can't expand in calendar 2019, I know it's early to talk about 2019, but given the inconsistency of recent performance, I think maybe investors deserve a little bit of clarity as to how confident you feel about the sustainability of what the trends you're seeing develop in the fourth quarter, and is the tax rate sustainable at 20%? Thank you.

David Knopf -- Chief Financial Officer

Sure, Steve. David again here. Thanks for the question. So for 2019, we do expect a much better balance of top and bottom line growth going forward. In 2018, we had a number of transitory issues that we don't expect to repeat, we really accelerated and pushed commercial growth harder, given the greater visibility on the investments that we're driving and putting in the business. And then on top of that, the tax favorability was mitigated a number of these headwinds on the bottom line.

Going forward, we feel good about that balance for several reasons. Our ability to continue driving real volume mix driven organic growth, our ability to drive EBITDA dollars and at industry leading margins as one-off factors fall away and contributions from our savings curve accelerate. And finally, I think our ability to build the brand and category advantages and capabilities that we've been talking about, the same thing will make two plus two greater than four in the event of a transformational deal.

And then finally, with respect to your tax rate, I think we started the year a bit higher, but based on further clarity on the new tax laws, I think we're really expecting to get to that 20% for the full-year.

Operator

Thank you. Our next question comes from the line of Dara Mohsenian of Morgan Stanley. Your line is open.

Dara Mohsenian -- Morgan Stanley -- Analyst

Hey, guys. So, I just wanted to focus on US pricing, I understand that some of the decline was probably passed through pricing, but I'm assuming you were still down at that or at least not up substantially, which is surprising, just given the level of gross margin pressure and EBITDA pressure we're seeing here at the corporate level. So, just wanted to get your thoughts around what sort of drove the sequential deceleration in pricing, obviously a lot of your direct and even more so indirect peers in CPG land have been talking about taking more pricing recently given some of the margin pressures in the sector.

So, do you have plans to increase pricing going forward? And as you look at your price premiums in the categories you compete, given they moved up over the last few years, do you think you need adjustments in those price premiums? Are you comfortable you can get more pricing going forward? Thanks.

Paulo Basilio -- President of US Zone

Hi, Dara, this is Paulo. Thanks for the question. So, when we think about the price and the profile we had in the quarter, it was really consistent with our expectations. The change from the positive pricing we had in the first half to a lower net pricing in the third quarter was primarily driven by three factors. The first one was the stock let and the carryover pricing we had from prior year. Second, we passed through recent commodity declines mainly in bacon and given our strong innovation pipeline and portfolio position, we believe that was the right time to expand trial consumption and drive strong volume gains, which we did it.

As David noted before, our commercial profitability or profit contribution from pricing and vol mix was solid. We believe that we have a very strong portfolio of brands with ability to price as it is shown, have been showing over there, the past several quarters as we mentioned. And for your last point, and you look forward to the next year, for sure price will be an important lever, we will consider and manage our cost profile.

Dara Mohsenian -- Morgan Stanley -- Analyst

Okay. And then the comment on 2019 EBITDA, I just want to be clear, you talked about a better balance, did you mean year-over-year growth in EBITDA in 2019, just to be clear, or are we talking about sort of level of improvement relative to 2018 I just wanted to be precise there Thank you.

David Knopf -- Chief Financial Officer

Hi, Dara. This is David, again. Thanks for the question. So, when we talk about our ability to drive EBITDA dollars, we do mean year-over-year.

Dara Mohsenian -- Morgan Stanley -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Andrew Lazar of Barclays. Your question, please.

Andrew Lazar -- Barclays -- Analyst

Hi, good afternoon. Just two things from me, one quick one first, sometimes when -- I think when investors here, sort of the term spending to ensure customer service and things like that, I mean sometimes the notion comes up a visit, sliding or paying more to keep product on the shelf for retailers sort of asking for more dollars or those sorts of things, so I was hoping you could just address that, just to take that off the table if that's not the case.

And then I guess more importantly putting the one-offs, the one-off spending aside, you still did, it looks likes or sounds like increased sort of commercial spending, spending around capabilities, spending that's ongoing that will be in the base, if you will. And it sounded like after the second quarter that you had a pretty good read on that and it's -- and obviously it increased in the third. So, really I guess what gives you that comfort level that that this is the right number and that, in 2019 there's not ultimately the need for another significant step up, because we have seen some other food companies already starting to talk to '19 and saying, hey, one year of reinvestment spending that was tax reform led, actually isn't enough in order to get the top line going, it really needs to be a multi-year timeframe. So, any color on that would be really helpful to. Thank you.

David Knopf -- Chief Financial Officer

Hi, Andrew, this is David. Thanks for the question. So let me take your first question and then I'll take part of your second question and turn it to Bernardo. So, in terms of the cost, additional cost that we incurred that were one-off the nature to support the volume. These were not any sort of trade or slotting cost, these are two fold, one, kind of logistics, freight costs, which were higher than what we anticipated given, whenever we have more volume than what we planned for, you need to go to the spot market and it's typically more expensive. Going forward as we plan to higher volumes, you wouldn't expect to see those same level of cost.

The second piece was actually less about cost inflation and more about our savings projects which we chose to delay. So in short, it was not related to anything like freight or slotting fees. In terms of the commercial spending, I think just one important caveat here, we did talk about the incremental investments this year, we did have some kind of one-off cost associated with the fact that, as you released this into the P&L, it did come in higher in Q3 than what would be reflected on a run rate basis.

So, there is kind of some lumpiness from the quarter-to-quarter perspective that drove either down that is one-off in nature, but that's on top of the investments that we talked about and anticipated this year. And then I'll turn it to Bernardo to answer your last question.

Bernardo Hees -- Chief Executive Officer

Hi, Andrew. In respect of the level and thinking already about 2019. We do believe, what the right call in the beginning of '18 to take the decision to go to the $300 million commercial investment, given the benefit in the strong balance sheet we had with tax reform and then so on. And this number is already in our base.

So, to be honest, looking to 2018 we do believe that, the investments we're doing now is not only for '18, but there are significant benefits coming in the quarter to come, '19 and beyond. I think the commercial results with volume mix grow -- is faster in the United States is a good attachment to that. So as we're seeing today, I think the numbers are already in our base. We are not seeing the reason to increase that into 2019.

Andrew Lazar -- Barclays -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of David Palmer of RBC Capital Markets. Your line is open.

David Palmer -- RBC Capital Markets -- Analyst

Thanks. Just one question on pricing and promotion effectiveness, you've talked about and we've heard about your sales team making pitches for promotion changes out there with retailer customers using data to do that. It's not always easy to get retailers to change the promotions that they currently do, they feel like they know what they're going to get. And we see in these results, it's tough to see that the effectiveness really coming through, you talked about cheese and ready-to-drink promotions as drags on margin. So can you just speak to the traction you're getting maybe provide some examples or maybe some evidence of how you're getting smarter and convincing retailers to take this journey with you on promotion effectiveness. Thanks.

Paulo Basilio -- President of US Zone

Hi, David. This is Paulo. I think the main -- the main driver here to see, this is the comment that we saw the commercial profitability that we saw in the quarter. So, we are really comfortable and happy with the efficiencies we got in the moment that we decide to do the investments we did, but it is -- so in the part of the promo discussion, I think we -- yeah, as we -- we've been investing in revenue management strategy, we've been getting more and more lower terms, which type of promotions will execute. As an example, I think we were very successful in the beverage promotions that we did in ready-to-drink, and all of these ended up appear in our -- in our commercial profitability.

David Palmer -- RBC Capital Markets -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Chris Growe of Stifel. Your line is open.

Christopher Growe -- Stifel Nicolaus -- Analyst

Hi. Thank you. Good evening. Just had two questions for you, if I could. The first just be, as we think, in relation of the gross margin performance that you've mentioned before, David some comments about positive commercial profits and, but I was surprised with the weakness in the gross margins, so I want to make sure I understand some of those unique factors. How they would have affected gross margin versus say, SG&A like some of those were could have gone either way. Do you have any color on that you can provide?

David Knopf -- Chief Financial Officer

Hi, Chris. This is David. Thanks for the question. Yeah. So we did see both gross margin and SG&A increase since that weighed on EBITDA margins, again driven by the same factors that I talked about was the higher-than-expected supply chain cost in the US. Okay. So more related to the operation side, disproportionate impact from the commercial investments that we made which is going to be on the SG&A line. And then unanticipated one-off supply chain costs from the Middle East that we moved to Europe and that will be more of a gross profit, gross margin impact. But again, as many of these one-off factors fall away we would expect to see the dollars and the profitability improve significantly in Q4 and going into next year. And that's going to be across both gross margin and SG&A.

Christopher Growe -- Stifel Nicolaus -- Analyst

Okay, thank you for that. And then just a question in relation to your US sales. We had obviously very strong performance there, volume driven. I don't see that level of growth in the measured channels, but I wonder if you could say, is there anything unique that's helping boost the US sales in this quarter, be new products that kind of thing or maybe also how your unmeasured channels performed in the quarter to help kind of round out that performance for the US?

Paulo Basilio -- President of US Zone

Hi, Chris. This is Paulo. Thanks for the question. We estimate that our underlying consumption growth in Q3 was roughly 1.3% across all retail channels plus foodservice. This excludes the Planters and club, where we'll have shipment losses in July. The strong tenant that we saw in first half were much driven by frozen snack nuts, beverage meats and sauces businesses. The other drivers in Q3, then if you grow for Q3 were a combination of inventory shifts and timing of trade spending beyond the prior-year. Net-net, these other factors added roughly 50 basis points to organic growth in Q3.

Christopher Growe -- Stifel Nicolaus -- Analyst

Okay. Thank you very much for that.

Paulo Basilio -- President of US Zone

Welcome.

Operator

Thank you. Our next question comes from the line of Akshay Jagdale of Jefferies. Your line is open.

Akshay Jagdale -- Jefferies -- Analyst

Thanks for the question. Wanted to delve into this term you've been using commercial profitability. Can you just talk through like what is included in that number and why is that a good measure of sort of the ongoing profitability of the business. That would be helpful. And I have a follow up.

David Knopf -- Chief Financial Officer

Sure. Akshay. This is David. Thanks for the question here. So in terms of commercial profitability as we look at it, but we define it as the contribution from pricing and volume mix, OK, so EBITDA together. And this is before things like investments and inflation on the business. Now, the reason that we're calling it out is because we think it's important to understand that even with the lower negative pricing year-over-year, the significant volume pickup that we had that was significantly positive leading to organic growth was positive on EBITDA and not negative.

That being said, we're still seeing inflation and we need to address the inflation, the business, which in the near term, we're managing with our savings curve and going forward, we'll evaluate other levers like price.

Akshay Jagdale -- Jefferies -- Analyst

Got it. So in other words, I mean when the market seeing pricing down and profits down, they're assuming you got the profit from taking pricing lower right and what you're trying to say is that's not what happened basically?

David Knopf -- Chief Financial Officer

Yeah. I would say, I think that the key point here is that profitability on dollars perspective, have actually increased even despite negative pricing, because our volume mix was so strong in quarter which we very happy with.

Akshay Jagdale -- Jefferies -- Analyst

Got it. I'll pass it on. Thank you.

Operator

Thank you. Our next question comes from Jason English of Goldman Sachs. Your question, please.

Jason English -- Goldman Sachs -- Analyst

Hey, sorry about that. Can you guys hear me?

David Knopf -- Chief Financial Officer

Yes, yes.

Jason English -- Goldman Sachs -- Analyst

Awesome, little phone malfunction over here in my end. I wanted to come back at trying to sort of on-pack the drivers of the decline, if we read from a slightly different angle. Looking at the EBITDA year-on-year decline in the US, it's been accelerating obviously we've -- at least another $100 million plus of year-on-year erosion this quarter. It sounds like that's predominantly driven by these one-time factors, right as well as maybe a little bit of bonus accrual.

David Knopf -- Chief Financial Officer

Hi, Jason, this is David. Thanks for the question. That is correct. So the same factors that I outlined on a global basis are very much the drivers for the US year-over-year and a big piece of that is going to be the bonus accrual that were locked in from prior year as an impact on our year-over-year growth. And then the other items were more related to our kind of current year margin profile, all of which together is why we feel confident, that we'll see that sequential improvement into Q4.

Jason English -- Goldman Sachs -- Analyst

Maybe you can help me size the bonus piece I think, because, if I look at a $100 million, I can hear you on marketing, but yeah, in cheese, with amount of marketing you spend in the US, and incremental $10 million would be a really high percent. So it's hard to see that incremental marking, some material driver, and it's difficult to wrap our head around the logistics side be another $100 million or so that it would kind of have to be the bridge there. So, maybe I'm just not fully appreciating the magnitude of this bonus accrual, can you contextualize that for us with some real numbers?

David Knopf -- Chief Financial Officer

Hi, Jason. This is David. So, unfortunately, we can't provide specific numbers on the bonus in some of these other drivers. But what I'd say is the bonus is quite a large driver in the year-over-year delta, as you can imagine that the magnitude, the variable compensation that we have. On top of that, the operational costs are also quite significant in the quarter rate, also logistics often I talked about as well as the savings projects that we didn't anticipate in Q3, but we're ready to execute at the right moment. And then finally, there were the supply chain costs that we talked about related to Middle East and Europe. So I think there are a few different components, the two largest I guess I can go ahead and say the bonus and higher operational costs that we talked about.

Jason English -- Goldman Sachs -- Analyst

Okay. No, I had to try. Thanks.

Operator

Thank you. Our next question comes from the line of Robert Moskow of Credit Suisse. Your line is open.

Robert Moskow -- Credit Suisse -- Analyst

Hi, thank you for the question. I thought that your shipments in the US were shipping slightly above the consumption, that we were measuring in Nielsen. Presumably, I think it's because you're getting more shelf space, but I tried to find that in Nielsen data and I couldn't really get it, maybe it's on a lag. Can you speak a bit about the shelf space that you might have gained from all of these new product introductions? Are you seeing it in you're tracking data? And also, are you taking steps to make sure that you're not causing an environment where maybe there could be an inventory to load in fourth quarter, which has happened before, but maybe not with all these new products. Thanks.

Paulo Basilio -- President of US Zone

Hi, this is Paulo. So, if again, if you think about the breakdown between the 1.8% growth, 1.3% is coming from what we're seeing as underlined real consumption in Q3. The other 50 bps is the volume effect of that I mentioned about combination of timing after spending and inventory ships. So the real consumption we see for the business is 1.3%. And this is pretty much a combination of a management chain of growing around 0.8% and to other channels including food safety growing another 50 bps, so that is how we are seeing our consumption happen. So we are very happy, confident with the consumption improvement. We are seeing these in Q3. We are also seeing these in Q4. So we are seeing our real as I said -- consumption growth in Q3 in the level of 1.2%.

Robert Moskow -- Credit Suisse -- Analyst

Okay, thank you.

Operator

Thank you. Our next question comes from the line of David Driscoll of Citi. Your line is open.

David Driscoll -- Citigroup -- Analyst

Great, thank you so much, and good evening. So just wanted to confirm, Paulo, I think you said that shipments in the quarter were ahead of the consumption, including the unmeasured channels. Is that correct? And then will that reversed out in the fourth quarter?

Paulo Basilio -- President of US Zone

No, what I said now is that our underlying consumption overall is around 1.3% growth year-over-year, and this 1.3% is a combination of measured channels 0.8% growth, but 50 bps coming from other unmeasured channels including food service.

David Driscoll -- Citigroup -- Analyst

Okay. A follow-up on the bonus question. So, in most companies when we see companies miss profit targets, usually the bonus accruals are -- it goes the opposite way. There is not more bonuses there is less bonuses. Why isn't working that way here, I just don't understand something. And then I just had a final question on market share, can you give us some sense on your read on Kraft Heinz's market share movements across it's major categories and major geographies. Big picture question, a lot of companies have some nice simple metrics to give us an understanding as to whether or not you're gaining or holding share in certain percentages of categories. I don't know if you guys can provide that, but it would be helpful. Thank you.

Bernardo Hees -- Chief Executive Officer

Hi, Rob (ph) It's is Bernardo. In regarding to metrics of compensation, and so as we have been discussing quite sometimes we're very performance-driven organization, right. In our case here, since the beginning of the year we have a combination of different KPIs between top line growth that have been accelerating, EBITDA and cash flow. And redeem these frame the variable compensation established by -- with this is mind and looking at our balance sheet, our performance this year have been surpassing significant performance last year knocking all KPIs like in January. And that's relate to our variable compensation. With that I'm going to ask David to the KPI overall metric that you're requesting.

David Knopf -- Chief Financial Officer

Sure. Thanks, Bernardo. I think a couple of data points that I think Bernardo said earlier on the call. On a global basis, more than half of our categories saw consumption growth in Q3. Okay. And the second point to point out, I think a particular relevance in the US, our categories are going through trend then with aggregate consumption across our categories, improving nearly 2 percentage points in Q3 versus Q2, which obviously excludes the one-off impact of nuts that we've talked about. But we've seen a sequential improvement both in inventory channels and as Paul pointed out on overall consumption. But on a global basis, more than half of our categories are consumption growth in the quarter. Paulo, I don't know if anything you would like to add.

Paulo Basilio -- President of US Zone

I can't comment more about the US. What you can see is that in the first half, we were losing pretty much the same happened in 2018. We are losing our 0.6% share in our -- across the portfolio in Q3, we reduce this to 0.3% and if we exclude the nuts business that we are lapping shipments since July. This number would go to around 0.1. So it's a significant improvement in share performance that we see -- moving when move through the year.

David Driscoll -- Citigroup -- Analyst

Thank you very much.

Paulo Basilio -- President of US Zone

And just to complement on that, I think that what's makes us actually positive about what's coming, because you see consumption and share in most parts of the world really improving behind the commercial initiatives and the investments. Right. With the results are presenting now a new release they can be sustainable in the coming months and quarters. We will continue to see acceleration in share, in volumes, in commercial performance in general.

David Driscoll -- Citigroup -- Analyst

Thank you.

Chris Jakubik -- Head of Global Investor Relations

Well, thanks, everyone. I think we'll stop it there. For anybody with follow-up questions, Andy Larkin and myself will be available and anybody in the media with follow-up questions, Michael Mullen will be available. So, thanks very much for joining us and have a great evening.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.

Duration:  57 minutes

Call participants:

Chris Jakubik -- Head of Global Investor Relations

Bernardo Hees -- Chief Executive Officer

David Knopf -- Chief Financial Officer

Kenneth Goldman -- JP Morgan -- Analyst

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

Steven Strycula -- UBS -- Analyst

Dara Mohsenian -- Morgan Stanley -- Analyst

Paulo Basilio -- President of US Zone

Andrew Lazar -- Barclays -- Analyst

David Palmer -- RBC Capital Markets -- Analyst

Christopher Growe -- Stifel Nicolaus -- Analyst

Akshay Jagdale -- Jefferies -- Analyst

Jason English -- Goldman Sachs -- Analyst

Robert Moskow -- Credit Suisse -- Analyst

David Driscoll -- Citigroup -- Analyst

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