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Mondelez International Inc (NASDAQ:MDLZ)
Q3 2019 Earnings Call
Oct 29, 2019, 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 2019 Earnings Conference Call. Today's call is scheduled to last about one hour including remarks by Mondelez management and a 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

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.

As we discuss our results today, unless otherwise noted, we'll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results. In addition, we provide our year-over-year growth on a constant currency basis unless otherwise noted. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation.

In today's call, Dirk will give you an overview of our results as well as a progress update against our strategic priorities, then Luca will take you through the financials and our outlook. We'll close with Q&A.

With that, I'll now turn the call over to Dirk.

Dirk Van de Put -- Chairman and Chief Executive Officer

Thank you Shep and good afternoon everybody. We are pleased to report another quarter of strong topline growth, continuing the momentum of the first half of the year. As you know, a year ago, we launched our new strategy, which intended to accelerate our growth by focusing on the consumer, driving operational excellence and building a winning growth culture.

Today's results are proof that this strategy is working well and that we are making progress against our goal to create attractive, long-term, sustainable growth. So, let's take a look at the quarter in more detail. We reported revenue growth of 4.2% in the third quarter, which confirms the strength of our snacking fundamentals around the world, as well as the leadership role that our portfolio of global and local brands played in snacking.

The growth was high-quality. and driven by a good balance of volume mix and pricing. It was also broad-based geographically, our emerging markets grew 6.6% or 5% ex-Argentina, and we are encouraged by what we are seeing in markets such as Russia, India, China, as well as Southeast Asia. Our developed markets grew 2.9% Europe reported strong volume-driven growth in key markets like Germany and the UK, and in the US, we saw continued revenue growth and share gains, which was driven primarily by biscuits.

Our strategy to invest more in our growth initiatives is paying off, resulting in solid operating income growth. Our adjusted EPS growth was 10% for the quarter and we are also pleased with our year-to-date cash flow of $1.2 billion. As we look across our business units, we are seeing evidence that our strategy is creating the basis for sustainable future growth. This is driven by a renewed focus on the consumer, which is informing everything we do, and it inspires and also motivates our teams.

So, while the entire organization is focused on driving top line growth, we remain true to our culture of cost discipline, so that we can ensure that topline growth generates attractive OI dollar growth. This focus is leading to impactful growth initiatives across our business, in key markets and key channels, as well as on our local and local and global brands.

For instance, we are winning in growth channels in both developed and developing markets. In the US, this means capitalizing on growth opportunities like discount and club outlets. While in China, we achieved new distribution milestones this quarter. We reached 1.5 million outlets with our biscuit products and 1 million outlets for our gum. And in e-commerce, another example, this means a continued global expansion through our partnerships with e-tailers and online platforms. Our reported growth in e-commerce for the quarter was 25%.

Another area to highlight are our local jewels. Local brands that are also contributing to our growth. A few examples that stood out in Q3 are the Jubilee biscuit brand in Russia, the iconic Prince Polo brand in Poland and for instance Biskuat in Indonesia. All of these are performing well, thanks to renewed investment and focus. A big priority for us this year, has been to reinvigorate our marketing approach. One manifestation of that focus is what we call our new marketing playbook that gets to the roots of what makes our brands special. Our intention is to drive clarity and brand positioning and consistency in execution.

We've applied this playbook to many of our global brands, and we'll be rolling it out across more brands in the future. As a result of this renewed focus, we're seeing some good examples of brand equity campaigns that enhance our connection with consumers. In the UK, for instance, where our growth was particularly strong this quarter, our latest addition of the Cadbury Dairy Milk generosity campaign is performing really well.

While we are driving growth, we remain very focused on our operational excellence. For instance, in marketing we've seen solid improvements in our return on investment in digital, while in our supply chain we continue to focus on productivity and process improvements. Good examples here would be the digitalization of our procurement function, as well as a reduction of waste in our North American Network.

Around the world in our different business units, we are trying to reach best-in-class execution. In EMEA, for instance, we are leveraging our significant sales and distribution capability in key markets like India and Southeast Asia to win in seasonals. As an example, our seasonal gifting offerings performed well during the Hindu celebration of Rakhi in India, or as another example, this year's mid autumn mooncake season was particularly successful across Southeast Asia with Kindle and even Oreo branded mooncakes selling really well.

Local adaptations of our global brands or the success we're having with culturally relevant seasonal offerings underscore the power of our more, locally oriented model. Another strong example of this is the work we are doing in China with our Stride gum brand. Here our approach is to personalize our marketing to Chinese consumers and it is working well, helping us win with Gen Z consumers through mainly digital spend.

Finally, we continue to make good progress with our more agile innovation approach and our SnackFutures initiative. Our focus is on emerging trends and technologies in well-being and premium products. As an example, we've recently reached an agreement with a key supplier to explore the use of cocoa fruit, by introducing those parts of the fruit into the food chain that have thus far been discarded.

A product using this ingredient was developed in record time and put into the market in a very limited distribution to see how it will perform. This sort of an approach is very different from the innovation approach than we had in the past. I'm also very proud of the progress we are continuing to make on our sustainable and mindful snacking strategies. Creating durable growth also means, looking after our planet and the people who contribute and consumer products.

This quarter, we were again recognized by the Dow Jones Sustainability Index and improved our rating for environmental reporting, this is just one example of how we are bringing to life our sustainable snacking strategy, which is our commitment to grow our business the right way. Another example is how we are using a new methodology focused on science-based targets to help us further reduce our end-to-end CO2 emissions.

Finally, I want to mention the work we are doing to respond to the well-being needs of our consumers. We are working on offering the consumer, the right snacks, which can mean different things to different consumers. The options are ranging from smaller portion size formats, what you could call permissible indulgence to better for you products, which are made with authentic and simple ingredients or with particular functional nutrition characteristics.

A good proof point was our recent commitment in the UK to ensure that all our products that are made for parents to offer to their children are less than 100 calories per serving. I'm quite proud of this move and know that we'll have more to share in the future.

And with that, I will hand it over to Luca.

Luca Zaramella -- Chief Financial Officer

Thank you Dirk and good afternoon. As you can see on slide 9, we delivered strong performance, across a number of key metrics. Our third quarter growth was notable for both its quality, which was broad-based, as well as for the balance of volume and pricing. During the quarter, we drove growth on a variety of fronts. We delivered strong results in three of four regions. Global brands grew mid-single digits, while local brands continued to accelerate with growth in line with overall categories.

And this growth was high quality, as it was driven by a balance of volume and pricing. Finally, this happened on the back of strong category growth, which we have drive. We also delivered a solid increase in gross profit and OI dollars, along with 10% EPS growth. Productivity and cost savings initiatives, provided the fuel for approximately $85 million of business investments through the first three quarters, that will strengthen our brands, our go-to-market positions and sales and marketing excellence for future years.

Finally, Q3 marked another good quarter of free cash flow generation, which continues to be a key priority. We generated $1.2 billion through Q3, and are on target for a full year outlook of $2.8 billion. Turning to slide 10, our scale reach and expertise in emerging markets are clear assets for our company. We continue to drive robust volume-driven growth in key countries like China, India, Southeast Asia, Russia, Mexico and Africa. In aggregate, emerging markets grew approximately 7%, marking the fifth consecutive quarter of growth, greater than 5%.

Excluding inflation driven growth in Argentina, emerging markets grew 5%. Developed markets also performed very well during the quarter, with revenue growth of nearly 3% driven by strong volume driven results out of Europe and North America where we saw a combination of volume mix and pricing increases.

Now, let's review our profitability performance on slide 11. In the third quarter, we increased gross profit by 2.6%, which in turn translated into solid OI dollar improvement with volume leverage, pricing and cost savings partially offsetting investments, primarily in route to market capabilities. It is important to note that our profitability results are consistent with our goal of higher quality and sustainable growth.

When excluding Brazil, which is dealing with margin headwinds related to supply chain transition and powdered beverage category weakness, our business is growing volume mix by more than 2%, growing gross profit dollars faster than revenues, enabling incremental investments across A&C and go-to-market and growing operating income dollars faster than revenue, on a year-to-date basis.

Moving to regional performance on slide 12. Europe delivered another excellent quarter with 5% revenue growth. The UK was a standout with double-digit revenue growth in the quarter. Germany, Russia and the rest of Eastern Europe also posted strong results. Europe continues to demonstrate sales and marketing excellence, with particular strength in our chocolate franchises, where, all of our top brands, delivered volume and revenue growth.

Consistent with Q2, the Philadelphia business turned in very good results, driven by targeted investments and great sales and marketing execution. Adjusted OI dollars grew by 6% in Europe due to robust sales and volume leverage alongside ongoing investments, partially offset by higher A&C. AMEA grew 5.3% showing continued strength across much of the region. India grew double-digits behind strong execution and an attractive market backdrop. We continue to perform well in chocolate, while building out a more meaningful biscuits business that represents a large opportunity for us. China grew just shy of 10% driven by another well executed quarter in both biscuits and gum. The team -- show the power of our new local first commercial approach that empower, speed, agility and consumer-centric decision making. South East Asia grew mid-single digits with solid results in biscuits and chocolate. AMEA increased operating income dollars by 10% due to leverage from topline growth, partially offset by continued increases in investment in high growth potential markets.

Latin America grew 4.3% due primarily to inflation driven growth in Argentina. Revenue declined 1.5% excluding Argentina. Mexico grew mid-single digits, driven by strong execution in candy, while Brazil posted a decline, mostly due to softness in powdered beverages driven by category decline and some share losses. We expect to see some volatility in this category in the coming quarters.

Adjusted OI dollars in Latin America declined by approximately 13% primarily due to volume losses in powdered beverages, as well as the plant consolidation issues in Brazil that caused additional waste and logistical costs. We are continuing to work through these issues, and expect to see progress in Q4 though still some headwinds on an absolute basis. Finally, North America grew 2.5% in Q3 led by another solid quarter in US biscuits.

We grew share in Biscuits as Oreo, Ritz and belVita all delivered strong results. Improved commercial execution and innovation, share gains in alternative channels and more consistency in supply chain helped guide these results. We remain committed to sustaining our improved performance in the region. The North American region grew OI by almost 5% due to effective pricing and waste reduction, with pricing and volume mix providing fuel for marketing investments.

Let me spend a moment on category highlights; our three snacking categories continued to demonstrate strong fundamentals with total category growth up 4% on a year-to-date basis. We remain encouraged by the health of our categories and believe they can continue to sustain growth of approximately 3% over the long term. In many geographies, we were a key driver of the category growth. This includes areas such as US and China biscuits, India, UK, Russia and Germany chocolate and China gum. As we mentioned before, specifically chocolate is benefiting from a prolonged Easter season, and the subsequent halo effect on overall consumption.

These tailwind accounts for almost one percentage points of overall category growth. Overall, we held or gained share in 65% of our business, which is consistent with our second quarter and evident of an improving trends over the past year. This resulted in overall flat share results for Mondelez. Our Biscuits business grew 4.1% approximately 75% of our revenue grew or held share in this category, including our US, China and India businesses.

In chocolate, our business grew 6.4% approximately 65% of our revenue grew or held share, including the UK, Australia and Russia. Gum and candy revenue grew slightly, about 35% of our revenue in this business gained or held share, including strength in China, France, Brazil and Russia gum. Now turning to EPS on slide 18. Q3 EPS grew 10% in the quarter. This growth primarily reflected operating gains, driven by strong revenue results income from the JV equity and the tax benefit in the quarter.

I'll now move on to our free cash flow results on slide 19. We delivered year-to-date free cash flow of $1.2 billion, which is an improvement over the last year through Q3 due to continued progress in our cash conversion cycle, lower cash restructuring and capex. We remain well-positioned to deliver on our full year target and feel good about our ability to make improvements over the coming years.

I wanted to also mention that we continue to thoughtfully manage our balance sheet and leverage, and cost of debt. In September, we raised approximately $2.5 billion in new financing at attractive rates to refinance debt that mature in late October. Turning to capital deployment on the next slide, we have returned $2.3 billion to our shareholders through the first three quarters.

Moving to our outlook, we are increasing our full-year organic net revenue growth expectations to 3.5% plus. This reflects our strong year-to-date results, which included the benefit of a longer Easter season. These dynamics, do not extend into Q4 and as a result, we are not expecting Q4 growth at the same level as the first three quarters of the year.

We are also increasing our outlook for adjusted EPS growth to 5% to 7%. As a reminder, in Q4, we expect to lap significant favorability in the equity income line, related to our JV investment due to the impact in Q4 of 2018 from an enacted tax rate reduction in the Netherlands.

Please note, that when estimating adjusted EPS, we apply 5% to 7% outlook to the prior-year basis of $242 then adjust for the expected impact of currency, which we anticipate to be circa $0.14. We expect underlying profit performance to be comparable with the profile so far, where volume leverage upsides and gross profit increases will be partially reinvested in growth initiatives.

Additional geopolitical disruptions or other disruptive events including the hard Brexit are not anticipated within this EPS outlook. We now expect to spend approximately $1.5 billion for the full year on share repurchases, as we acquired The Perfect Snacks business and are managing overall leverage thoughtfully. We repurchased a little over 200 millions of shares in Q3, to bring our year-to-date amount to more than 1.1 billion and continue to repurchase shares at current levels.

We remain committed to returning meaningful capital to shareholders, and share repurchases continue to be an important component of our capital return program. We will continue to operate with a disciplined approach, which aims to optimize results for continuing shareholders, and allows for flexibility based on market conditions.

Finally, our free cash flow expectations remain unchanged.

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

Questions and Answers:

Operator

[Operator Instructions] And your first question comes from the line of Andrew Lazar with Barclays.

Andrew Lazar -- Barclays Investment Bank -- Analyst

Good afternoon.

Dirk Van de Put -- Chairman and Chief Executive Officer

Hi Andrew.

Andrew Lazar -- Barclays Investment Bank -- Analyst

Hi there. Two questions if I could. First, the updated full-year organic sales guidance of 3.5% plus, as you mentioned suggest perhaps a sequential deceleration in 4Q. Can you explain some of the puts and takes on that, particularly in light of the accelerated global category growth. I know you mentioned Easter, but wanted to know if there were some other things playing into that as well?

And then second, Mondelez did discuss the challenges in Brazil on the supply chain last quarter. It feels like things maybe got a bit more challenging in 3Q. Can you talk about your visibility there, why you think you've got your arms around it, and perhaps you can parse out, how much of the impact in the third quarter was really supply chain versus some of the other headwinds in Brazil like powdered beverages and such? Thanks very much.

Dirk Van de Put -- Chairman and Chief Executive Officer

Okay. Well maybe I'll start with looking at the top line and then maybe Luca can discuss Brazil. The first thing I would like to say that the strategy is working well. We are pleased with our progress. We see good momentum in the business. We are delivering on and above our goals. Everything we put in motion a year ago about consumer-centric organization and increasing our speed, execution and results it's all working out probably faster than we expected. And in this quarter, we saw some quality net revenue growth and also year-to-date as it relates to volume mix and price, the mix between developed markets and emerging markets or between global and local brands, the balance is there and the category is strong as you pointed out, Andrew, in many cases it's driven by us, since we play -- we're a major player in the categories. And yes, we do have some challenges in Latin America, but otherwise, our overall performance from net revenue through gross profit into OI is a very healthy equation, and it shows that the top line growth we're having combined with the cost discipline is working out for us.

We did call up our full year outlook to 3.5 % plus net revenue growth and an EPS to 5% to 7%. That means that, yes, we expect that Q4 will be a little bit lower. I would say, as you pointed out, Andrew the first thing to keep in mind is the longer Easter season that we had this year, which will have an effect or no effect in Q4 if I can say it like that. In Q3, we also lapped the heat wave, we had last year in Europe which was beneficial to us, so that had a benefit. And so in Q4, we will not see any of these benefits and overall, we feel that our categories are somewhere between 3% to 4% growth, not fully the 4% that we saw in Q4 and we think that the categories will go back to a normal growth rhythm, around 3% plus as we've been saying all the time in reality.

As it relates to 2020 we continue to see big opportunities for us to keep on driving the categories to improve our market share and increasing our investment in our brands, in our capabilities. But we have to remain a little bit mindful again about Brexit, which didn't happen this year, but it will have an effect, potential on the first quarter. We'll give you a full outlook on 2020, when we report the Q4 earnings. But I would say that's the way we're looking at Q4 right now.

So Luca, maybe a bit on Brazil?

Luca Zaramella -- Chief Financial Officer

Yes. Let me maybe just start by saying that Brazil for us is a large and complex market. We have clearly a big portfolio in there that spans pretty much across all the categories that Mondelez compete in globally. We have a good set of global and local brands, and as you say Andrew in Q3, we had a material negative impact that will be [Phonetic] contemplated for the most part and these negative impacts, quite frankly, explains the entirety of that profit shortfall that we had in [Phonetic] Ele in the quarter versus last year.

As you said, the issues are two fold. As we discussed the last quarter, some plant closures caused transition issues. We ended up with line start-ups that were delayed and we faced extra cost. We ended up scrapping more products than we wanted to, and in addition to that we had some extra logistics cost.

I would say this first issue accounts for pretty much, half of the material profit gap we saw in the quarter in [Phonetic] Ele and in Brazil, as I said. And the second issue is about powdered beverages, which is a material category for us, both in terms of top and bottom line. The category itself is quite challenged at the moment, and our shares of market are declining. The declining trend accelerated a bit in Q3 versus what we saw in the first part of the year and that resulted in revenue and profit shortfalls also compounded by the fact that in a declining category and share environment, we had to take out some trade stock in the quarter.

So, we're working on both fronts and we are making good progress with our supply chain, but as we said, very clearly in Q3, we will still have some impact in Q4, but the issue should get materially better as we enter 2020. For PBs the issue is a little bit more accentuated, and it will take some time for us to address both the category and the share decline dynamics. I would also like to take the opportunity that you provided with your question to reiterate a couple of things. Despite, as I said in my written remarks or recorded remarks, the materiality of the issues in Brazil and the fact that we are lapping the highest gross margin in Q3 last year, our virtuous cycle is working. GP, NOI are both growing circa 4% on a year-to-date basis. As I said, when you take out Brazil gross margins NOI margins are both up on a year-to-date basis.

We are delivering the volume leverage and SG&A leverage, as we planned. We continue with cost discipline, I think you see in the quarter a good number for SG&A, that number includes an increase in A&C, but the embedded CBD behaviors we have, are delivering savings. And all of these quite frankly gives me confidence that the model is working and that we will deliver on our long-term ambition to grow OI and GP more than revenue. So not ideal, what we saw in Brazil in the quarter. But in the big scheme of things, when you strip it out I think the model is working and the long-term algorithm we have in mind is safeguarded.

Operator

And your next question is from Chris Growe from Stifel.

Chris Growe -- Stifel Financial Corp. -- Analyst

Hi, good evening.

Dirk Van de Put -- Chairman and Chief Executive Officer

Hi Chris.

Chris Growe -- Stifel Financial Corp. -- Analyst

Hi. I just had a first kind of high level question. As you think about the strategy and executing your new strategy in your playbook for the business. I'm just curious, how that's developing sequentially. So, maybe even a quarter-by-quarter, but just like are you moving on different types of investments, have you made a lot of the initial investment you wanted to make, is it moving more now marketing new products. Just wanted to get a sense of how that's playing into the stronger revenue growth, barring some of the unique things that occurred this quarter.

Dirk Van de Put -- Chairman and Chief Executive Officer

Yes. So, maybe first of all, it's a multi-year investment program. We are probably flowing less of our gross profit next year than this year into investments, but we want to keep on increasing our investment year-after-year and this year the investment was focused on an increase in our A&C, an increase in route to market investment and to our R&D, so innovation. So Luca was talking about this virtuous cycle which we want to continue.

If I look at what that means for us going forward, I do not expect substantially these investments to change. We do have still areas of the world where we should be putting more A&C investment in our brands, particularly the local brands which are accelerating, but they are yet not always on the right level of investment. We still have big route to market opportunities if I think about China, India, where we have to go in third-tier and four-tier cities and we for several years, we need to keep on investing, and you can imagine the same for places like Southeast Asia or Africa where we need to keep on doing that.

And then in R&D, we do want to -- a continued push on more agility and fast speed and we may be a little bit less in the years to go forward than we did this year, but it's going to be largely the same three buckets that we are going to invest in. I would also say that apart from increasing our investment, we are also moving more of the investment within A&C into working media and on top, we are trying to drive the ROI of our marketing spend.

We've done things like consolidation of our agency, which drive value and gives us more consistent quality globally, and we are also working quite hard on our point of sales execution investment, which we will continue next year. So maybe a long answer, to just point out where we are investing and the fact that we see that continuing. It's working for us, and we feel that there is still a big upside in continuing to do so.

Luca Zaramella -- Chief Financial Officer

[Speech Overlap] second, you know all of this is contemplated in the mid-single digit guidance for OI growth that we gave you at Investor Day and the high single-digit EPS growth that again, we gave you at Investor Day.

Chris Growe -- Stifel Financial Corp. -- Analyst

Going forward. Thank you, guys. Okay. And just one other question if I could, which is the pricing that's coming through this year. Would you say that is offsetting cost inflation, so if we think about a pricing, net of cost you're --- that's sort of not a factor on the gross margin here, is that the right way to look at that?

Luca Zaramella -- Chief Financial Officer

Yeah, I think it is. The -- you know, I'm particularly pleased about the fact that our top line is in the quarter, half volume and half pricing. I think it varies a little bit by region, clearly. We see pricing more pronounced in emerging markets in the North America where the inflationary pressure has been a little bit higher than in Europe. Europe growth is mostly driven by volume. I think you see AMEA with combined strong volume growth and pricing. I'm happy to report clearly that North America has returned to volume growth this quarter. So overall, we really like the algorithm. It is more volume driven in developed markets where margins are higher, and the emerging markets in relative terms, we see a little bit less volume and more pricing, which again, we like. So, in the big scheme of things it is quite balanced and it is offsetting the inflationary pressure.

We see quite frankly though that is also because we covered our commodity and FOREX exposure quite well, so I don't want to hint to any pricing going into next year, but if we have to mark-to-market, our commodities and FOREX impact will be a little bit higher than what you see in the P&L at the moment.

Chris Growe -- Stifel Financial Corp. -- Analyst

Okay, thank you for all the color. That was helpful.

Dirk Van de Put -- Chairman and Chief Executive Officer

Thank you Chris.

Chris Growe -- Stifel Financial Corp. -- Analyst

Thank you.

Operator

Your next question comes from Dara Mohsenian with Morgan Stanley.

Dara Mohsenian -- Morgan Stanley -- Analyst

Hey, good afternoon guys.

Dirk Van de Put -- Chairman and Chief Executive Officer

Hi.

Dara Mohsenian -- Morgan Stanley -- Analyst

So, first just a clarification Luca on the Brazil issue. This just sounds like it will linger in Q4, are you expecting a similar magnitude in Q4 relative to Q3 and then it's really next year, when you start to see that drag dissipate. And then second, in the UK, obviously very strong momentum in the quarter, double-digit revenue growth. Can you give us a bit more detail on what drove that strength in terms of market share versus category growth, and some CPG companies have noted a bit of slowdown around the Brexit uncertainty, even though it didn't ultimately come to fruition this month, so have you seen any impact there so far in Q4, expecting any deceleration going forward? Thanks.

Luca Zaramella -- Chief Financial Officer

Yeah, maybe I'll comment on Brazil, a little bit on the UK and the [Indecipherable] here. So, on Brazil the biggest impact has been -- actualized in both Q2 and Q3. There will still be an impact in Q4, but the impact will be sequentially lower. Importantly as we enter next year, the supply chain related issues should be fully solved or almost entirely solved. I think, we will still see some issues related to powdered beverages and competitiveness of Mondelez in that category. Remember in Q1, it is summer time and so there is a big consumption, so there might still be some PB or powder beverage related issues in Q1.

In the UK, I think we are quite frankly hitting on all cylinders. The category -- the chocolate category is up. It is on the back of a hot summer last year, and the fact that Q3 was quite hard, so there was a market pickup. But importantly, we are gaining share. Dirk alluded clearly to or actually said that in Q3, the execution of Cadbury Dairy Milk, and the campaign with Cadbury Dairy Milk generosity is working very well, and we are seeing material share gains. So, we are executing quite well around chocolate, but I would also say around biscuits, which is the other good category. So, we are very pleased with the execution in that market.

Dirk Van de Put -- Chairman and Chief Executive Officer

And I would add that at this stage, we cannot talk about any slowdown as it relates to Brexit worries as the numbers testify. So, we don't see at the moment, we are preparing for it of course, but we also believe that our categories -- the snacking category is not necessarily going to go big swings up and down as consumer sentiment goes up and down. So, we hope that we will be a little bit protected from big consumer sentiment changes.

Dara Mohsenian -- Morgan Stanley -- Analyst

Great. Thanks guys.

Luca Zaramella -- Chief Financial Officer

Thank you.

Operator

Your next question comes from Ken Goldman with JPMorgan.

Ken Goldman -- J.P. Morgan Equity Research -- Analyst

Hey, good afternoon everybody. I wanted to -- I know you're not willing to talk about 2020 specifically yet. But, you have brought up Brexit a couple of times, and I just wanted to ask, how you think about either including or excluding any potential impact from Brexit in your guidance? And some companies have said, you know what, there is no way we can quantify it. So, when we think about the out years, we're just not going to even try and other companies who said no maybe we should bake in a little bit of risk into our guidance, just in case.

I'm just trying to get a sense of where you guys fall on that spectrum, if you've even considered that yet.

Dirk Van de Put -- Chairman and Chief Executive Officer

Yeah, at a larger scale, I would say you can say we are in the first part where we cannot really quantify it. We don't know what type of Brexit it will be. And so, we have not included a larger effect of Brexit into our thinking. What we always include, which we will also do for 2020 is the short-term Brexit disturbance that you could have at the border, so where we need to increase our inventories, we need to book more transportation, we need to stock up on raw materials and packaging and so on; that we've always done and that we will continue to do, and that's included in our forecast, but if it would be a hard Brexit with a devaluation of the pound, and a big consumer reaction that is not included for us.

Ken Goldman -- J.P. Morgan Equity Research -- Analyst

Thank you. And then follow-up is, in Andrew Lazar's conference recently, you talked about Oreo's distribution not being good enough in US c-stores. I've always thought -- and I think you guys have always thought, it's a pretty big opportunity that is not necessarily being capitalized on now, but I didn't get a sense of what moves you're making necessarily to improve Oreos in c-stores, whether you're going to use your DSD system to gain distribution and so forth. I just wanted to get a better sense of sort of what the strategy, and maybe some of the tactics are along those lines.

Luca Zaramella -- Chief Financial Officer

Yeah. But, first of all I can say that in the background there is a lot of work going on as it relates to Oreo in c-stores. It takes a while, we have to test our approach, see if it works. So, next year we are expecting to make bigger strides as it relates to that. Just for to clarify, our DSD does not work in the c-store channel. Our DSD is a system that works in the supermarket channel for us, so we are not planning at this stage to use our DSD system for that, but we do have the right route to market setup, and we are building up the right programs and relationships with the clients and we are expecting that next year will show some significant progress.

And I think our biscuits, if you look at the market and share for c-stores, I think we are having, not as high as new opportunities yet, but we are gaining share in c-stores in biscuits as well.

Ken Goldman -- J.P. Morgan Equity Research -- Analyst

Great, thank you.

Luca Zaramella -- Chief Financial Officer

Thank you Ken.

Operator

Your next question comes from Steve Strycula with UBS.

Steve Strycula -- UBS Investment Bank -- Analyst

Hi, good afternoon. So, a quick clean-up question on the gross margin. Excluding Brazil, I think last quarter you called it out as a $25 million to $30 million profit drag to the line. How should we think about the contact specific to a Q3 and then I have a revenue question follow-up.

Luca Zaramella -- Chief Financial Officer

I think it is around about the same number, it is in the ballpark. I think clearly the -- one of the components as I called out, it is in relation to PBs powdered beverages and some destocking we had in that category. But, when you look at all the numbers excluding Brazil, you really see that the shape of the P&L is good. And as I said, particularly on the year, notwithstanding the fact that in Q3, we are lapping the highest gross margins last year, particularly on a year-to-date basis, you see that this growth model predicated on volume growth coming into fruition.

Steve Strycula -- UBS Investment Bank -- Analyst

Great. And then Dirk, can you walk us through some of the bigger chocolate markets were Mondelez entered the last few years, but not necessarily has scaled pretty big into, specifically China and the US. What's your latest thinking on about what the near medium and long-term opportunities for both those markets? Thank you.

Dirk Van de Put -- Chairman and Chief Executive Officer

Yes. So, both markets are a little bit the same for us. We entered largely from what I would say, as an opportunistic approach trying to carve out as big a niche as we can. That would lead to a market share, somewhere between 1%, 2% maybe 3% best case. We were always aware of that.

I would say now that we, that both markets have very significant players here in the US and in China that we would be up against, so we didn't want to have sort of a major strategy or a major approach. We wanted to just capture the opportunity that we had, largely using Oreo as a brand. So, so far, we have captured what we were planning to get, but we are not planning on pushing that into other brands or a major chocolate approach. We feel that we have other opportunities around the world, which are more -- which are bigger and give us a better return, and we want to focus on those first before we want to enter those two big chocolate markets or increase our presence in those two big chocolate markets in China and US.

Steve Strycula -- UBS Investment Bank -- Analyst

Okay, thank you.

Dirk Van de Put -- Chairman and Chief Executive Officer

Thank you Steve.

Operator

Your next question is from Jason English with Goldman Sachs.

Jason English -- Goldman Sachs -- Analyst

Hey, good evening folks.

Dirk Van de Put -- Chairman and Chief Executive Officer

Hi Jason.

Jason English -- Goldman Sachs -- Analyst

We've covered a lot of ground so far. So, I just want to, I guess I'll bring us back to that gross margin question to build off of Steve's prior question, I appreciate that you're up against a larger year-on-year comp, but just looking back over history, your gross margins aren't meaningfully different between the second quarter and third quarter, yet this quarter they sequentially fell by around 90 bps. With what sounds like a fairly comparable Brazil supply chain issue. I'm not trying to make a mountain out of a mole hill here, but could you just help us understand a little bit more what the drivers are of that sequential step down, and how many of them are durable in nature and which ones may dissipate with time?

Luca Zaramella -- Chief Financial Officer

Yeah, I believe look, if you really look at percentages, I think on a year-to-date basis, we are about 40%. I think we closed last year at 40.2%. So, if we really want to dissect to the decimal points, yes, we are a few decimal points behind. I don't think, Jason there is anything structural besides Brazil, and Brazil, again as I dissect the issue there is part of it that is going to persist to a certain extent into next year, and it is the powdered beverage part of it. On supply chain, we should be safe. So, I think, as you look at all the components of the gross profit delivery, volume leverage is there. I think when you look at -- and the volume mix that is 2% that is a good number.

I think that provides material leverage both into the GP line and the overhead line, and I think we see it coming into fruition. In terms of pricing last year, we announced a couple of waves of pricing in the US market, and I think as you look at the biscuit market specifically, you see volume and value going up, in that context we are gaining share.

I think in emerging markets, we clearly have the pricing discipline that is required and quite frankly, it is a little bit more sophisticated than going out and announcing big price increase as it is. Leveraging the full array of pricing, tools that we have including trade deals optimization, promo intensity, price pack architecture. And as I answered before, if I look at the composition of the commodity and FOREX inflation, and the pricing we have taken business unit by business unit, I think we did a good job in both emerging and developed markets.

And productivity, it is a little bit lower than in the past years, not because gross productivity isn't there, it is there, but we are facing a little bit more inflation on the labor front and the logistics cost. So, as I dissect the gross margin component and take myself, you know, in the context where I say OK Brazil is a little bit of an outlier, do I see us having material issues on price, net of commodities, productivity, volume leverage, the simple answer is no.

I think the one point is mostly attributable to Brazil, it is attributable to the fact that in Q3 last year, the number was higher than the rest of the year. At 40% with Brazil embedded into the number, I don't think it is for us something that we should worry structurally about. I think, having said that, we need to continue working well on delivering volume, on getting the productivities and pricing in line with inflation we see in the marketplace.

Jason English -- Goldman Sachs -- Analyst

Very well. Thank you for the fair response. I appreciate it. I'll pass it on.

Luca Zaramella -- Chief Financial Officer

Thanks Jason.

Operator

Your next question is from David Palmer with Evercore ISI.

David Palmer -- Evercore ISI -- Analyst

Thanks. Good evening.

Dirk Van de Put -- Chairman and Chief Executive Officer

Hi.

David Palmer -- Evercore ISI -- Analyst

Dirk, in the past you've talked about that country level approach to management and one outcome would be that the local power brands would be getting more marketing support. Could you talk a little bit about that. How is that going? Are your country level managers spending more on those local brands, as you had planned and are you getting a return on that investment, in terms of accelerated local brand growth, any numbers on that would be helpful, and I have a quick follow-up.

Dirk Van de Put -- Chairman and Chief Executive Officer

Yes, the short answer to your question is yes, they are spending more on the local brands, and yes, we are getting on a return on that and also we're seeing an acceleration of the growth. So, if I look at our local brands, they, for instance in 2018 they would have grown around 1%. Year-to-date 2019 they're growing about 3.5% and they were even higher in Q3. So, we clearly see the effect on our brands and we feel that we're getting a good return.

Of course, we want those local brands to grow in line with the markets and thereabouts there, but there is still -- we feel opportunity to keep on investing more. An example would be a brand like Pacific in China, which is a very local brand, which is adopted to local flavors biscuit brand and it also has a health and wellness connotation, so that plays well. We're revamping LU in Belgium and France, and there is a number of these brands around the world, which we think we need to really offer a full portfolio to our consumers. And again, to answer your question, clearly yes, we are seeing very clearly an effect on our local brands, and it's working well.

David Palmer -- Evercore ISI -- Analyst

And related to that, I would -- I would have thought by now there'll be more of those bolt-on Tate's like acquisitions around the world. You'd be getting a wish list as you get that country level approach, and they're seeing stuff that is more relevant for them in a country level, and then you'd be getting that wish list, and be building up by now and that inorganic growth would be becoming a bigger part of the story.

Do you think that, that could happen at some point, and we start to see more and more bolt-ons as they look to add to the inventory of brands?

Dirk Van de Put -- Chairman and Chief Executive Officer

Yes. We are constantly evaluating, I would say, largely in our bigger markets, what are the opportunities for us to do bolt-on acquisitions. Of course, in the first place we want to invest in our own local brands. But, if we see a clear gap in the market -- or I'm sorry, in the snacking landscape as we lay it out, and the brands fits there, like we for instance, did with the recent acquisition of Perfect Snacks here in the US, protein bar, refrigerated largely based on nuts, that is something we don't have growing very fast. So, as we see these opportunities around the world we are clearly engaging. We try to be disciplined, and so we only will do it when it makes financial sense for us and on top, we see a large runway toward becoming a significant brand. We do not want to buy brands that in the end, will not be of significant volume and net revenue to make a difference for us.

But yes, again, the answer would be yes, and hopefully in the coming quarters, you will see the effect of that.

David Palmer -- Evercore ISI -- Analyst

Thank you.

Operator

Your next question comes from Nik Modi with RBC.

Nik Modi -- RBC Capital Markets -- Analyst

Thanks. Good evening everyone. Dirk maybe. Hi how are you? Maybe you could just answer two quick ones. The first is just latest thinking on DSD. I just wanted to get your latest state of the union on that, and then the second is really talking about the breakfast occasion, as well as savory snacking and kind of how your initiatives in those areas are working and what we should be expecting, if you have any big opportunities over the next few quarters? Thanks.

Dirk Van de Put -- Chairman and Chief Executive Officer

Okay. Maybe on DSD. As we said in the past, we think DSD for us is a strength, it allows us to have a better customer service and a fuller presence, if I can call it like that in the store and we've been very pleased with our performance of our DSD in the US, and we're seeing important market share gains and we are pushing the category. Obviously, the way we think about our DSD system is as we acquire some of these bolt on brands, we are expecting to bring them over time onto our DSD system, and we've been testing that we want to trade very carefully and we do not want to do it overnight, but some of the tests we've been doing putting some of those new brands on our DSD system have been highly successful. And so, as we go forward, you will start to see us putting things like updates on our DSD across the US, which will be a big boost to the [Phonetic] Tex brand.

So, we remain very committed to DSD, and we have a clear executional expectation of how DSD will perform for our current brands. But, we also see a big opportunity to bring some of our new brands onto our DSD system.

As it relates to the breakfast occasion, do you mind repeating what you were earlier alluding to Nik, because I didn't fully understand it.

Nik Modi -- RBC Capital Markets -- Analyst

Yeah, I'm just trying to get a sense. Obviously, those are two important opportunities of growth for the company. So, just wanted to understand what your -- how those businesses performed this quarter and are there any big initiatives that we should be looking out for the next few quarters?

Dirk Van de Put -- Chairman and Chief Executive Officer

Well, the brand that we are positioning on the breakfast occasion is belVita. belVita is a biscuit that gives you sort of a slow release of energy, gives you four hour energy. It's a brand that's performing quite well. And it's a mid-single digit growth at the moment, doing quite well, particularly in the US. Our evolution for belVita is to offer it in more different forms going into soft cakes for instance, going potentially into bars and gradually expand the range of belVita to make it a full breakfast offering, not only in the US, but around the world and potentially also take the brand into mid-morning snacking, which could also be very interesting.

And I think the brand has credentials, not only from a branding perspective, but also from the active ingredients to make that happen. That's really our focus for the breakfast occasion for us.

David Palmer -- Evercore ISI -- Analyst

Excellent. Thank you.

Dirk Van de Put -- Chairman and Chief Executive Officer

Okay.

Operator

Your next question is from Robert Moskow with Credit Suisse.

Robert Moskow -- Credit Suisse -- Analyst

Hi, thank you. I just want -- this year is characterized as one of reinvestment. So, I think people are going to look at the SG&A decline as a percentage of sales, as a sign that this quarter didn't get the reinvestment as you normally would give to the business. But, then again, you've been very clear that ex -Brazil there was reinvestment and there the model was working. So, can you kind of confirm that the missteps in Brazil didn't result in any kind of lower spending elsewhere around the globe, that you knew the profit was coming in weak, in Brazil, but maybe you cut the spending a bit in Brazil, but not elsewhere.

And then secondly, a question on powdered beverage, is it about $400 million in sales, that was just my desk estimate here, in Brazil?

Luca Zaramella -- Chief Financial Officer

So, to your first part of the question, we didn't cut anywhere. Our [Phonetic] PB expenses are up materially in Q3, actually more than on a year-to-date basis. So, we protected the A&C investment as Dirk said many times, there are a couple of things to bear in mind there. The first one is, we are also skewing more toward working media so that number that on the face of it is high in terms of total A&C, is even higher, in terms of working media in the quarter and on a year-to-date basis. And the second element that has to be kept in mind is that management -- certainly management sitting at this table, but also management sitting in the business unit is not getting any pass for A&C reductions, in terms of incentives.

So, if we deliver profit in a quarter through cutting A&C, the number is not going to account in terms of incentive that we're going to get at the end of the year, and I think that is an important step forward versus the past. And the last thing we are going to do is [Indecipherable] and see, even in a context where maybe we are under a little bit of pressure from a profit delivery.

In Brazil, we deep cut some A&C, but it was due to the fact that we clearly didn't see it working. So, we are not going to be blind and say, yeah, let's spend whatever and no matter what, but I want to reassure that on that front we are not going to do anything that we will regret, in the medium to long term.

The PB categories in Brazil, it is north of $300 million. As I said, the category is a little bit challenge, we have big brands in there, namely Tang and Clight, and the local brand which is called Fresh. We are facing a couple of pressure point, one it is CSDs are taking share from the category, and the second element -- and so, the category is shrinking a bit. And the second element is, we are getting pressure from more competitive propositions and low price point propositions for consumers.

So, we are working on both, and there is a more comprehensive plan we have in place for powdered beverages, which hopefully will bring some positives. But, I think it will take a little bit of time for that plan to really be in full effect and bring the capital back up, and our share back up.

Robert Moskow -- Credit Suisse -- Analyst

Great, thank you.

Luca Zaramella -- Chief Financial Officer

Thank you.

Dirk Van de Put -- Chairman and Chief Executive Officer

I think we can stop the questions here, we are at the top of the hour. So, to wrap it up, our third quarter results, particularly our topline performance demonstrates the continued strength of our core categories and the power of our unique local and global brand portfolio.

Our new strategy, focused on growth, execution and culture is continuing to drive engagements and results across our business units. We are encouraged by our early progress against our strategy, we are equally excited about the opportunities that we see ahead of us, particularly for next year and to increase further the momentum for our company.

We see that in the form of expansion into adjacencies, driving market share gains in our existing portfolio or reinforcing the growth potential of our categories. Our focus, going forward remains on continuing to execute against our strategy and ensuring that the company is well positioned for sustainable growth and attractive long-term shareholder value creation.

Thank you for dialing in. Thank you for your interest in the company, and talk to you next quarter.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Shep Dunlap -- Vice President-Investor Relations

Dirk Van de Put -- Chairman and Chief Executive Officer

Luca Zaramella -- Chief Financial Officer

Andrew Lazar -- Barclays Investment Bank -- Analyst

Chris Growe -- Stifel Financial Corp. -- Analyst

Dara Mohsenian -- Morgan Stanley -- Analyst

Ken Goldman -- J.P. Morgan Equity Research -- Analyst

Steve Strycula -- UBS Investment Bank -- Analyst

Jason English -- Goldman Sachs -- Analyst

David Palmer -- Evercore ISI -- Analyst

Nik Modi -- RBC Capital Markets -- Analyst

Robert Moskow -- Credit Suisse -- Analyst

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