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Mondelez International Inc (MDLZ -0.15%)
Q3Â 2020 Earnings Call
Nov 2, 2020, 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 2020 Earnings Conference Call. Today's call is scheduled to last about an hour, including remarks by Mondelez management and the question-and-answer session. [Operator Instructions]
I'd now like to hand the call over to Mr. Shep Dunlap, Vice President, Investor Relations for Mondelez. Please go ahead, sir.
Shep Dunlap -- 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, 10-Q and 8-K filings for more details on our forward-looking statements.
As we discuss our results today, unless noted as reported, 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 our slide presentation. In today's call, Dirk will provide a business update, and then Luca will take you through the financials and our outlook. We will close with Q&A.
With that, I'll now turn the call over to Dirk.
Dirk Van De Put -- Chairman & Chief Executive Officer
Thank you, Shep, and good afternoon. We are very encouraged by our performance in the third quarter. Our execution was strong. We continue to accelerate our strategic initiatives, and all of our regions were in growth. Our teams have been resilient and focused, and we continued to prioritize safety during Q3, as we will for the remainder of the year. We continued to manage successfully through uncertainty and COVID-related challenges. And as a consequence, we are outperforming our categories, continuing to gain significant market share. While our category outperformance is in most markets around the world, there are very diverging markets and category situations, depending on how they are affected by COVID dynamics.
Our largest categories, biscuits and chocolate, continue to perform well. Gum is still under significant pressure due to changes in consumer mobility and habits. And Candy, while initially under pressure, also improved. Meals and powdered beverages continue to do well. Demand remains elevated in developed markets and we saw sequential improvement in emerging markets. In developed markets where more of our business is in the grocery channel and our Gum business is also smaller, we continued with good momentum. In emerging markets, the majority of our markets grew in Q3, including key markets such as India, China, Brazil and Russia. But conditions do vary, and some markets are still challenged, particularly where our portfolio skews toward Gum & Candy or where our sales are mostly in the traditional trade which is mainly in Latin America, the Middle East and Africa.
Our long-term growth strategy remains unchanged, but during this crisis we have accelerated certain initiatives in order to emerge stronger and build further on our advantaged position. First, we are simplifying our business in order to facilitate more growth and reduce costs. Examples of this would be SKU reduction and innovation streamlining. Second, we are accelerating a number of growth initiatives in order to maintain our momentum and build on our share gains. For instance, in H2 we are increasing investment in our brands and commercial capabilities. We've also focused more on the momentum in e-commerce and the grocery channel. Third, in order to offset some of the extra COVID-related costs, we have advantaged -- or advanced a number of strategic cost-reduction initiatives. We're also prioritizing stronger between capex projects.
And fourth we are rolling out changes in our way of working and optimizing our organization structures while strengthening some new, more required capabilities. Switching now to slide 5, Q3 was a strong quarter across all key metrics. We delivered organic net revenue growth of 4.4%. We are holding or gaining share in over 80% of our revenue base. We had good momentum on share coming into the pandemic, and I'm satisfied that we have sustained share gains beyond the initial phase of the crisis. This demonstrates the strength of our brands and our supply chain. Our gross profit dollars grew strongly at 6% despite the incremental COVID-related costs. And operating income grew strongly at 10.5% despite the significant increase in our brand investments.
And last, we continued to improve free cash flow generation, delivering $1.7 billion year-to-date, up $0.5 billion versus the same period last year. I'm now on slide 6. As stated, we continue to believe that our growth strategy is the right one for this environment. Not only do we believe that our strategy is the right one, we have the ambition to emerge from this crisis even stronger than we were before. To do so, we are accelerating certain areas of investment and other initiatives within the current strategy in light of the current dynamics. Let me highlight a few of these areas where we are making strong progress. We are stepping up working media investments behind our brands in the second half of this year. This is possible because we decreased our investments during the second quarter when, because of all the issues arising when this crisis just started, it did not make sense to invest.
We are seeing good results from these increasing investments. For example, as one proof point, our market share momentum continued in Q3. Also, our ROI on these investments has increased significantly. We now rank in the top tier in our industry. And interesting to note is that we are skewing our spend to digital even more. For the first time this year, we will be spending more on digital than on TV. Another area of great progress is brand equity increases. Our marketing teams have successfully adapted our brand communication to the circumstances. Some of it is focused on purpose and human connections, others on staying playful while staying at home, or some others are about reinforcing hygiene practices. As a consequence, our brands are forging stronger connections with our consumers, really connecting through their purpose.
In another area, we are on track to be 75% through our SKU reduction exercise by year-end. Our teams are focused on ensuring we don't lose shelf space or incur too much waste while increasing sales, reducing inventory and increasing line efficiency. I do want to reiterate that while 25% SKU reduction sounds like a big number, this represents a very small percentage of our revenue. A fourth highlight is that we have successfully implemented cost mitigation programs that we expect to fully offset the COVID-related costs we incur in the second half of the year. While this helps to deliver an on-algorithm year this year, it also supports our plan to continue to increase our investment in brands and capabilities again next year while continuing to deliver against our financial algorithm.
As it relates to our new ways of working, the company is functioning very well in this new reality, with most of our office associates working from home for the foreseeable future. We've also optimized our organization, shifting people to where we need them most, like e-commerce, digital, or RGM. Switching to slide 7, while the COVID crisis has been all absorbing, we are continuing to progress, even enhance, our ESG agenda. In this quarter, three areas got particular attention. First of all, we are focused on and making progress against the enhanced diversity and inclusion commitments we made in September. I am particularly pleased with our recent appointment of a new Global Chief Diversity and Inclusion Officer, Robert Perkins.
Robert will help us increase minority representation in our business and advise me, my team and the broader company on how to take further action to drive an even more inclusive culture at Mondelez. As it relates to sustainability, we are continuing to invest in creating a more sustainable supply chain for cocoa. We just unveiled the new global cocoa technical center in Indonesia, which will support sustainable cocoa farming practices and drive positive change for farmers and communities. And finally, we are developing the sustainable futures investment program to amplify our impact in sustainability areas. Its role is to invest in innovative sustainability and social impact solutions, mainly in our palm and cocoa growing communities. With these actions, even more so than before, we are living our purpose to empower people to snack right.
With that, I'll hand it over to Luca.
Luca Zaramella -- Executive Vice President, Chief Financial Officer
Thank you, Dirk, and good afternoon, everyone. Our first quarter performance was strong in terms of revenue growth, share gains, profitability and cash flow. As we exited Q2, we've already seen signs of improvement in both business units that had been heavily affected by lockdowns and traditional trade closures and we were expecting a good quarter with a combination of sustained consumption trends in developed markets but also return to growth of our emerging markets. Across Q3, we delivered growth of plus 4.4%. Our developed markets delivered a strong organic increase of plus 3.8%, while emerging markets returned to more normal levels, delivering plus 5.3%. To provide more color, in developed markets as far as North America goes, we continue to see elevated consumption versus pre-COVID levels, albeit at lower rates than in Q1 or Q2.
And for Europe, too, we saw strong mass retail demand across all our key markets. In emerging markets, we saw good growth in 80% of the business units revenue base including in large businesses like India, China, Russia and Brazil as operation restrictions eased, enabling better mobility and access to traditional trade. Although the situation is better in the vast majority of our emerging markets, we expect some COVID restrictions and challenging economic circumstances to continue in part of Latin America and Middle East, Africa and impacting disproportionately our Gum & Candy categories. Growth this quarter included impacts of trade restocking as demand spiked in North America and European retailers as well as traditional trade closures in emerging markets, resulting in trade inventories below normal levels as we exited Q2.
This contributed approximately one point of growth. Turning to slide 10, Q3 revenue growth was driven by solid volume and pricing. Mix was unfavorable due to lower world travel retail and Gum revenues. As mentioned, growth includes approximately one point of pipeline refill. In terms of categories, Biscuits continued to experience strong demand with growth at nearly 8% driven by North America, EMEA and EU, with oil a key contributor and an important driver of our share gains in the categories. Chocolate returned to growth at more than 5%. This was aided in part by large chocolate businesses such as India and Brazil returning to robust growth, not overall. All key markets like the UK, Germany, Russia, Australia, France and Nordics did have a very good quarter. These results also include nearly 2.5 points of headwind related to world travel retail.
Overall, category is doing well and on top we are gaining share. Gum & Candy declined double-digit, primarily driven by Gum which improved from Q2 lows but it is facing significant headwinds from social distancing and less out-of-home activity and this particularly affected in some emerging markets like Mexico and Western Andean. Turning to slide 11, I wanted to spend a moment on e-commerce as this channel has clearly taken on more importance. E-commerce revenue grew 78% on a reported basis in Q3 and represents 5% of our revenue base. In our top four market we grew triple digits in the U.S., close to triple digits in the U.K. and double digits in China and France. In some of those markets, our e-commerce share is greater than our offline share while in others we had more headroom.
We see multiple instances of significant e-commerce share gains this year such as, Yes [Phonetic] Biscuit and UK chocolate. Importantly, we believe e-commerce is driving incrementality as we look to meet and generate additional demand. This is also additive to our bottom line with profitability comparable to our offline business. Basing on our existing trends, we are making substantial investments to take this business to the next level. This includes our increased investment in more digital working media, data-driven engagements and improved online shopping site. Ensuring we have the right packs and the right price, we did packs and bundles and testing new platforms to explore incremental opportunities. We needed to be [Indecipherable] to consumers.
Turning to capital and share highlights on page 12. Our efforts to drive meaningful and sustained share gains is succeeding as strong execution of our teams, trusted global and local brands and investments in more working media with competitive ROIs are continuing to yield very good results. We have had or gained share in 80% of our revenue base on a year-to-date basis. What we've shown on this slide is rounded to the nearest 5% but we were down 3% when compared to the last quarter as biscuit ticked down slightly. Biscuits and chocolate were the big drivers once again as biscuits has gained sharing 90% of our revenue base and chocolate has gained an 85%. Gum & Candy has gained 45%. Notable share gains included U.S., France, China, Russia biscuits and UK, Russia and Australia chocolate.
Many of these share gains such as Yes in China biscuits and UK chocolate are quite significant in terms of their absolute size. Similar to our commentary last quarter, it is important to understand that the year-to-date category goal of plus 3.7% that reflect unmeasured channels such as convenience and world travel retail. It's also but not include the impact of our real business, which is performing quite well. Now, let's review our profitability performance on slide 13. Overall, our profitability was strong in the third quarter. We increased gross profit due to volume leverage and productivity as well as some promotional efficiencies. Operating income dollars increased more than 10% due to over reductions and simplification efforts, which help offset COVID-related costs of approximately $50 million. COVID costs this year had been totaling so far about $200 million.
Importantly, we continue to step up our working media investment to further strengthen our brand, stay top of mind with consumers and position ourselves well going forward. Moving to regional performance on slide 14, North America grew 6.3% driven by elevated biscuit consumption and strong share gains. Ongoing investment in working media and strong execution are helping us to sustain our growth based share gains. Gum was down double digits due to limited undergrowth consumption occasions. North America operating income increased by more than 18% due to volume leverage and cost control initiatives more than offsetting COVID-related costs and meaningful working media incremental investment. Europe revenue grew 3.4% in the quarter. We saw our group traffic grow in Chocolate, Biscuits and Meals.
The breadth of growth across key markets was quite impressive with solid results in UK, France, Germany, Russia, Benelux and the Nordics. In terms of headwind, world travel retail continued to trend well below last year at circa 20% of 2019 revenue, and that had a headwind of more than two points to the EU. In terms of share performance, we drove notable share gains in the UK, France, Germany and Russia. OI dollars returned to growth as solid increases in volumes more than offset COVID-related costs and unfavorable mix. In addition, working media increased in the quarter. EMEA posted growth of 4.2% with growth across most markets as operating restrictions had become less onerous. China grew high single-digit, totaling double-digit growth in Q2 with significant share gains in Biscuit. India returned to growth with a high single-digit increase for the quarter driven by Chocolate and significant Biscuit growth, and the excellent execution of the team there.
Australia, New Zealand and Japan posted low single-digit growth. Southeast Asia grew mid-single-digits in Q3, but we did see some headwinds in certain countries such as Thailand and the Philippines where toward the end of the quarter capital slowed down due to more difficult economic conditions, which are expected to persist in the near-term. Our Middle East and North Africa business declined low double digits as the economy there remains pressured. EMEA operating income dollars grew nearly 17% due to volume increases and cost mitigation efforts despite meaningful increases in working media. Latin America grew 3.1% behind better results in Brazil, while Argentina grew due to inflation-driven pricing. Ex-Argentina, Latin America grew by approximately 1%. Mexico declined low double digits due to a significant decline in Gum & Candy, which is more than 40% of that business as out-of-home categories remain impacted by social distancing.
The Biscuits business in Mexico posted robust growth. In Brazil we posted double-digit growth in the quarter driven by growth in powder beverages, chocolate and biscuit. Underlying growth was mid-single-digits when taking into consideration the lapping of the supply chain-related issues last year. Gum & Candy remains significantly impacted by COVID, posting double-digit declines. We feel good about the continued progress of our supply chain in store execution and marketing in this country, but we know that we have more work to do. Our Western Andean countries posted a decline as COVID continues to impact traditional trade channels. Gum & Candy as a category is down double-digits. OI in Latin America grew 11% as prices, cost containment measures and improved supply chain performance more than offset COVID-related costs.
We also benefited from currency hedges that are better than current spot rates. Our expectations is that part of Latin America will remain challenging in the near term given the restrictions in place and economic environment in many markets. We remain focused on execution and targeted investment to drive share gains as well as cost controls. Now turning to earnings per share on slide 18, on a year-to-date basis EPS is up 6% driven mostly by operating gains. Q3 EPS was flat versus previous years with operating gains of $0.06 and factors offsetting them. I'll now move on to our free cash flow on slide 19. We delivered free cash flow down from $1.7 billion through the first three quarters, an increase of almost $500 million versus previous year. Higher earnings, more focused capex, lower restructuring and strong working capital management with a three-day improvement in our cash conversion cycle helped drive these results.
In addition, deferred tax payments, some of which will reverse in Q4, also positively impacted these results. Moving to our outlook on slide 21, visibility still remains challenging in several markets, but we are providing an updated view of our full year expectations based on what we know today. We expect full year organic revenue growth of 3.5% plus. Implied Q4 would be broadly in line with Q3 when excluding the refilling of trade stock. We expect overall good EBIT growth in Q4 but below Q3 levels, particularly as we continue stepping up working media as we face some additional inflation in North America around transportation costs and that in Latin America we expect the benefits of favorable currency hedges to subside.
For the full year, adjusted EPS is expected to grow at 5% plus at constant forex. Free cash flow should be approximately $3 billion, ETR should be in the low to mid-20s and adjusted interest expense is projected to be approximately $350 million. We are also planning to reinstate our share buyback program in the fourth quarter, given the business is performing well, cash flow is strong and we have further strengthened our balance sheet. It is not expected to have a significant impact on EPS this year given proximity to year-end. Forex translation is now expected to negatively impact our reported revenue by approximately 3 percentage point and EPS by $0.04 on the year based on current market rates.
This is based on current conditions and does not factor in a significant degradation of the operating environment that could be triggered by material worsening of COVID. This also incorporates the full year expectations, a continuing level of elevated demand and in-home consumption in certain developed markets such as North America and Europe mass retail, headwinds in certain emerging markets, predominantly in our Latin America region, the Middle East/North Africa countries, and part of Southeast Asia, and in our Gum business continued weakness in world travel retail.
With that, let's open in up for Q&A.
Questions and Answers:
Operator
[Operator Instructions] And your first question is from the line of Andrew Lazar with Barclays. Please go ahead.
Andrew Lazar -- Barclays Capital, Inc. -- Analyst
Great. Thanks so much. Good afternoon. Dirk, as you pointed out in the prepared remarks, organic sales growth was strong across all regions. Perhaps you can maybe take us through your thoughts on how trends look currently in key regions as you enter 4Q. And then as a follow-on, maybe you can extrapolate kind of 3Q results into 4Q and whatever you feel comfortable talking about now regarding '21 at this stage, because the company will obviously be lapping significant COVID costs, while some incremental brand investment you'll be lapping, as well as have incremental cost saves kicking in right as you go into next year as well. Thanks so much.
Dirk Van De Put -- Chairman & Chief Executive Officer
Okay. Thank you, Andrew. Maybe what I can do is do a little tour maybe through categories and regions, because the two are quite linked, and then Luca can talk about Q4 and '21. So if you look at the categories, the categories are affected by the mobility of the consumer. So I would say that 80% of our revenue is coming from advantaged categories that are performing very well. And on top in those categories we have strong Mondelez brands, and we are increasing our market share. So Biscuits is the main driver at the moment. The demand remains very strong globally. We had high-single digit revenue growth in Q3, and we had very strong share gains. Chocolates came back in Q3. It accelerated versus Q2 largely because some of our emerging markets came back, like for instance, India.
And the 5% growth that we're seeing in Q3 is despite the world travel retail headwind, which squeezed off two points of the growth of chocolate. And, yeah, world travel retail, as you can imagine at this stage, is still lower than 20% of what it used to be. I think we do see that chocolate growth because we have a very advantaged portfolio, which is skewed to at-home consumption. In the emerging markets we have a low unit price. We have good affordability in our chocolate and middle-of-the-road with the right price points. The one that remains very challenged is Gum. We knew that in recessions or in moments that Gum is affected, it recuperates slowly but it's probably recuperating a bit slower than we would've anticipated. And that has to see everything with the consumer mobility. 75% of gum consumption is on the go.
And even if we're not in lockdown anymore, or unfortunately about go back to lockdown in Europe, the consumer is still not as mobile as before. And then meals and powdered beverages are doing quite well. So if you keep that in mind and then you go through the regions and you know more or less what the mixes of the regions, it gives you an idea of how we're doing. So North America, 80% biscuit, demand of biscuit, as I said, remains very elevated. Our execution has been very strong. Very strong share gains. Consumers are snacking more at home, still well above the pre-COVID level -- not as high as in March and April, but still quite increased consumption. And so North America is solid. And seeing where we are with COVID and the fact that we probably will get more recommendations to stay at home, we expect this elevated consumption to continue for a while.
We said the same in Europe in mass retail, but our business there is more also on the go with Away from Home and world travel retail is consolidated in our European numbers. So apart from that, Europe has very strong mass retail. And now that we go back in lockdown, we can expect that to remain like that. And we did see an improvement in the convenience channel in Europe. But, as I said before, the world travel retail still remains very soft. And then in emerging markets, two thirds of our markets, which we had already mentioned in the Q2 call, bounced back quite nicely. I'm talking about China, India, Brazil and some of the European emerging markets like Russia.
Q2 was disrupted, but they're all coming back all at high single-digit growth. At this stage we do not expect a repeat of the disruption that we saw at the beginning of the crisis. I think it's impossible in those countries to do the same sort of lockdowns that they did because it led to severe economic effects. So we continue to see those markets recuperating, with bumps. It's not going to be one nice growth effort. It depends a little bit on the local situation and what the government does. But overall, I would suspect the emerging markets to gradually keep on improving. And then there is one third of our emerging markets that are in situations where the macro effects are more pronounced on top.
Unfortunately, those markets are having a high mix of gum and candy in their sales, and so they are severely affected. And those are the ones that are having more serious problems. I'm talking about Mexico, Central America, talking also about the Middle East and parts of Africa and also a few countries in Southeast Asia. So that gives you an idea where we are. I think that situation will continue in Q4 and even stretch out in the beginning of next year. I don't see a huge change taking place on the regional situations as we see them today. Maybe, Luca, you can talk a little bit about Q4 and 2021?
Luca Zaramella -- Executive Vice President, Chief Financial Officer
Yeah, sure. Hi, Andrew. So beating on what Dirk just said, we have line of site at this point to, as we said, full-year revenue outlook number that is 3.5-plus percent, and importantly, as Dirk just said, all the underlying trends that have been discussed so far are totally unchanged into Q4, and certainly as we start November. And that is why we see Q4 in terms of top line that is 3% or so growth. As far as EBIT goes, Q4 should be another strong quarter. I want to reiterate that, now more in line with last year ROI growth rate, we will continue investing in working media. We see the benefit of that. Dirk alluded to higher ROI and the share gains are there to justify the metric of continuous investments. There will be some effect but lower than in the past in terms of COVID costs as well as -- and we are very pleased with the positive effect of the cost initiatives that we are putting in place, that we have put in place as part of the emerge stronger.
Nevertheless, we see some cost pressures particularly in the U.S. insolidated demand. And indeed, we had to improve on shelf availability. It's causing some extra logistics cost. We have been hearing also by competitors and others that there is a pressure, we are feeling it as well as we buy a portion of our transportation on the spot market, and as I said inflation is quite high. In addition, we are earning out of some positive truck hedges in Latin America. In other words, I would say gross profit will be more muted in terms of growth in Q4 versus the 6% you have just seen in Q3. On 2021, we are still going through the plan for next year but based on what we know so far, we believe that 2021 should be [Indecipherable]. I can give you some flavor on the building blocks of the plan. First of all, we expect to retain our share gains and to continue to invest not only in working media but in marketing and sales.
We talked many times about the distribution opportunities we have around the world in emerging markets as one example. Despite COVID costs subsiding into next year and the emerge stronger initiatives that in our mind will carry the benefits into 2021, we will reinvest the upside in the business to sustain the material share gains that you see and potentially to weather a more recessionary environment. Biscuits and chocolates from what we see today will continue to do well. But as you say, we will be lapping some elevated growth in 2020, particularly in developed markets in biscuits. But on the flipside, I think there should be recovery of the most impacted COVID capitals and countries. Talking about costs, commodities enforce inflation is -- is both strong aligned to what we have seen in the last few years.
In some cases, for instance in chocolate and cocoa and in some countries, for instance Brazil, there will be higher inflation, but overall, we are in the neighborhood of what we have seen in the last few years. The sum of all of these again should lead to a 2021 that should be a number even. We will have to stay tuned and I'll give you more flavor and updates as we post the Q4 results, but needless to say that there are still some unknowns like Brexit or the potential tax change in the U.S. or a material relapse of COVID. And so I think it is important that we stay agile, and we talk to you more about the situation if there is evolution of what we know.
Andrew Lazar -- Barclays Capital, Inc. -- Analyst
Great. Thanks, everybody.
Luca Zaramella -- Executive Vice President, Chief Financial Officer
Thank you, Andrew.
Operator
Your next question is from the line of Dara Mohsenian from Morgan Stanley. Please go ahead.
Dara Mohsenian -- Morgan Stanley -- Analyst
Hey, guys.
Dirk Van De Put -- Chairman & Chief Executive Officer
Hey, Dara. How are you?
Dara Mohsenian -- Morgan Stanley -- Analyst
So the market share results have been very impressive for you guys this year in biscuits and chocolate, obviously you had some momentum pre-COVID but it's ramped up even more during COVID. So just wanted to get your thoughts on the sustainability of Mondelez market share gains as you look out to 2021, particularly as you have to cycle these difficult COVID comps and perhaps had a higher A&C spend might play into that?
Dirk Van De Put -- Chairman & Chief Executive Officer
Yes, yes. First of all, this quarter the areas where we are gaining or holding share is at 85%. It's about three points lower than it was the previous quarter, that's minor. And so overall I would say we've held on to our share geographically speaking, and in varying terms very well. What's more important, which we don't report here but which we know is that the size of the market share gains is quite significant. And it seems some of the more important areas like in China [Indecipherable], Germany chocolate or biscuits in the U.S., China, Brazil, Germany and so on. If we analyze what happened, in the beginning I would say at the beginning of the COVID crisis, it was our supply chain and our route to market that partially helped us because we saw an increase of our total distribution points.
We saw a very good customer service levels, seeing the circumstances and so on and we have DSD in some parts of the world. We also know that consumers in this crisis tend to go to trusted brands. They want to feel safe so they go to the brands they know and trust, particularly the big heritage sort of taste of the nation brands around the world, and then we are accompanying that with increased media and adaptive messaging on our brands as much as we can to the COVID situation and that all seems to play very well for us. We've done a number of very successful adaptations of our brand so we can see the equity that is in our brands increasing.
And then the third factor I would say is since there was more at-home snacking, our range that we have in the different categories, our range of products is better suited. We are more in the classical biscuits and crackers I would say, which is very well-suited for home consumption and also in the tablet category of chocolate. And that's really helping us. So going forward, we're doing a number of actions to sustain those share gains. We increased our working media in the second half, but going into next year, we are continuing to do the same thing. And so yes, as Andrew was mentioning, we lapped a number of things that will be beneficial for us.
We also have some cost pressures, obviously, but we are also increasing again our A&C investments. Our algorithm allows us to do that, and I think it's critical in a situation where there might be a recession and the consumer might still be a little bit unsure. I think we need to keep on supporting our brands. So we think that will help. We are doing a lot of work on in-store visibility starting Christmas early, probably will start Easter early. We've got some very big team activations coming up for next year, some very exciting stuff. And so I feel that we probably have the best activity plan related to our brands that we've had in a number of years coming up for next year.
And then we are working very hard in our promotional strategy, really keeping an eye on value and any value plus strategy that we need to do like multi-bites or family packs or whatever is needed for the at-home consumption. And the last thing we are doing is that we've done a number of launches of innovation in certain countries like and expansion of the Milka spread, the launch of the LU biscuit brand in Germany and so on. And based on all these things and the fact that we have the momentum and we are seeing great connection of our brands with the consumer, we are confident that on top of the elevated level of this year, we can increase our market share for the next year.
Dara Mohsenian -- Morgan Stanley -- Analyst
Great. Thanks.
Dirk Van De Put -- Chairman & Chief Executive Officer
Okay.
Luca Zaramella -- Executive Vice President, Chief Financial Officer
Thank you, Dara.
Operator
And your next question is from the line of Ken Goldman we J.P. Morgan. Please go ahead.
Ken Goldman -- J.P. Morgan -- Analyst
Hi. Good evening.
Dirk Van De Put -- Chairman & Chief Executive Officer
Hi, Ken.
Ken Goldman -- J.P. Morgan -- Analyst
You have taken down your exposure to joint ventures this year. I wanted to ask a little bit about this. Dirk, you previously qualified these JVs maybe a little bit more as investments than core strategic assets. Can you give us, how do you see these investments today in respect to maybe some other opportunities you have out there? And does the sale or partial sale of your equity, does that say anything about your longer-term strategy if anything? I guess I'm just trying to get at what's the plan here going forward for some of these assets, if you're willing to talk about it? Thank you.
Luca Zaramella -- Executive Vice President, Chief Financial Officer
Yeah. Thank you, Ken. Maybe I'll take that. I mean we reiterate what we said many times. We remain optimistic about both assets. They have clearly a long-term potential. To start with, they compete in strong categories. They have solid fundamentals as categories. And these companies are equipped to get more traction on key trends like on-demand coffee, as one example only. They are gaining share. They have a clear strategic direction. They are executing quite well, and there are strong management teams that can even enhance the advantage of the categories and both the brand that both companies have. So there are all the ingredients in our mind for long-term top and bottom line cash flow potential.
We are not able to really talk specifically about our JV and the results so far. But I think you saw a strong quarter for KDP. Continued momentum, top line weakened consensus gained penetration, some share momentum to EPS and really strong outcomes across all metrics. And they continue to deleverage and create cash flow. So we believe that the value is higher than the current stock price would say for both companies and not inconsistent with other country companies as well in the broad CPG world. We made a series of moves that, quite frankly, were more tactical than anything. And if you look at our balance sheet, we have showed the top quite well since the beginning of the year. So on KDP, we are comfortable around current levels of ownership and if we make part of trades, they will be -- drive value for us, and we will try to coordinate with other major shareholders.
And on JV, clearly, we are a major shareholder. We own 22.9% of the company. We did welcome the IPO that is giving us an avenue for optionality and having said that though, we are committed for the long-term success of the company. You might expect some trades from us in the coming quarters that should improve the current limited flow. But we will remain disciplined, both in JV and KDP. And under current circumstances, we want to retain the privacy in both stocks. So what we have seen recently was more tactical than anything. We took advantage of certain stock price levels. We remain committed to these companies, and we really believe in the potential. But as you said, over time we want to replace those with snacking assets.
Ken Goldman -- J.P. Morgan -- Analyst
Great. Thanks much.
Operator
Your next question is from the line of Bryan Spillane with Bank of America. Please go ahead.
Bryan Spillane -- Bank of America Merrill Lynch -- Analyst
Hey. Good afternoon, everyone. So maybe just a follow up on, Luca, the comment you made in response to Andrew's question related to algorithm next year. And more interested at this point in cash flow so I guess two questions around that. One, would you expect that free cash flow would also be, or free cash flow conversion would also be sort of on algorithm? And then maybe connected to that, part of the algorithm has been returning cash to shareholders, right, via share repurchases and dividend increases annually. So would we expect that that would be part of the equation again in 2021?
Luca Zaramella -- Executive Vice President, Chief Financial Officer
So the straight answer to the last part of the question is absolutely yes. We remain committed to dividends, to what we said several times about dividend growing in excess of EPS. I think the last dividend increase reflects that. Share buybacks should continue absent acquisitions or things that at this point might happen or not. And so I would say, yes, there should be share buybacks. And finally, on free cash flow, free cash flow there is no reason to expect a slowdown into next year. Having said that, I think you know we went public with JV that we set the base for tax purposes in Europe. And there is a tax component that is going to be tracked into free cash flow next year. But I feel like at this point, it might not be going up from this year but considering some of the facts, one-timers that I just talked, I think you can think about a $3 billion, $3-plus-billion cash flow even for next year. That's the plan at this point.
Bryan Spillane -- Bank of America Merrill Lynch -- Analyst
Okay. Terrific. Thanks, Luca.
Luca Zaramella -- Executive Vice President, Chief Financial Officer
Thank you, Bryan.
Operator
And your next question is from the line of Chris Growe with Stifel. Please go ahead.
Chris Growe -- Stifel, Nicolaus & Co., Inc. -- Analyst
Hi. Good evening. Thank you.
Luca Zaramella -- Executive Vice President, Chief Financial Officer
Hi.
Chris Growe -- Stifel, Nicolaus & Co., Inc. -- Analyst
I just had two questions if I could. Hi. The first one is in relation to the SKU rationalization program. Just wanted to get a sense. Does that start here in the quarter? Does that ramp up in the fourth quarter into next year? And I guess I'm also curious like where you see the benefits of that coming through? So as you come behind that with more innovation, is it just better volume growth? Is there mix improvement, that sort of thing? And then just a quick question if I could on inventory levels. You got some benefit this quarter from shipping inventory. Are you back to where you want retail inventories to be or your own inventories? Are there more building to go as we move in the fourth quarter next year? Thank you.
Dirk Van De Put -- Chairman & Chief Executive Officer
Okay. Maybe I'll do the SKUs and then Luca can do the inventory. So the SKUs, the timeline on that is gradual, largely driven in negotiations with the trade. Around the world, there are certain moments you can make these changes, and for instance in Europe, that moment is the beginning of next year. So we are preparing for it now, but the implementation will only be the beginning of next year. So roughly I would say if you look at it around the world, we should be 75% done by year-end, and than the rest would be done in the beginning of 2021. You have to think about this as part of a broader simplification program, that is meant to drive both the top line and the bottom line and cash flow. It's a simplification of SKUs, the number of innovation initiatives, and also looking at our brand portfolio. So we do not expect the negative top line impacted.
They represent, the 25% represents a 2%, 3% of our revenue, but we think we will easily replace that with higher velocity on the remaining SKUs. We will get more shelf space. And then the benefits as I already mentioned, more sales. We expect our inventories to go down because it's those SKUs that take a lot of inventory. In manufacturing, it is less complexity, less downtime, fewer changeovers so it gives us a benefit on our costs. And on the customer side, we give them better customer service. It's going to be easier for them to manage their shelf and so their costs go down too. So it's a support to deliver our long-term algorithm. This is not meant to be transformative from a margin perspective but it does help us to deliver on the top and the bottom line in the cash flow of our algorithm. Luca?
Luca Zaramella -- Executive Vice President, Chief Financial Officer
Yeah, on inventory levels, there are obviously puts and takes. I would say we go to a more normalized level at the end of Q3 although I think we are in a decent situation. As I said, there might be places where we need to do a little bit more, otherwise we are fine. I wouldn't expect a big pick up due to inventory replenishment in the quarters to come and obviously we want to end the year with the right level of inventory as we have always done.
Chris Growe -- Stifel, Nicolaus & Co., Inc. -- Analyst
Thank you for those answers. I appreciate it.
Luca Zaramella -- Executive Vice President, Chief Financial Officer
Thank you.
Operator
And your next question is from the line of Robert Moskow with Credit Suisse. Please go ahead.
Robert Moskow -- Credit Suisse -- Analyst
Hi. Thank you. Just wanted to make sure I understood the implied sales guide for 4Q. It seems like it's below 3%. Year-to-date you're at 3.9%, so just wanted to understand why it might be lower than year-to-date. And then also can you be more specific about the cost reduction plans, the efficiency plans? It looks like in the quarter they were in LatAm and they were in EMEA. And is that where most of these cost reduction plans are going to take place? And if so, does that make it more difficult to capitalize on the growth as they recover? Thanks.
Luca Zaramella -- Executive Vice President, Chief Financial Officer
We said it is 3.5% plus on the full year, so we imply a growth rate, as I said. It is about 3% for Q4. I wouldn't read too much into a different number than 3% in Q4. I also clearly said that there is 1 point of growth in the 4.4% that you see in Q3. So again, we are not mindful as you think about Q4. Importantly at this point, we ended the year with the right level of trade inventory. And as we look into next year, again, we want to reign up all the initiatives that will allow us to be a year that is on our date. And I think that's the simple way to think about it. In terms of cost initiatives, I would say they are pretty much across the board. The emerge stronger initiatives, the initiatives we have taken in terms of redesigning our cost packages, in terms of pushing net revenue growth, in terms of working to reduce nonworking media, and increasing working media. Those are effects that you see consistently throughout the region. Yes, there might be regions like the U.S. or North America where we did a little bit more in terms of revenue growth benefit. But overall, again, they are steadily consistent across the board.
Robert Moskow -- Credit Suisse -- Analyst
Okay. Thank you.
Luca Zaramella -- Executive Vice President, Chief Financial Officer
Thank you, Robert.
Operator
And your next question is from the line of Alexia Howard with Bernstein. Please go ahead.
Alexia Howard -- Sanford C. Bernstein & Co., LLC -- Analyst
Hi, there. Good evening. Can you hear me OK?
Luca Zaramella -- Executive Vice President, Chief Financial Officer
Yeah, hi.
Dirk Van De Put -- Chairman & Chief Executive Officer
Hi, Alexia.
Alexia Howard -- Sanford C. Bernstein & Co., LLC -- Analyst
Two quick questions. Firstly, on emerging -- e-commerce. You talked about how [Technical Issues]. And then my follow-up is [Technical Issues]. Are you thinking about changing back [Technical Issues]? Thank you.
Dirk Van De Put -- Chairman & Chief Executive Officer
Thanks, Alexia. It was very broken up, so I had difficulties understanding what you exactly asked. There was an echo somewhere on the line, and made it difficult. I think you -- I heard it was about e-commerce, but I don't know what the details were. Could somebody -- do Luca or maybe you can try again?
Luca Zaramella -- Executive Vice President, Chief Financial Officer
No. Yeah, I didn't understand the second part of the question at all. I mean I know the first part was about e-commerce. The second part, I had no clue.
Alexia Howard -- Sanford C. Bernstein & Co., LLC -- Analyst
Can I try it -- can you give me? Let's try once again. Is a clearer now?
Dirk Van De Put -- Chairman & Chief Executive Officer
Yes. Yes.
Alexia Howard -- Sanford C. Bernstein & Co., LLC -- Analyst
Perfect. All right. So on e-commerce, you mentioned that you are underrepresented in some areas and overrepresented in e-commerce, different regions, and obviously areas where you're underrepresented relative to your brick-and-mortar sales. That might be the area where you've got more headroom. Could you just give us an idea of which regions those are where you think there are real opportunities? And then the second question was on cocoa sourcing. I'm just curious about whether you might be changing your regional approach to cocoa sourcing given your current new Center of Excellence in Indonesia? Meanwhile there's $400 a ton cocoa taxes going in, in some parts of Africa. Are you still thinking about changing your regional approach to where you're getting the cocoa from globally? Hopefully, you can hear that better?
Dirk Van De Put -- Chairman & Chief Executive Officer
Yes. Yes. Yes. Now it worked. It was not you. It was the technical side of things, Alexia.
Alexia Howard -- Sanford C. Bernstein & Co., LLC -- Analyst
Understood.
Dirk Van De Put -- Chairman & Chief Executive Officer
On e-commerce, yes. First of all, we're seeing very good growth in e-commerce, as I mentioned in the prepared remarks. Roughly, you could say that our e-commerce headspace is largely in China and in the U.S. The rest, the two other big countries we have are the UK and France. But I would say the biggest gap we have in China, which we are catching up. We're working very hard on that. Overall, we've seen market share gains largely in most of the areas around the world with the exception of France at the moment. And we've also started to enter into smaller countries, and that is going to give us some extra gains also. Overall, though, if you take globally, our shares on and offline are similar so we have some headroom here and there, but then we are overrepresented somewhere else.
So that's a little bit the situation on e-commerce. Going forward, it's about expanding the assortment to meet the channel needs. It's about recreating impulse experience. It's about developing our data as it relates to the consumers and getting better connections with them. It's about putting more investments in there and then experimenting with two other areas the developing for us in e-commerce, which is e-business-to-business and direct to consumer. So also important to mention is that our margins are similar online and offline. So that's the situation on e-commerce. If I go to cocoa, we're experimenting with cocoa in other regions, but at this stage, we are going to continue in large part to source from Ghana and Ivory Coast. We source in Latin America. We source in India.
We source in Indonesia. But we are one of the biggest cocoa buyers in the world, and so if those regions do not offer us enough quantity to shift -- and shifting, developing real cocoa sourcing takes years. So we're working on that, but it's not going to happen next year, not with the amount of cocoa that we need to buy. On the other hand, we have already started to reflect the extra LID, or the living income differential, into our pricing, and so we are fully set to absorb that next year. And we feel good about supporting what the government in those two countries are trying to do. We think it fits in our ESG approach.
And at the same time, we want to keep on going with our own program, Cocoa Life, which is our complementary to that. We think it's the right thing to do because we want a real, sustainable future for cocoa, and farmer income is really critical. And we are making sure through Cocoa Live that we can actually see that and monitor what is going on. So we are planning to have 100% of our cocoa volume by 2025 being sourced through our Cocoa Live program. So I would say that is the answer on cocoa.
Alexia Howard -- Sanford C. Bernstein & Co., LLC -- Analyst
Perfect. Thank you very much for the color. I'll pass it on. Thank you.
Dirk Van De Put -- Chairman & Chief Executive Officer
No problem.
Luca Zaramella -- Executive Vice President, Chief Financial Officer
Thank you.
Operator
And your final question is from the line of David Palmer with Evercore ISI. Please go ahead.
David Palmer -- Evercore ISI -- Analyst
Thanks. Good evening. Just a follow up on emerging markets and a question on the marketing or growth reinvestments. On EM, you had last nice improvement in Russia, Brazil, and some other markets, and you mentioned in a previous question that you expect emerging markets to continue to improve. I think you also said in your prepared remarks that there was some late quarter slowing in Asia outside of China. And maybe just some clarification about where you feel like the momentum is continuing to improve across emerging markets would be helpful.
And then just in terms of your growth reinvestments, you guys don't have sort of just a windfall this year such that you're spending a ton of money in advertising. So I would expect this to be somewhat of a measured plan about what you're doing. And you said advertising, or working media, as you said it, would be going up particularly in digital. So could you talk about that gross spending? Where you're spending it? Where you getting the higher ROI? And do you think that's going to continue into 2021? Thanks.
Dirk Van De Put -- Chairman & Chief Executive Officer
Okay. Maybe I'll take the first part, and then you'll do the second part, Luca?
Luca Zaramella -- Executive Vice President, Chief Financial Officer
Yeah, of course.
Dirk Van De Put -- Chairman & Chief Executive Officer
So on emerging markets, I would say the temporary headwinds in our minds do not hamper the long-term prospects. We feel that we are executing well. We have an advantaged network. We have deep distribution. We have good momentum pre-crisis. We're coming out of the crisis in most of the emerging markets. It's very fast. I'm thinking about India, Brazil. We have share gains that we see and obviously, we can only focus on what we control which is execution, cost management, selective investment. We remain confident about two-thirds as I mentioned and those are the markets where we're seeing good momentum, China, India, European.
Sorry, emerging markets, Brazil, a little bit of the parts of Africa. We feel that they are already back in positive territory. We're confident that they will keep on growing. They were performing very well for us before the crisis. If anything, I think we've improved our position during the crisis and we have very strong teams on the ground. Where we are cautious and where we need to work hard because we are hampered by the local situation that's more in Latin America, thinking Mexico, thinking LatAm for us which is the Central American, Caribbean, and Colombia and some of the Middle Eastern and Southeast Asia countries.
That is where gum and candy is big for us and the recuperation of gum and candy is going to be critical for us. So we are doing a lot of work on how to promote gum consumption in the time of COVID where people are spending more time at home and they're wearing masks and so on, which is contraindicative for gum consumption. And we are trying to make sure that for next year we see good momentum in that category. So that's the parts where I would say that we are a bit more careful. Luca?
Luca Zaramella -- Executive Vice President, Chief Financial Officer
Yeah, so A&C, David, the way you have to see it is particularly in Q2 due to the circumstances we pull back. And so we've doubled down the second part of the year, and as we said many times, the share gains that we're seeing they are truly broad-based. They are because multiple brands, multiple countries with the exception I would say of gum. We are extremely pleased with the share gains we are seeing in biscuits and chocolates. And so we want to retain those and we will continue to invest into 2021. So this will be, in fact, the COVID cost will subside between the fact that in Q2 we will be lapping lower A&C spending.
I think you will see an algorithm that in terms of EBIT and EPS expansion, should be in line with expectations for next year. Don't expect the same material impact that we are having in the second part of the year in terms of working media into next year, as, A, we will be lapping a lower Q2, and B, we will have other levers into the P&L including COVID cost that will subside to be able to fund these incremental investments. But reality is the more we can retain those share gains, the better, even in a complex where it might be. Capital would be likely impacted by a potential recession.
David Palmer -- Evercore ISI -- Analyst
Very helpful. Thank you.
Luca Zaramella -- Executive Vice President, Chief Financial Officer
You're very welcome, David.
Dirk Van De Put -- Chairman & Chief Executive Officer
I think we're done. No further questions?
Operator
Yes, sir. And there are no further questions at this time. I would like to turn the call back to management for closing remarks.
Dirk Van De Put -- Chairman & Chief Executive Officer
Okay. Thank you, Angela. Well, thank you for connecting. As you can see, we had a good, solid third quarter. We feel good about where the fourth quarter is heading and how we will close the year. We've given you a first flavor of what '21 looks like, which we also feel pretty good about, and obviously in the next call, we will give you the guidance for the year if that is possible because you never know what happens in these COVID situations. Thank you for your interest and thank you for your questions. And if there's anything else, feel free to connect Andrea or Shep and we can give you more information. Thank you.
Operator
[Operator Closing Remarks]
Duration: 64 minutes
Call participants:
Shep Dunlap -- Investor Relations
Dirk Van De Put -- Chairman & Chief Executive Officer
Luca Zaramella -- Executive Vice President, Chief Financial Officer
Andrew Lazar -- Barclays Capital, Inc. -- Analyst
Dara Mohsenian -- Morgan Stanley -- Analyst
Ken Goldman -- J.P. Morgan -- Analyst
Bryan Spillane -- Bank of America Merrill Lynch -- Analyst
Chris Growe -- Stifel, Nicolaus & Co., Inc. -- Analyst
Robert Moskow -- Credit Suisse -- Analyst
Alexia Howard -- Sanford C. Bernstein & Co., LLC -- Analyst
David Palmer -- Evercore ISI -- Analyst
