Mondelez International Inc (MDLZ) — Q3 2018 Earnings Call Transcript

Thank you. Good afternoon, and thanks for joining us. With me today are Dirk Van de Put, our Chairman and CEO; and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides, which are available on our website, mondelezinternational.com/investors. During this call, we'll make forward-looking statements about the company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and the risk factors contained in our 10-K and 10-Q filings for more details on our forward-looking statements. Some of today's prepared remarks include non-GAAP financial measures. Today, we will be referencing our non-GAAP financial measures unless otherwise noted. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation. And with that, I'll now turn the call over to Dirk.

Thank you, Shep, and good afternoon. We delivered very solid results for the third quarter. We continue to build momentum on the top line while increasing both adjusted growth and operating margin, and we delivered another double-digit increase in adjusted earnings per share. Our third quarter organic net revenue grew 1.2%, which includes 60 basis points of headwind for one-time malware effects last year, and it was supported by positive volume growth. We also delivered adjusted EPS growth of 18% at constant currency and solid free cash flow, which is now $1.1 billion year-to-date. As I laid out at our Investor Day last month, we are excited about the growth potential of snacking. Vibrant categories like chocolate and biscuits are growing faster than other areas in food. I want to thank many of you for attending and giving us an opportunity to share our vision and priorities around growth, execution and culture. Mondelez is well positioned to lead the future of snacking, thanks to our unique portfolio of iconic global and local brands and our advantaged geographic footprint. Nearly 40% of our revenues come from fast-growing emerging markets, which we expect will disproportionately contribute to future snacking growth. In the third quarter, emerging markets continue to show strong momentum and delivered an increase in revenues of 6%. This was driven by positive volume and pricing with particular strength in Russia, India, Mexico, China, Southeast Asia, and Africa. Excluding Argentina, emerging markets grew 4.5%. In North America, as we discussed with you before, we are working to address several issues in our business which, as expected, continue to impact results. On the biscuits consumer side, overall consumption and our share were positive with key brands such as Oreo, Ritz, and belVita performing well, but we have more work to do to improve our service delivery. Over the past couple of years, we've already made significant changes in North America, and we are now producing around 60% of our volume on advantaged assets in the region. We are continuing with additional end-to-end investments in capacity, systems, and people, and we are seeing the progress. However, it will take us time to fix, and as such, progress will not be linear. Turning to our long-term growth strategy. I would like to share with you the progress we are making towards our strategic growth priorities. But before I do, let me remind you what they are. First, we are accelerating consumer-centric growth. Second, we are driving operational excellence in everything we do. And third, we are building a winning growth culture. Our long-term goal is to deliver volume-led top line growth that translates into high single-digit adjusted EPS growth and attractive free cash flow generation. Unlocking further growth requires us to put the consumer at the heart of our work. We will do so by further contemporizing our brands, capitalizing on untapped growth opportunities in channels and geographies, and overhauling our marketing and innovation agenda. Let's look at innovation in a bit more detail. As I explained at our Investor Day, we're implementing a more agile innovation model founded on the test, learn, and scale principle and grounded in local consumer insights. A good example of this is the recent introduction in Europe of Joy Fills, an innovative product platform that we're launching under the Oreo, Cadbury, and Milka brands at the same time. Our European team has taken this idea to market in record time, creating an entirely new product format for consumers to munch on. Imagine it as a crispy, pea-sized biscuit with a creamy filling that offers a light, but indulgent, treat. Early indications are positive, and we're looking forward to seeing more. Over in India, our recently launched Lickables product continues to do well with consumers, helping deliver 90 basis points of chocolate share gains year-to-date in a market where we already have strong leadership. And here in the U.S., Oreo, which is already posting mid-single-digit growth in the third quarter, is getting ready for the launch of the biggest Oreo cookie yet, the Most Stuf edition. While we're driving the test, learn, and scale model in local markets, we're simultaneously dialing up our overall commitment to innovation with a platform called SnackFutures, which will be dedicated to unlocking future snacking growth opportunities around the world. SnackFutures will bring together internal and external talent to drive three mandates: inventing new businesses and brands in key strategic areas, reinventing smaller brands with untapped potential, and creating ventures with early-stage entrepreneurs to seek new businesses. We are excited about the potential of this platform to help us drive the future of snacking. We will share more with you in the coming weeks about this. Another route to drive additional growth is M&A. Our recent acquisition, Tate's Bake Shop, performed well in the quarter, growing strong double digits, above our expectation, as it continues to ramp up distribution in the U.S. We remain excited about this platform and the opportunity we have to scale the business while preserving what makes it unique. Turning to the second pillar of our strategy. We remain highly focused on driving operational excellence in all facets of our business. In recent years, we have focused mainly on productivity improvements, and we continue to make progress in this area. In the third quarter, we drove productivity even further, which helped to deliver a 110 basis point increase in our adjusted gross margin to 40.6%. Beyond this, we are also looking to drive end-to-end improvements in our processes and systems to help make us more efficient and, specifically, to iron out the operational challenges that are impacting North America. Finally, we remain committed to changing not just what we do but how we do it by building a winning growth culture. As such, we are altering our ways of working to provoke a shift in mindset and behaviors. Starting January 1, we will shift to a new local commercial structure that will drive greater consumer focus and reduce the complexity caused by organizational overlap, but we will continue to manage our operations by region to leverage regional operating scale. We are creating 13 geographic business units, each reporting into one of our four regions. This move clarifies accountabilities, and we are aligning our incentive structure to drive greater ownership of local business results. We believe this change will enable volume-driven top line growth and absolute profit dollar growth. With the rollout of this new structure in the regions, we will create a more agile company that can react faster to local consumer preferences without losing the benefits of our scale and global expertise in marketing, manufacturing, and innovation. We have also announced today that Hubert Weber, Executive Vice President and Regional President of our European business, has decided to retire from the company at the end of January. Hubert has led our European business during a period of exceptional change, delivering a strong track record in terms of profitability and setting up this important region for future growth. We thank him for his 29 great years with the company and wish him all the best. Hubert will be replaced by Vinzenz Gruber, currently President, Western Europe, who brings extensive marketing and commercial experience as well as strong leadership credentials both from within this company and outside. We are confident Vince will step in right away and continue to build on the great momentum we have in our European business. During our Investor Day, I also talked about our purpose, which is to empower people to snack right, a purpose we believe we can fulfill by providing the right snack at the right moment, made the right way. We are already seeing compelling evidence of our new purpose in action. Our ambition to produce snacks the right way, for instance, is manifested in our recently announced commitment to ensure that all our packaging is recyclable by 2025. And we strongly believe that if we make our products the right way, our consumers will continue to choose our beloved and iconic brands for years to come. In summary, our third quarter results were solid. Our year-to-date momentum continues, and we are well set to deliver our commitments for the year. The underlying strengths of our snacking categories, particularly in emerging markets, together with our early progress on our strategic initiatives, gives us confidence that we are on the right track to generate attractive, long-term total returns for shareholders. Now I'd like to turn it over to Luca.

Thanks, Dirk, and good afternoon. We performed well across a number of financial metrics and continued to see good revenue and volume momentum as well as solid margin performance that is consistent with our outlook. Organic net revenue increased 1.2%. This top line performance includes a headwind of 60 basis points related to the lapping of the malware recovery. Emerging market performance stands out in the quarter as it was broad-based with strong volume growth. China, India, Mexico, Russia, Southeast Asia, and Africa all delivered good results. These results reflect solid execution by our commercial teams as well as robust market dynamics in our categories. On a regional basis for the quarter, Europe's organic net revenue increased 0.2%, though underlying growth was better as these results included approximately 150 basis points of headwind related to the malware incident. Russia posted mid-single-digit revenue growth and share gains in both chocolate and biscuits. And Germany delivered solid growth in biscuit, where the Milka-branded chocobakery portfolio continues to fuel strong performance. AMEA grew 4.6%, with broad-based growth across all key areas. India and Southeast Asia continue to execute well with high and mid-single-digit growth, while China delivered its fifth consecutive quarter of growth fueled by biscuit and e-commerce. We also saw strong double-digit results in Africa. Latin America grew 4.6%. Although the region was impacted by inflation-driven growth in Argentina, we continued to see good momentum in Mexico, which grew mid-single digits behind both gum and candy. Brazil declined low single digits in the quarter. We are addressing price gaps and have also made steps around innovation that will help to improve the trajectory of our business in Brazil. North America declined 2%. While we saw positive U.S. biscuits category and share dynamics, we continued to face a number of operational challenges which impacted volume. As Dirk mentioned, we are making investments in people, processes, systems, and capacity to address our operational issues and expect improvements moving forward, although it will take time and progress will not be linear. Let me describe what the nature of the issue is. While we have invested significantly in North America over the last several years, creating a state-of-the-art greenfield plant in Salinas, Mexico, and installing new Lines of the Future in existing plants in the U.S. and Canada, around 40% of our volume is still made on lines that do not provide full reliability. To compound the situation, volume demand growth is putting more pressure on our network. We are making the necessary investments to stabilize the U.S. factory network while enhancing our capabilities through people and systems as far as supply and demand planning are concerned. We are seeing some progress already, but installing capacity where needed, stabilizing some of the lines, improving our systems, and adding capabilities will require some time. Now let's review our margin performance. In Q3, adjusted gross profit dollars grew more than 4% on a constant currency basis. Positive pricing, net of commodities, and productivity savings drove the margin expansion. We are benefiting from favorable cocoa costs, which were partially offset by continued freight and logistics cost inflation. We also continue to maintain pricing discipline to protect our margins in the medium to long term and have already announced and taken pricing in a number of countries this year, including our U.S. business while striking the right balance with volume and overall profit. Adjusted operating income grew by 4% on a constant currency basis with margins of 17.1%, up 40 basis points as a result of higher gross margins. There were several items in other income and expense lines that were unfavorable when compared to the prior year, partially muting the gross profit margin expansion. Cost savings in the SG&A line continue to provide offsets to inflation. On a regional basis, gross margin expansion and cost execution drove margin improvements in 3 of 4 regions. Europe grew 110 basis points to 19.8%. North America decreased by 90 basis points to 20.6%, driven by higher conversion costs in U.S. factories and customer service and logistics costs. Latin America increased by 30 basis points to 18.1%, and AMEA improved by 120 basis points to 14.2%. Now let me take a moment to discuss category highlights. The snacking categories continue to display good dynamics and solid growth, building on the past 4 quarters with growth of 2.7%. We remain encouraged by the overall health of our categories. Overall, we held or gained share in 60% of our business. Year-to-date, our biscuits organic net revenue grew more than 3%. Approximately 75% of our revenue grew or held share in this category, including our U.S., France, China, and Germany businesses. In chocolate, our business continues to perform well, growing 3.5%. India, Australia, and Brazil all posted growth during the quarter. Approximately 40% of our revenue grew or held share in this category, including Germany, Russia, and India. Gum and candy growth was flat, reflecting soft but improved results in developed markets. About 40% of our revenue in this business gained or held share, including China. Now turning to earnings per share. We delivered another strong quarter of adjusted EPS growth, which increased 18% on a constant currency basis. These results were driven by favorable operating gains, taxes, and share repurchases. With respect to capital deployment, we returned approximately $800 million in capital to shareholders in Q3 and $2.6 billion year-to-date. During the quarter, we repurchased approximately $500 million in stock and paid more than $300 million in cash dividends. Turning to free cash flow. The third quarter was a solid quarter of cash flow generation as working capital management and higher cash earnings drove results. Year-to-date, we have generated $1.1 billion in free cash flow. Our team remains focused on closing out the year and delivering our full year 2018 target with a strong Q4. Now let me spend a minute on our outlook for the year. Overall, we now expect our top line outlook for the full year to be approximately 2%. We are encouraged by our top line results as emerging markets trends and overall category growth trends remain solid. We are maintaining our outlook for the year with respect to our adjusted operating income margin, adjusted EPS, and free cash flow. As you think about Q4 modeling, second half operating margins should be roughly comparable to the first half of this year. With that, let's open the line for questions.

I have two questions. First, regarding the quarter, it seems like you delivered significantly better gross profit dollars compared to previous performance, but the SG&A expenses were a bit higher than we anticipated. Can you explain whether this increase was due to more spending on marketing or if you exceeded expectations and reinvested? Or was there some other factor influencing SG&A this quarter? I also have a follow-up.

Thank you, Bryan. I'm pleased with the growth in gross profit, exceeding 4%. Our gross margin increased by 110 basis points, which aligns with our commitments. However, this growth didn’t fully result in an increase in operating income margin because last year we had some positive factors in our other income line, while this year, we encountered some unfavorable items that affected comparisons. Overall, we performed well this quarter, maintaining cost savings we've implemented this year and offsetting inflation. Regarding advertising and promotions, it's consistent with last year, with no significant changes. We have also made additional investments in areas showing good momentum, and we expect more in Q4. The overall advertising and promotions expenditure for this quarter wasn't due to overhead costs; rather, it was influenced by some unfavorable results in other income compared to last year, where we benefited from asset sales and insurance claim refunds.

Okay. As a follow-up to that, Dirk, you're starting to see initial progress with your strategic plan. Can you provide some insights on how you plan to manage spending levels for 2019 and how we should consider that while reviewing our models and looking at opportunities for next year?

Yes, yes, Bryan. Well, first of all, maybe a little bit on the strategy in general. We had a number of premises in our strategy as we announced it in September. The first one was that snacking is a great place to be in food these days, and the quarter confirmed that with the 2.7% growth of our categories worldwide, even if we had a significant heat wave in Europe which obviously impacts chocolate sales. And then the other premise was that emerging markets will continue to drive growth, and they were particularly strong in this quarter with 6% growth. So we feel good about those two premises, they were confirmed. And then as it relates to the other three strategies that we laid out: accelerated consumer-centric growth; we continue with our new marketing playbook; we did a number of innovations that were launched, I talked about a few; and we keep on being focused on M&A, operational excellence. We talked about gross margin. Also, the new organization we're putting in place, the recyclable packaging. And then as it relates to the culture, again, that new organization which pushes accountability closer and the new incentive plan that will reward profit dollars and volume growth. So we're on track, we're making progress on all these three strategies and can go deeper into detail if you would like to. But overall, what we're expecting for the spending next year, and we're still, of course, finalizing the plans, but we expect those to be the four big areas. The first one would be, of course, A&C; the second one, in overall capabilities of the company; the third one, in quality; and the fourth one, in route to market. The specific levels are probably a little bit early to comment on, but we're expecting those four areas to see a significant increase next year.

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

Yes, yes, yes. No change there.

I would like to ask one quick question and then a broader one, if possible. For the fourth quarter, or for the second half of the year, I believe you mentioned that you anticipate your operating margin on a pro forma basis to be roughly similar to the first half of the year. This suggests that the operating margin in the fourth quarter might be lower than the annual average, possibly around 16.3 or 16.4 percent. Can you confirm if my calculations are correct? I just want to clarify this as we consider our modeling.

Look, I think, and as you think about our margin year-to-date, operating income margin is around about 16.8%. I think as we guided the full year to approximately 17%, I would say Q4 is around about in line with the year-to-date number.

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

Look, I think we have work to do in the U.S., quite honestly. But I think pricing and the right balance between volume and pricing is something that we feel quite good about. If you look at the U.S. market and what we have done in biscuit not only this quarter but over the last few quarters, I think you'll see, in consumption terms, a nice balance in biscuit between volume and pricing. So going back to your specific question, we implemented pricing earlier in the year, which was a line pricing increase on some of our local brands, and that is coming in effect now. We have optimized promo spending. And again, I think we found the sweet spot in some of our brands where, I think, there were some inefficient promotions in place. And as I said, we are pleased seeing volume and pricing growth in the marketplace in consumption terms. And we introduced some price pack architecture. So we really used a full array of tools to implement pricing in the U.S. In addition, as we said, we have announced additional pricing across biscuits, gum, and candy. And that pricing will be effective as of Q1 next year, and it will be for the vast majority line pricing. I think based on what we see these days, quite happy with the share gains and the balance, as I said. So we have confidence in the fact that this is the right move. And I think, as you look at the sustainability of the category and the ability we have to invest, I think, clearly, given the inflationary pressure we see in some commodities and logistics costs, this is the right thing to do.

Just two quick ones for me. I'd say, first, to reach 2% organic top line for the full year, I suggest around 1% organic top line in the fourth quarter. Obviously, slower than the 2.3% rate year-to-date and even down sequentially from the third quarter of 1.8%, if you exclude the malware impact. So I guess I'm just trying to get a sense, is there something specific that you see as slowing the organic down in Q4 or really just sort of thinking conservatively at this point?

We are clearly encouraged by the growth in our revenue. We see strong momentum, particularly in emerging markets. We are satisfied with the balance between volume and pricing. The categories are quite dynamic, especially in emerging markets. We want to be mindful of the fourth quarter. As you know, there may still be some challenges in the U.S., even though we expect improvements in Q4 and particularly in October. We are just being cautious regarding the fourth quarter, and we believe we can achieve around 2% growth in Q4.

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

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

Can we ask about the product strategy here in the U.S.? I've been looking at the Nielsen data, and it seems as though the big launch of the chocolate product a couple of years ago seems to be being undone. Gum seems to be getting a little bit better sequentially. I don't know whether you're putting more investment in there as you also try to migrate one of those brands into the mint segment. Obviously, you've still got the cookie strategy going strongly. I think there may have been some innovations that didn't quite work in crackers. Could you just give us a sort of quick summary of what you're actually focusing on and what the strategy is, product category by product category, here?

Yes, I'll begin with chocolate. We have entered the competitive U.S. chocolate market, which we understand will take time. We are leveraging the Oreo brand there, which is a good example of expanding our brands into adjacent categories. However, this will be a niche endeavor. We are observing positive signs for Oreo chocolates, reflected in a strong consumer response and the highest repeat rate of recent innovations in this category. Overall, we are optimistic about this, noting that it’s common to see a slight decline in the second year after a launch. Regarding gum, the market is improving, and we are seeing category growth in the U.S. Our performance has also benefited from a new innovation called Trident Vibes, which we have launched in China under the Stride brand, showing good results with an early share increase of 1.2 points. As for cookies, while crackers appear relatively flat in terms of our shares, other cookie segments are experiencing notable growth. Oreo is in the mid-single digits, belVita is seeing good gains, and Ritz is performing well. As you can see, our cookie strategy has been successful, though there are some mixed results. Overall, we feel positive about our progress. Although you didn't mention candy, Sour Patch Kids is performing well. There are some ups and downs, but if we look across all categories, we are increasing our market share.

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

Yes, the category growth is strong at about 3.6%. Our revenue growth was 3.5%, which is quite close. We’re currently holding or gaining share at 40%. This is largely due to certain regions like Australia and New Zealand. However, we did lose some share in France and Sweden. Overall, I don’t find this particularly concerning when I evaluate our performance. We are seeing increased competition. For example, while the chocolate category as a whole is still growing in mid-single digits, emerging markets are experiencing high single-digit growth. The developed markets may have seen a slight decline in growth during the third quarter. Nevertheless, we feel quite positive about our chocolate performance.

Okay, no areas of price competition emerging as costs get a little more favorable there, certainly in cocoa.

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

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

Yes, the lap for cookies versus last year, there was a big buildup for the hurricane last year. So yes, the overall category growth was a little bit slower, but we attribute that largely to a very tough comparison for last year. Year-to-date, we see the category at 1.9%, with our share being up 0.7%. In the last quarter, our share grew a full point. We expect the category to be coming back to higher levels as we don't have that lap effect anymore. So we have no particular indication that the category would be slowing down.

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

I can provide some insights and then pass it to Luca for specifics on pricing. Overall, we're experiencing strong organic growth in Latin America and are effectively navigating the volatility in emerging markets. The revenue growth in the third quarter primarily came from Argentina and Mexico, while Brazil saw a decline. I'll let Luca share more about the situation in Argentina. We're quite pleased with Mexico, which showed solid mid-single-digit growth, and our gum and candy segments remained strong. As for Brazil, the decline was expected, but we've been addressing the chocolate pricing gaps from earlier this year, which is helping us regain some market share in that category. Generally speaking, we're not seeing a particular need for changes in management in Mexico. In Argentina, due to high inflation, we need to stay alert, and Luca will provide more details. However, we're feeling optimistic about Brazil for next year, as we anticipate improvements and positive sales growth.

So specifically in Argentina, it is around about 2% of our revenue. And given the high inflationary environment, we are managing it, quite frankly, a little bit differently than the other two countries that Dirk mentioned, Brazil and Mexico. It is a disciplined approach, the one we are taking, to protecting cash flow and value. In fact, in the quarter and consistently throughout the year, we did double-digit pricing that drove revenue. We're happy with the way we are protecting cash flow and value in that country. In fact, I can tell you that our margin in the quarter was in line with last year. So it is a fine line between understanding how to price, protecting cash flow, and also with the look of not losing too much scale in the country as it is tough to see it, but I think, potentially one day, that is a country with a sound economy that could grow and be a good business for us. So it is a fine balance, but it is a different way of managing it as we have compared to other countries in Latin America.

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

No, it is a tricky question to guide you on coffee because, clearly, KDP is a publicly traded company. And that is one of the reasons we decided to go on a lag. There was an 8-K earlier in the month, where you can find the detail by quarter. But simply said, the impact of moving us to a lag, it is not going to be material in the year. So I can give you more details, maybe separately, and take you through some of the highlights of the 8-K, but think about consistency with what we said before in the context of double-digit EPS and the synergies that KDP is going to deliver.

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

I will first talk about North America. As we mentioned earlier, we implemented a wider spread between a price increase, adjustments in our pricing structure, and promotional optimization for our local brands. We're also planning to increase prices across the board at the start of next year. We intend to continue with these three strategies for raising prices, with a greater focus on line price increases at the year's beginning. We believe this approach is appropriate given the current market conditions and category performance. It will enable us to invest properly in our brands and categories, and we feel it's the best strategy at this time. Of course, there are cost pressures from freight and some commodities, which the trade is conscious of, and these factors contribute to our decision to raise prices. Globally, the situation is similar, though less severe. We are implementing price increases in other countries, but they are not as significant as those planned for North America.

Okay. In chocolate, please proceed.

Look, we cannot comment on specific pricing actions. As we said about pricing, the vast majority of pricing, it is coming in effect in emerging markets, excluding Argentina. We are pleased with what we see there. I think, if you look and extract Argentina from the number of emerging markets, you see a growth that is 4.5%. It is underpinned by pricing, but there is also a nice component of volume. So think about pricing being in effect in emerging markets pretty much on the vast majority of those markets. And we are watching closely volume dynamics because we don't want to lose momentum, and we want to preserve that operating leverage that is the foundation of the plan we presented at the Investor Day.

I have a quick clarification. You mentioned that the operating margin for the first half was 16.7% and that the second half's operating margin would be the same as the first half. However, the full-year guidance is around 17%. Could you clarify that for me? I don't mean to be overly precise about the basis points, but it sounds like the two segments of the guidance might result in a number lower than 17%. Perhaps that's the correct interpretation, but I would appreciate your clarification on this point.

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

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

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

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

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

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

So I guess, just to, I guess, beat the horse till he's dead, excuse my phrase. Just in terms of 2019 and, as we have stressed, the price increase across the categories, the expectation would that there would still be a balance between the pricing and the volume? Or are we thinking even though the goal, obviously, the target is to have volume-driven top line longer-term, that maybe in '19, it's a little bit more tilted to pricing upfront? Is that fair? That's my first question.

Yes. We're relying on the same favorable balance between volume mix and pricing to carry into next year. We'll see how things develop, but currently, we are planning for conditions similar to this year. As mentioned, we have strategies to adjust promotional spending, which provides flexibility regarding the volume we can achieve. Therefore, I don't anticipate significant changes for next year. At this point, we feel confident that our current approach is effective and that we can maintain it moving into 2019.

Okay, fair. I just have a couple of housekeeping items. From the Investor Day, it was mentioned that the expectation for next year includes favorable trends in GDP improvements, which would support approximately 3% category growth. It appears that the all-inclusive growth for snacking may be more influenced by biscuits, and the performance in Q3 was somewhat below expectations. My first question is whether there have been any significant changes in biscuit growth projections for 2019 and if this is partially due to different GDP forecasts. Secondly, regarding the currency impact for next year that was discussed at the Investor Day, it seems that what you mentioned today aligns with that. However, it looks like the currency situation has shifted a bit in the last two months. I would like to know if there are any updates on currency trends for 2019 compared to two months ago. That's all I have.

Yes, let me start maybe with the forex impact. The forex impact is the same as we had for Investor Day, but it happened to be a coincidence. There were various puts and takes. And I can tell you that, in general, with the profit component of emerging markets, EPS was improved. But we had the eurozone that lost a bit. So it happens to be the same. It was refreshed as of last week. So the number is the same, but it is a coincidence. In terms of categories, look, I think the guidance we gave you in terms of top line for next year, which is 2% to 2.3%, calls for a category dynamic that is in line with what we have seen this year and in line, certainly, with the 2.7% on a year-to-date basis. There might be puts and takes, but that is where we see the category, the snacking category, playing out for us this year and next year.

In closing, I want to express my pride in the efforts of our teams across the company and the results we are currently experiencing. We are very optimistic about the advancements in our emerging markets, which performed exceptionally well this quarter and are a key source of our future growth. Europe continues to be a strong market for us, while there is still work to be done in North America; however, I am confident that there is ample opportunity for growth in that area. Our new long-term strategy is generating enthusiasm within the organization. We are building on our leadership position in the market and are taking steps to enhance our capabilities and seize opportunities, particularly with our new consumer-focused commercial model that promotes greater local accountability. I am also excited about our test, learn, and scale approach to innovation and our heightened focus on mergers and acquisitions, which is just one example of what lies ahead. Furthermore, we are laying the groundwork for future growth with the launch of our new SnackFutures platform, which we will provide more information about in the upcoming weeks. Overall, our incentive structure is evolving. We feel positive about this quarter and optimistic about the quarters and the next year ahead. I look forward to updating you on our progress in future calls, and I appreciate your interest in the company.