Arca Continental SAB de CV
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Arca Continental SAB de CV
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Good day, everyone, and welcome to the Arca Continental Conference Call. [Operator Instructions] Please note that this call is being recorded. [Operator Instructions] For opening remarks and introductions, I would like to turn it over to Melanie Carpenter of i-advize Corporate Communications. Please go ahead.
Thanks, Jennifer. Good morning, everyone, and thank you for joining the senior management team of Arca Continental to review the results for the first quarter of 2018. The earnings release went out this morning, and it's available on the website at arcacontal.com. This call is also being transmitted via webcast, so please access the replay.
It's my pleasure to introduce our speakers. Joining us from Monterrey, are the Chief Executive Officer, Mr. Francisco Garza Egloff; the deputy CEO, Mr. Arturo Gutierrez; the Chief Financial Officer, Mr. Emilio Marcos; as well as the Investor Relations team. They'll be including some forward-looking statements today, so we ask that you please refer to the disclaimer and the conditions surrounding these statements in the earnings release. And with that, I'm going to turn the call over to Arca Continental's CEO to begin the presentation. So please go ahead, Pancho.
Yes. Thanks, Melanie. Good morning, and thank you for being with us today to review our performance for the first quarter of this year. I am pleased to report that we started the year on a positive note. We delivered another quarter of volume and value growth, including the new U.S. territories. Overcoming a still volatile economic landscape and challenging business environment echoes our operations in South America. Total consolidated volume grew 25% in the quarter to reach 521 million unit cases, with total revenues increasing close to 50% to MXN 37.1 billion, driven by the integration of the U.S. operations and disciplined market execution. Consolidated EBITDA for the quarter rose 18%, reaching MXN 5.9 billion, representing a margin of 16% as we completed integrating our U.S. beverage business into our consolidated results. Combined with our relentless pursuit of efficiencies and synergies and from further optimizing our cost structure. Our initiatives to increase operational efficiency and maintain strict control over costs and expenses has set a strong foundation for our company, and it's part of our culture, placing us in a favorable position and focus our efforts to protect our overall profitability. Beyond the control, on the fixed costs, which is of course very important, we have been able to manage favorable costs of our main raw materials via integration, like in the case of our sugar mills in Mexico or in Argentina. But also through foreign exchange hedging -- price hedging and also price negotiations with our suppliers. With respect to our actions in the marketplace, we continue taking steady steps to standardize our proven capabilities across all our operations. One great example is our ACT execution model. And as you remember, ACT aligns all our market initiatives into one model to achieve flawless execution by focusing on core processes such as segmentation, revenue management, route-to-market fundamentals and market tools. Arturo will later provide you with more detail on how our fundamentals, which is part of this ACT model, are playing a key role to accelerate the integration of Coca-Cola Southwest Beverages into our business model. In addition, as we briefly mentioned last quarter, we are moving forward with our goal to deploy our new web-enabled point of sale digital platform in 3,300 mom-and-pop stores in Mexico by the end of this year. Our goal is to reach 30,000 or more customers in 5 years. In addition, we will simultaneously start the pilot of this technology in Peru and Ecuador soon, so we can also expand these initiatives throughout South America in the next coming years. This innovative platform helps our customers improve their business performance and generates for them a strong competitive advantage by increasing store traffic, accelerating inventory turnover and capturing additional revenue streams coming from e-payments that they receive. With this win-win model, we are able to gather additional consumer insights and enhance sales information of all our categories but also as well as from other consumer products, which will allow us to improve even more our execution and the market and the knowledge of what is happening in our customers at the point of sale.
Moreover, we recognize digitization as a key element of our future growth strategy. We defined a new data-driven business model with a clear road map to develop new capabilities in data analytics. This project aims to enhance our commercial capabilities that we continuously collect from more than 250 million data points. Importantly, during the first quarter, we developed 2 significant use cases of advanced analytics in Mexico at progressing key processes such as out-of-stock management and -- at the point of sale and execution variables to measure them and define very clear the impact of each of them. We will match these tools and our market knowledge to strengthen our ACT commercial model, expanding these new capabilities in Mexico and rapidly replicating them across all our geographies to continue enhancing our competitive position in all the market that we serve.
Then I will now turn the call over to Arturo who will provide you with a more detailed outlook of our operating performance. Please, Arturo?
Thank you, Pancho. And let me now expand on the operational performance across our geographies and lines of business beginning with Mexico. Once again, our flagship market posted solid results. Total volume grew 2.3% on top of a strong 5.3% growth in the first quarter of 2017, and 11.5% in the same quarter of 2016. This marks the 11th consecutive quarter of volume growth as we continue to drive momentum in an already mature market. The fundamentals of the Mexican economy remain solid considering the recent slowdown in inflation, growing remittance inflows and healthy employment levels. The first quarter was exceptional for the still beverage categories, which expanded 7.4%. Personal water increased 10% and sparkling grew 1.4%, continuing the trend in sequential improvement. Notably, Santa Clara's dairy portfolio grew by double digits, driven by expanded coverage and the launch of new flavored milk presentations. Total revenues in Mexico rose 4.3% in the quarter to reach MXN 13.4 billion. Average price per case in Mexico, not including jug water, rose 1.6%, reaching MXN 55.10. EBITDA remained flat in the quarter at MXN 2.7 billion, representing a margin of 20%, impacted by increases in sugar, concentrate and fuel costs.
Let's now move to our beverage operations in South America. Total volume in the first quarter decreased 3.2% due to declining volume in Peru, which was partially offset by volume growth in Ecuador and Argentina. As a result, total revenues during the first quarter decreased 7.5%, reaching MXN 10.1 billion. On a currency neutral basis, total revenues in South America grew 4.3% in the quarter. EBITDA declined 8.4% to MXN 2.1 billion, representing a margin of 20.7%. On a currency neutral basis, EBITDA increased 3.6%. Our beverage business in Argentina delivered solid 5.2% volume growth, confirming the sequential recovery trend in the last 4 quarters. Despite prevailing economic challenges, we gained volume and value share in both sparkling and still beverages as we drove affordability by promoting immediate consumption occasions and returnable packages. The sparkling category grew 1.4%, stills grew organically 1.3% and the others portfolio contributed with 1.2 million additional unit cases. Coca-Cola without sugar was launched in Argentina this quarter with outstanding double-digit volume growth, surpassing the previous sales of Coke Zero and increasing our market share in the non-calorie sparkling category. In the flavored water category, we launched Aquarius Zero in new attractive packages and flavors with 2 innovative options, grapefruit mint and lemonade ginger. We also started distributing Monster Energy drinks as we are fully leveraging our execution capabilities to capture additional share in the fast-growing energy drinks segment. In Ecuador, the results for our beverage business confirm the sequential improvement in volume recovery. Volume for the quarter rose 11.1%, driven by 15% growth in Coca-Cola brand, 6% growth in still beverages and a 43% increase in bottled water. As an important initiative, this quarter, we introduced Inca Kola in Ecuador. We continue expanding our sparkling portfolio with this iconic brand from Peru, targeting a broader base of new consumers.
Tonicorp, our value-added dairy partnership with Coca-Cola, posted positive results in the first quarter. Core categories such as yogurt, flavored milk and ice cream reported solid sales growth and market share gains. We accelerated our innovation pipeline, centering on product functionality and price point affordability. Our new Greek yogurt and oatmeal product offerings have been widely accepted by consumers.
Let me close our operations review in South America with Peru. Overall consumer and business confidence were severely affected by the political instability. The decline in business sentiment was driven by a broad-based deterioration in confidence in the Peruvian economy. Our beverage business posted an 11.9% volume decline in the first quarter, driven by a contraction in the water segment, which had a significant boost last year from weather-related events across the country, particularly severe rain and landslides, known as huaycos. We're maintaining profitability despite economic weakness and the decline in consumer demand. This quarter, we completed the installation of a new hot-fill production line in Lima. This allowed us to expand our portfolio of juices and nectars under the Frugos brand. We recently launched 1-liter packages with new flavors and innovative packaging. We have optimistic expectations for the long-term prospects of this important market. We're confident that this negative trend will be reversed once a new economic climate begins to encourage market investment and growth. Shifting gears to our beverage operation in the United States. Coca-Cola Southwest delivered its fourth consecutive quarter of revenue growth, posting a solid 3.8% increase. Total volume in the quarter grew 1.9%, driven by large stores channel with 12-ounce cans and the on-premise channel with immediate consumption packages and personal water. We continued the trend of value share growth, leading the nonalcoholic ready-to-drink beverage industry, driven by gains in 3 of our pillar categories: energy, tea and juices. We are strengthening our ACT commercial model to further refine point-of-sale execution as we focus on consolidating our fundamentals strategy. We are automating fundamentals reporting by releasing an enhanced set of key performance indicators, enabling us to detect opportunities outlet by outlet. Among the highlights of the quarter, we successfully introduced the Diet Coke recast throughout the region. We launched 4 bold new flavors in sleek cans, outperforming our sampling goal with more than 290,000 impacts across our market units. Furthermore, the addition of the Topo Chico product portfolio to our red trucks was another important milestone. Also in the quarter, we launched new Coke Origins, featuring 2 flavors, Georgia Peach and California Raspberry. With these products, Coca-Cola brings scale to the specialty sparkling category, targeting consumers who are looking for authentic products with heritage and interesting flavors.
Let me now give you an update on our synergy plan. I'm glad to report that we are on track to achieve our updated target of $90 million in annual synergies within a 3-year period. We continue to make steady progress in most of our initiatives. Some examples of these include our advances in production line improvements, vending optimization and centralized procurement projects. We're also moving ahead with an integration of the Oklahoma market unit, and in recent weeks, we successfully completed the migration to our common IT platform.
Let me now close our operations review with our food and snacks business in Mexico, the U.S. and Ecuador. Bokados reaffirmed its sequential revenue growth trend in Mexico with net sales up high single digits for the quarter, driven by growth in modern trade and convenience store channels. We continued refining execution at the point of sale and an innovation in product and packaging, posting double-digit growth in key categories such as extruded chips, marzipan and popcorn. We'll continue with strategic investments in marketing and brand-building activities to strengthen the core portfolio and target a much broader consumer base. Our food and snacks business in the U.S. posted single-digit net sales growth in the quarter, mainly driven by the integration of Deep River snacks, which was acquired late last year. Excluding Deep River, comparable sales declined single-digit as a result of continued retail volatility and competitive pressure, driven by industry consolidation. We are rapidly integrating the new Deep River operation. This quarter, we completed transition of manufacturing processes for production facilities in Berwick and Fort Worth. We're also leveraging our state-of-the-art production plants to rapidly capture expected synergies. We're moving forward with the integration of sales teams and accelerating the rollout of a joint go-to-market strategy to combine our full portfolio of brands. In March, we began a gradual rollout of Wise's entire portfolio across 14,000 new Dollar General stores to significantly drive incremental volume and brand availability nationwide. Notably, Wise completed the acquisition of Carolina Country Snacks, a prominent brand of pork rinds that has grown organically through quality products and strong focus on continuous expansion of its geographic reach. Through this acquisition, Wise enters a new and growing category with big potential for growing the brand across our territories. Lastly, Inalecsa continued its growth momentum, delivering excellent organic top and bottom line results, posting mid-single-digit sales increase in the quarter, mainly due to significant growth in plantains, potato chips and corn chips brand categories. We are bringing innovation to the Ecuador snacks market with the launch of Prispas, which is one of our most successful extruded chips brands in Mexico. These actions allow us to reach the highest share market in the salty snacks category of the past years. And with that, I will now turn the call to Emilio to comment on the details of our financial results. Please, Emilio?
Thank you, Arturo. And to everyone on the call, we appreciate your participation today to review our financial performance for the first quarter. Arca Continental began 2018 with positive financial results despite weak consumption environment in Peru and a strong Mexican peso appreciation. We posted a strong volume growth in Mexico, thanks to the recovering consumption and disciplined execution at the point of sale. The U.S. region delivered solid volume and price performance. South America was able to maintain margins -- EBITDA margins, even with its low top line performance. In the first quarter, consolidated revenue grew 49.7% with the U.S. beverage operation contributing MXN 13.6 billion. It's important to mention that starting this quarter, we are including proceeds from third-party bottlers in the U.S. Mexico revenues increased 4.3%, mainly due to solid volume growth, up 2.3%, while in South America, revenues decreased 7.5% due to the negative translation effect from a stronger Mexican peso. Comparable currency neutral and without the U.S. beverage operation, we posted a solid performance with revenues up 4.3%. Cost of goods sold increased 58.3%, mostly from the integration of Coca-Cola Southwest beverages and the higher sugar prices in Mexico. Excluding the U.S. beverage operation, cost of goods sold declined 1.6% due to the South America exchange rate effect. SG&A expenses were up 53.8% in the quarter, mainly from the U.S. operation, and to a lesser degree, from Mexico and Peru, which posted higher sales expenses, partially offset by the South America currency devaluation.
Operating income increased 10.9% in the first 3 months for a margin of 10.3% affected mainly by raw material prices and higher SG&A expenses. Consolidated EBITDA increased 18.2% to around MXN 6 billion, reaching a 15.9% margin, a dilution of 420 basis points, mainly from the Coca-Cola Southwest integration. It is important to mention that in terms of profitability, the first quarter of the year is historically the weakest in the U.S. beverage market. On a currency-neutral comparative basis and excluding Coca-Cola Southwest, EBITDA in the quarter increased 1%. In the first 3 months of the year, the income tax provision was MXN 722 million compared to MXN 885 million in 2017. Effective tax rate for the quarter was around 30%, in line with the expectations. The comprehensive cost of financing during the quarter increased to MXN 1.5 billion from MXN 635 million due to an exchange rate loss of MXN 593 million as a result of our net monetary position in U.S. dollar and higher interest expenses from the Coca-Cola Southwest debt of MXN 800 million. Net income decreased to MXN 1.3 billion from MXN 1.3 billion (sic) [ MXN 1.7 billion ] last year, minus 23.2%, representing a margin of 3.6%, explained by the variation in the comprehensive cost of financing. Yesterday, we announced an amount of MXN 12 billion for CapEx investment for 2018, around 7% of sales, mainly allocated to enhance market and execution capabilities, capture synergies in the U.S. operation, upgrade production facilities and improved logistics capabilities. A dividend of MXN 2.2 per share, totaling MXN 3.9 billion was announced yesterday and will be paid by coming May for a payout ratio of 30%.
In the first quarter of 2018, we reached a cash position of MXN 24.5 billion and debt of MXN 55.5 billion, meaning a 1.1x net debt-to-EBITDA ratio. These results motivate us to keep up the hard work in a very challenging time. The strategy is focused on improving profitability with a better price mix, taking advantage of our proven RGM initiatives, which combined with the innovation in data and analytics processes will be able to enhance the execution at the point of sale in all the countries where we operate. And with that, I will turn back to Pancho.
All right. Thank you, Emilio. As we accelerate our evolution to a total beverage company, we remain totally focused on our efforts to become more efficient, leaner and swifter to adopt to market-changing conditions. Regarding price, we have already deployed a company-wide program to refine our proven revenue management initiatives and price-package architecture in order to achieve this year the goal to increase prices in line or above inflation. With respect to raw materials, we expect sweetener prices to remain stable as we leverage our flexibility to use sugar and high fructose as needed. And as we mentioned, we will continue capitalizing on our vertical integration in sugar as our facilities in Mexico and Argentina allows to the benefit of securing all of our needs of these key inputs at very competitive costs. Notably, we locked fructose supply for 2018 for Mexico at very competitive prices. And at the same time, for this year, we have locked sugar prices in Peru, even at lower prices than last year, which, by the way, are also very competitive. Importantly, we have completed 90% of our hedging programs for this year to mitigate aluminum cost fluctuations at below the current LME, London Metal Exchange market price, and very close to the price level of last year, leaving only the challenge of dealing with the complementary factor in these raw materials, which is the MWP, Midwest Premiums, which is minor factor but we need to take care of it. On the other hand, we have already secured our supply and locked in PET price formulas for the year and even further years at very competitive structure and prices. Furthermore, our foreign exchange hedging program of U.S. dollar-denominated raw materials in Mexico is already locked at very favorable levels for all this year, which, by the way, are at a lower number today than it is the real exchange rate today.
Summarizing, we are taking bold actions to hedge key input prices and foreign exchange as well as good negotiation with those raw materials. These actions, together with the actions in prices increases, to be taken in the next coming months and the reasonable volume growth that we foresee, we feel confident of having good performance for the rest of the year. In closing, all of us who are part of Arca Continental are proud of the transformation we have achieved thus far. Nonetheless, it implies an even greater commitment to leverage our new scale and continue growing as a company focused on excellence in everything we do. Our solid financial position, our expanded geographical presence and our firm commitment to serve our customers and consumers with excellence are the basis from which we will continue seeking profitable growth opportunities in the beverage, food and snack business in the Americas. Thank you for your continued support. And operator, we are ready to open the floor for questions. Thank you.
[Operator Instructions] Our first question comes from Lauren Torres with UBS.
Pancho, I think you did help out a lot on the cost outlook or at least the moving parts on your cost, the sweetener cost for this year. But I was hoping we could get a bit more clarity on selling expenses, SG&A for this year. Starting next quarter, we'll have lapped the U.S. business integration. So just curious how to think about expenses, like-for-like now that you've lapped the U.S. I think you also mentioned there was some impact in the quarter on higher selling expenses in Mexico and Peru. Can you talk about what those are and how you expect that to play out this year?
Lauren, it's always a great pleasure to talk with you. Well, as I mentioned, I mean, we've been talking a lot on all the actions that we've been taking on the raw material side. But also, we are also taking care, as I mentioned, on the fixed and operational expenses. And regarding SG&A, I will ask really my friend here, Emilio, to explain us what are reasons why we have these differences, and I can explain more about it once he mentioned about. Please?
Yes. Lauren, thank you for your question. As I mentioned, basically, well, the main increase is the integration of the U.S. operation. But taking that out, we have sales expenses increases and OpEx expenses basically in Mexico and Peru. Most of them, it's for higher depreciation on Mexico and Peru. And in Mexico, there's also fuel prices much higher than last year. So in Mexico, there are basically these 2 main impacts. And in Peru, basically the depreciation. We have a very clear budget for SG&A for all the countries, in all the concepts and areas for the year. And we -- we're really follow up this budget. So we don't expect -- maybe we started expanding a little bit faster than we expected in the year. But we have a very clear budget. So we will maintain our SG&A over sales percentage as we have done in the past.
Yes. One important factor is also to mention is that we've been spending more money just in advance of what we are preparing for, the summer campaigns, especially the World Cup. That is something that it will be balanced to the rest of the year. And -- but we have been really investing in advance, let's put it in that words. But beyond that, I mean, and not only SG&A but also the fixed cost and the plant operations, we have a specific program also to continue optimizing our efficiencies there. And beyond synergies or any other aspect that we have done in the past, we have what we call the operational excellence. And through this operational excellence process, which by the way is part of our culture, we have established, since the beginning of the year, a specific program to find several, let's say, opportunities in reduction of -- or price reduction and optimization of costs. Just in Mexico, in Mexico, we had, through all the different categories of costs about this year, I don't know, MXN 80 million or MXN 90 million. And part of it is, of course, in fixed and SG&A. Other part is in the area of raw materials. So but we have that, let's say, culture of continue moving in that regard. As was mentioned by Emilio, we foresee that we will be in a good position through the rest of the year in that regard.
Our next question comes from Alex Robarts with Citigroup.
I guess my focus would be on the U.S. profitability level. And we see this high single-digit EBITDA margin in the quarter. Could you help us understand a little bit about the differences you're seeing in the relative profitability of the beverage business and the snacks? It seems like with Wise in this new expansion into Dollar General and the acquisition and these pork rind extensions that the snack business is in a period of kind of putting together its attribution, the benefits from the new Texas plant. At what point do we see kind of margin improving and getting perhaps positive in the snacks business? And to the extent that we can maybe start seeing some of the cross-selling synergies, do you think that that's something we could expect this year? And the last bit of this is the extent that we did see some of the synergy capture already this year? Or is that something that perhaps might be more backloaded toward the end of the year? So several bits around that margin question in the U.S.
As I mentioned before, great pleasure to talk on. And certainly, well, this quarter there are several effects on having, let's say, the U.S. operation and such a margin. The first one is operation in beverage itself. And certainly, the first quarter, let's say, normally as a seasonal trend, the most challenging because, I mean, the cost is there, the fixed costs is there. And then to manage the lower, let's say, level of volumes at the beginning of the year, it's more challenging compared with the mid part of the year, which is in the area in which we have the summer with higher volumes. But that's part of, let's say, the regular performance. But on the other hand, there has been some impact, of course, not too much but there is some impact there on the aluminum. That is important to mention. On the other hand, you probably already have captured that we have already in the margins, the sales of agencies, which does not generate any margin. Why we put the sales of -- or the revenues of agencies, or third-party, let's say, sales for third parties. Why we put it there now, and we were not putting before? Well, it was a change in the process of -- suggestions of our external audits that we should include it there instead of, let's say, in the level of other income. But that really affects the margin also. But based on -- these sales of - for agencies, or for third-party territories, which eventually through the next coming years will be reduced because we assume that all the territories will be, except very small ones, all the territories in the U.S. will be self-sufficient. But at this time, we'll have to export those products as part of the negotiation. And we were thinking that it was possible to have it that into the other income. But then,at this time, we have it as part of revenues. Eventually, this will be changing and will be reduced. And it's affecting the margin. But certainly, it's a factor that we will hope that in the next coming years, we will take this out in a process in which we negotiate with other bottlers to integrate themselves and not depends on ourselves in general, no? Expect very few exceptions. And there's other areas in which we have to talk, regarding the snacks, especially Wise, and the integration of Deep River and what is happening in that market. That is being also having some -- that is a challenge that we have. And we've been facing more competition and so on. And at the same time, integrating the Deep River. But we have good news as was mentioned by Arturo. Now we have more volumes coming in last month, and this month seems to be a better trend in terms of additional business we are capturing as well as obviously selling more into current customers. So it's not only horizontal but also vertical, let's say, growth with the same customers. And then having the combination of that and certain price modifications and new approach, we expect that this margin through the second part of the year will start having a better performance. And by the way, we are now taking advantage also of having a plant there in Fort Worth. As you know, this is a plant, which just started operations really with the new machineries there. And we have to, let's say, develop more the market in the Southwest, and having now our operation in the U.S. for beverages in the Southwest will facilitate the way we connect with customers like Fiesta or [ Sucre ] or other ones in Hispanic area as well as with customers like H-E-B and other ones there, we will definitely, having our operation or beverage there, we can really make some, let's say, support to our area of snacking to develop that additional business. And we are working on that. We're installing some people in the organization to assure that this will be happening. And this new plant, which at this time is also having some additional costs in the area of snacks, of Wise. We expect that definitely with this combination of factors and having the support of our team in the beverage and doing some cross-promotional actions, we start improving and become a real competitive factor at the plant instead of having a real, at this time, a problem on costs. So we hope that this plant will be converted to a competitive factor and will start creating value instead of what is happening today, which at this time is still -- the utilization is still low. So we have to move further and act rapidly to keep that plant in a much better shape soon. I don't know, Arturo, if you want to add something on this what I have I mentioned.
Well, probably just to complement on the synergies in the U.S., Alex, as you know, we have been very actively engaged in a number of projects and they are both in the cost and savings side and in the growth side of the business. First, to mention that each project -- we're very formal about this. These projects have leaders, key indicators that we follow for each of the initiatives. And we have routines and that is based on the model that has worked for us in over previous integration. So I would say that we have seen a lot of the effect of that in the first quarter. We did have some synergies in 2017 that are somehow contained in the results of that the year. But this year, we have projects at -- and I can give you some examples. We were installing a new production line for sleek cans in San Antonio, which are going to reduce transportation costs significantly. That is underway. So it's pretty straightforward but it's still not operational at this point. It's going to happen midyear or so. We have Topo Chico, as an initiative that continues to stabilize. And now we are -- every week, we are selling more of Topo Chico into Texas and Oklahoma market. And that's going to bring us significant growth to what that business had before. The same thing with our cultural fundamentals, basis, an adaptation for the U.S. market of what we have in Mexico and Latin America to -- and it's to improve our performance, and the basic indicators, customer visits, out-of-stocks, availability, picture of success, et cetera. We now have the scorecard. We have identified the opportunities and we've seen some progress. But again, that is not yet fully reflected, I would say. Same thing for the optimization of some of our production line processes. And even revenue management where we expect this year to have prices above inflation, which is something that has not been achieved in the U.S. market in recent years. So that is clearly a goal that we're very confident we're going to be able to meet for the year.
Yes. Well, summarizing, I think beyond the seasonal effect of having the most challenging part in the first quarter, which hopefully, by the summer and next year will be much more differently. And it's just a regular standard basis beyond that. We are working hard on the synergies as was mentioned by Arturo in the beverage area. The program is well installed, and we still have to work on several areas. But we are moving in a very disciplined manner, no, with very clear responsible people, teams and so on. So we can talk more -- much more deeper later or on another occasion about [indiscernible] programs. But we think and we believe really that we'll start having results soon. And beyond that, we have the snacks area, as I mentioned that
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Yes. Your line is now open. Please continue.
Okay. I was trying to make a summary of all the actions taken, Alex, regarding all these synergies in CCSWB, as we mentioned, and also regarding the snack area, especially with new customers coming as well as further sales in our current customers and some price adjustments as well as the plant in Fort Worth in snacks, which I hope that soon we will start have better results in that area. Thanks to the combination of the support of our team in beverage that will make some cross-selling actions and cross-promotions in concert with snack and having a very clear responsible of that actions located there in that area from the snack division. So we will make that an important change. And we hope that for the second and third quarter, we will start moving in that direction. But we will see the results very clearly. Thank you very much.
That was very clear. Just to understand. If we look like-to-like, apples-to-apples, excluding the agency impact, was the beverage margin in Texas, was it -- how did it compare to the apples-to-apples margin in Texas a year ago? Sorry, that was just the last bit.
Yes, it's a 1 point -- it's very [indiscernible] it's close to 1 point difference, 100 basis points, let's say. Close to that. So it means that net effect is -- it's something that it was already there, let's put it in that words. But it was in a net -- having that in revenues is, it's something that we have to have it just because of the recommendation of our auditors, because really we don't have control on that. It's something that it's there but we cannot -- we don't have any profits or basically no profits on that, but we will work on diminishing that business or sales or revenues through the next coming years, is in part of the agreement with Coca-Cola. And I hope that we can move it to that direction sooner.
Our next question comes from Antonio Gonzalez with Crédit Suisse.
Arturo, Pancho and team, just a quick one. On Diet Coke and relaunching in the U.S., I was wondering if you can just give us some big-picture context on how large is it in the portfolio today? What was the trajectory in your specific franchise territory prior to the relaunching, and what do you expect for the future?
Thank you very much. That's a very good question. And well, we are definitely having a clear perception on the -- and feeling on the results of Diet Coke, that they are moving better. I mean, we are somehow activating this -- reactivating this -- the life of this brand. And it's good to know that because it's coming back, let's say, to the stage, and we feel very happy with that. With many challenges, but definitely moving better. And I will ask Arturo to have more detail about this, Arturo?
Yes. Antonio, well, this is a very important launch in the U.S. One of the most important activities we undertook in our market was what we call the Diet Coke recast. And as you know, this brand was in need of some revitalizing and to get it back into growth. And that is really what has been accomplished. We have launched, as you know, 4 new flavors. And probably this innovation in Diet Coke, I think, is going to continue as we go on. It requires sampling, as I explained we secured more than 290,000, in fact, across the market units, which is pretty significant. And talking about numbers, we improved the volume for the brand and now we had positive volume in the quarter versus previous years. Its margin was 0.6 growth versus previous year, but it's still very important. And revenue was up 2.8%, which is really reversing the trend of Diet Coke that we've seen in recent years and it's really important to continue making this brand relevant in our market.
Is it possible to share, I mean, rough numbers how large was it, vis-à-vis full-calorie Coke? And where are we now? Any sort of order of magnitude you'd be able to share?
Regarding the mix or you want to say something [indiscernible]?
Exactly, exactly, exactly.
Yes, we can provide some details to you later, Antonio, on the mix and volume [indiscernible] performance.
Yes. I mean, because we have other, let's say, low calorie like the Zero and so on, so I know that [ we classify ] there. But anyways, I mean, if you try to look for this, Arturo, on the -- specific Diet. And it's moving better, definitely. And I think it's going to be good for all the U.S. market. But certainly, we are fully, let's say, supporting this activity and it will be a great initiative for the whole year.
Our next question comes from Isabella Simonato with Bank of America Merrill Lynch.
My question is in Mexico. If you could give us a little bit more detail on the pricing performance this quarter? As far as we noticed, it was a little bit below inflation. So you could just outline maybe more details about the mix or the performance per category of beverage and what you're looking for the remainder of the year?
Thank you very much for that. I appreciate your question. I'd say it's a very important one, as you mentioned. We are fully committed, as I delivered on my introduction speech, that we will reach the inflation or a little bit above through the year. And the reason why this happened, it's very clear, and I will ask Arturo just to mention why this, let's say, comparison is not best for the time being, but we will see in the next coming months the difference. Please, Arturo?
Yes, Isabella. Well, certainly price in Mexico in this first quarter was below the target that we have for the year and below the inflation and expected inflation. It was slightly below 3%, if you compare versus this period. And the growth of price in 2017 as well and as a comparison, because if you see 2017, we grew prices in the first quarter at 9.7%. So that means that growth last year was not really in a straight line. The big impact of increase in price came into effect in the first quarter of last year. And after that, we had almost no further increase, really flat, if you look at the chart for prices in 2017. So and at the same time, we have to say that we have implemented price increases in March, and we have not seen, obviously, the effect of that fully in the second quarter. So we are on track to meet our target for the year, which is -- continues to be increasing prices above inflation. Our revenue management team has been focusing not only in prices, but also in optimizing discounts, which is something that we have been able to do. And even with the price increase in March that was not fully effective in the month, we saw a much better month of March in Mexico that you would see in the quarter. Margins, EBITDA margins for March was significantly improved versus March of last year. So that's why we are very confident that we are going to meet our target for 2018 in terms of pricing margins as well.
I think it's -- the point is very clear. I mean, compared with the first quarter of last year, it's very tough. We increased this 9.7%. Just because remember that last year, the exchange rate [ cost us ] MXN 0.23, MXN 0.22. Then we start moving prices very effectively. And well, by the way, we thought that it was the inflation moving to the 6% because something last year. So we really took actions in advance to, let's say, compensate that complications that we were having at the beginning of last year. Then later on, the exchange rate reached much more normal levels through the rest of the year. So we did not increase anymore price practically, or very small adjustment. So meanwhile, this year, we increased at the beginning. We are going to increase again at the middle of the year. And then the comparison we will see in the cumulative comparison, we will start seeing this, let's say, gap narrow and to reaching to the level of the inflation, which we expect is going to be to the level of a little bit less than that 4.5% through the year. And that action has been already planned. I don't know if you have a clear answer on this. Are you there, Isabella?
Yes, perfect. That was very clear.
Our next question comes from João Soares with Bradesco.
Arturo or Pancho, I wanted to explore a little bit the dynamics in Argentina. I just wanted to understand if you expect the competitive environment to be a little bit softer this year in terms of what is your priority if you were effectively going to recover more market share? And if your competitive -- if your pricing strategy, I mean, are you willing to recover -- should we expect you to recover margins as well? I mean what is your priority there for Argentina?
Thank you, João. Well, I mean, if you -- I really appreciate you ask these questions. It is clear that in the first quarter also the prices there in the Argentinian pesos is, at this time, the cumulative number is below inflation there, definitely. But we have been, let's say, thinking that the inflation were in the direction of coming to a lower level rapidly, which has not been the case. So at this time, let's say, at the beginning of April, we already moved prices to a level in which we'll practically catch up the inflation. When you have inflation, you can adjust your structure more and more easily. So in other words, at this time, we already adjust close to the inflation level, which we expect is going to be in the level of 20% -- 19% or 20%. So if you see the accumulative number in first quarter in price in Argentina, in Argentinian pesos, it's obviously below that. And we have increased in April probably 5% or 6% just to reach the level or close to the level of inflation. And we will continue that level. We will not lose ground anymore. By the way, the margin is not [ bad, it's ] very well, but it will improve even more through these actions. And the volume is doing quite well. So I think that at least in terms of the economies, it's moving better. So we expect that as I mentioned, in volume in most of the countries even in Peru, are going to be in good shape. That's our forecast, that's our foreseeable numbers that we have. Our perception is good, but we've been a little bit with a low pace in prices, so we have to factor in that. And in case of Argentina, we have already accomplished that. We'll keep that process in place to achieve the role of being in the inflation or above, okay? And so we feel much more comfortable and confident that we can make this by the second quarter, you will see the difference. And the leadership is good. We have a very good market position. We have not lost any ground. And we are at the same levels. And the competitive factors there, we compete there more with a B brand or value brand rather than with other ones, by region. And that is much more challenging. But thanks to all the actions that we are taking on the different packages, especially returnables, we feel quite comfortable that we can achieve the volume growth. By the way, it's very good volume growth and the price increases that we have done in April to keep moving according to inflation. And that's the process. Additionally, we have added the soy products, which, by the way, we've been doing very well in our region. Our region in the Northeast and Northwest of Argentina is the most important region for AdeS brand in Argentina and probably in the whole world, I don't know. Many million cases are there, so we feel very well that we are growing the progress and the market position of that brand there, which is very important for our future. Furthermore, you know we have the sugar, let's say, mill there in good shape, which is providing us a much more better competitiveness. So we feel very -- with a good economy and a very good position there. I don't know if I answered you the question, João...
Yes, yes, yes. I think you answered all the big points. Just a follow-up if I may on Peru. I mean, should we expect more normalized volumes in the second quarter? I mean you had, of course, the hard comps from the water consumption in the beginning of last year. But you think -- should we expect similar dynamics that we saw in the first quarter '18 to last in the second quarter? I mean, you still -- are you still facing these hard comps? Or should we see some -- the performance of the other products in your portfolio offsetting the performance from water, just try to [indiscernible].
Well, I think just to -- as I mentioned before, I mean, the most challenging times for the volume in Peru, I think have been passed. So at this time, we have, at least for this month, still is not in a positive area but much more better. And we see the last weeks coming better. And we expect the second quarter to be, let's say, at least in balance, not -- we probably will not have high growth on that. But we will balance, no growth, no decreases for the second quarter. And after the third and fourth quarter, we expect it will grow and, of course, the comparison which will help us much more the last part of the year. The challenge started really in October, September, October last year. And it's mainly coming from the water. But let's say that also the economy has been, as was mentioned, it's been complicated there, especially lack of jobs and that has been complicated mainly in Lima area. But the new government already is in place. Now I think the investment and the agreement with the Congress and everything will start really opening investment in other areas to continue moving -- the country is in excellent shape in terms of financially, they don't have deficits or complexities. So it's an excellent country because with some challenges in the political area, which I think they are now solving. We respect that, we respect totally. And I think with this new process that they have in place with the government, they will open investment and we will start having good, let's say, or better performance of the economy. This, together with our market position and the new machinery we just started up for the Huntsville in the area of still beverages as well as the new execution programs that we have will bring really positive growth for the rest of the year, I think. So that is definitely happening. And beyond that, we are saving cost, I mean, saving costs there. We mentioned there that we have the impact in other expenses of closing the plant of Callao. Callao plant has been a huge plant. It's nearby the airport of Lima. So as you know that we have a huge plant in Pucusana, about also 1 hour from Lima. It's just brand new, 2 years ago, we integrated that plant. And certainly, we move and installed new machinery there and the plant of Callao has been already rationalized. And certainly, that will -- has been needed already and has been in the plan. And this is giving us more competitiveness in terms of cost. And beyond that, we will have the possibility eventually to sell that real estate, which by the way, is very valuable, located close to the airport of Lima. And it will represent many million dollars, many. So we are going to start working on that process to even improve further the cash flow. But very importantly, we'll reduce cost, we'll optimize that. We have a better economy in a good country with a government which seems to be now in agreement with the Congress, leading an open investment to start creating again jobs, which I think is going to be happening in the coming months. And beyond that, we are already having the, let's say, more volume in the last weeks and expecting second and third quarter and even fourth quarter a very important growth in that form. Next. I don't know if you want to ask -- thank you very much.
Our next question comes from Felipe Ucros with Scotiabank.
I wanted to switch back a little to Mexico and talk about the comments that we've been hearing from other companies in the last few days. And we've seen a little bit of a dichotomy. Some companies particularly in retail have been saying that they've been seeing a solid Mexico that is not decelerating, and they think basically that the macroeconomic trends are unchanged by the political environment and that the consumer is on solid ground. But then on the other side, we've seen some consumer companies and food companies reporting some down trading. So there's a little bit of a different view on what's happening in Mexico. And I wanted to ask you guys how you are seeing it and whether you see a difference in the modern channel and in the mom-and-pops side of the business. That would be great.
Thank you, Felipe. It's a very interesting question. And I think that it -- that perception seems to be true for certain areas of the country. I mean, the northern areas and the central and northern areas of Mexico are doing better, I mean, definitely. And we perceive that the NAFTA negotiation is in the right direction for everyone. I mean, still there are questions marked there. But that will really help that even -- anyways, Mexico is competitive, especially half of Mexico is very competitive. Even with or without the NAFTA, by the way, but with NAFTA makes much more clear picture. And that will really have more benefits for us in terms of our location because we have from the [indiscernible] area all the way to the north, which really is the area in which more, let's say, investment regular is done for a combination, let's say, supply chain with the U.S. So we expect that this will continue. At this time, I can tell you that there are several places or several cities in which we have our franchises in Mexico, in the North Mexico in which we feel it's difficult to find people to work in our operations. So it's very competitive. So in terms of jobs, we need to keep moving always to keep our people with us. It means that there is a lot of activity like in Juarez or in Piedras Negras and some other areas. So let's say, the level of, let's say, employees or jobs is very, very high. So I'm glad that we have that. And that makes some difference. On the other hand, well, I mean, I'm not saying that nothing is going to happen. At this time, because of the election, I mean, the volume, in general, for -- there a lot of expenditures, here or there, it's normal, from here to [indiscernible]. But it means that probably by the second part of the year, we will start feeling some, let's say, impact in the general economy, in terms of less activity just because, let's say, there will be less expenditures and a new government tax. Normally that happens. The first 6 or 7 months, a lot of the movement. And then the last 5 months, it changes a little bit. So but anyways, we feel that with or without that, Arca Continental in Mexico is located in a territory which is doing, in general, better than the average of the country portion. Regarding the channels, please can you talk about this, Arturo?
Yes, sure. Felipe, well, I think there are signs that confirm what Pancho was saying in terms of how our volume performed in the first quarter. It's not only that it was a solid increase despite the comps that we have that were pretty challenging. But if you think about a few indicators. First, there's channels that you ask, traditional channel continues to grow. It grew 2.4%. So that means that it's a healthy growth across channels. Convenience stores grew 3.5%. So I think all in all, we had a balanced growth across channels. Supermarkets also grew close to 4%. So I think that is a very good sign. Another sign is our still beverage portfolio continues to grow, albeit the categories in sports drinks and juices, those categories continue to grow, energy. Same thing with the nonreturnable one-way presentations, which also grow significantly. I think those are all signs that the consumer environment is quite healthy in our markets.
Definitely. And well, we have to remark again that we have also additional to that, new products like the AdeS in the soy products area, which brings in more volumes. Santa Clara is performing extremely well, especially in flavor milk. Now we don't have any restriction because there's a new plant already installed in Jalisco area. And we have new accounts like [indiscernible]. So and also the summer is going to be very active because normally -- beyond the issue of the election, which means that there are more expenditures, by July, we hope that we can have a very good volume because of the World Cup. So all the factors that we foresee and especially in our regions in Mexico, I mean, talking on the Bajío in the north. And if NAFTA is finally agreed, which hopefully, will be, we definitely will see a good year in volume. Definitely we feel confident in that, trust me, that beyond our competitiveness and goals and market acts and so on.
Our next question comes from Rafael Shin from Morgan Stanley.
Very quick question, and I apologize if you already answered this question. But can you provide us some color on, I guess, the magnitude and the timing of these restructuring costs to get to the 90 million synergy guidance? Or I guess asked in another way, how much longer do you expect this margin pressure to continue in the U.S.?
Thank you, Rafael. It's a pleasure, of course, to answer you. Well, first of all, I mean, we have established a program for 3 years. And remember that we started with $60 million to $80 million, a range of $60 million to $80 million of synergies, average, let's say, $70 million, average of $70 million. And we improved that [indiscernible] to $90 million. So we feel very comfortable that we will -- and confident that we will reach that number. And so we started, let's say, somehow, this program to, let's say, August, September last year. So we expect that by the year, would be 2017 to 2018 in the first year to 2019 in the second year. So somehow, let's say, by middle of the year, 2020, everything has to be accomplished in that regard. So I'm sure that Arturo can provide you more details. But again, I mean, the margin is not bad. It's just that I mentioned the seasonality. Normally, the first quarter is more complicated when in terms you have a fixed cost high normally, [indiscernible] fixed cost, regular fixed cost and the volume is lower because of the weather and standard way of doing that. So regularly that is happening. So we will see that the margin will continue through to the second, third quarter. And in average 3 year, it has to show some improvement. Beyond that, please take into account that the agencies feel already if that does not generate any profit practically, we have been, let's say, they have the recommendation to put that into the revenue. So those are really -- we don't have control on that then. It will -- it diminish the margins but it [indiscernible] at the end they should be -- we don't have control on that. Nothing to do, eventually they will disappear and talk. So but the external auditors told us that we should put it there, and we have put it there. So it doesn't mean that the margin is there. That doesn't affect really -- we have to take that out to compare the real -- what we are taking actions on. And the number three, is all the synergies, please, Arturo, can you explain more detail what are the synergies that we are moving and timing?
Yes. Well, certainly, margins the first months of the year, as Pancho said, are typically lower than the rest of the year in the U.S. That, I think, is different to compare in the U.S. market. We did have a somewhat less profitable mix based on the promotions for Easter this year, which is also something that's going to recover in the second quarter of this year. So we expect margins for the second quarter to be much better, to go back to the 14%, 15% range. That is not considering this agency adjustment that we explained before. And that is even before many of these synergies are -- in fact, that's just the natural of the state of the business I would say. So synergies that we're working on are, again, in 2 basic areas. Secondary -- first is savings, so like secondary packaging, eliminating -- that is eliminating the plastic shells and the pads that we have in our products, the secondary packaging. We have plans for improving the efficiency in the production lines based on practices that have been successful in Mexico and other operations. Transportation savings, I mentioned sleek can production, internal sleek can production, optimization of CO2 yields. That's also something that is relevant in all of our operations, that would include Oklahoma. Our procurement savings, we're already seeing some of that, some of the [indiscernible] procurement. Same as light weighting of bottles and reducing the weight also enclosures of bottles, which also carry some savings. Things that already have worked in Mexico and in other places. On the revenue side, I mentioned Topo Chico. We have additionally the project of expanding distribution of Powerade, juices and tea, improving the execution through the cultural fundamentals that I mentioned before. But we have already identified clear opportunities really to do a better job in the market. That will be a source of revenue growth as well. The improvement of vending operations, just vending machines, just adjusting prices to what we need to have in the market. Here, that could be pretty simple. But there's big opportunity to think about the size of our operation and the need to align prices with our pricing strategy. Right there, we have a huge opportunity that we're already capturing. And also one that is not going to be seen in the very short term, but we're already working on the pilot is the optimization of our go-to-market models, especially in the on-premise market, which we believe that we have the opportunity to better serve those customers, develop a broader portfolio of customers on the food service and on premise market.
Very good, Arturo. Is that right for you, Rafael?
Yes. No, that's perfect. Just a quick follow-up to clarify. These agency sale that have lower margin, are they actually helping your sales then?
No, no. You know that when we negotiate -- the system in the U.S. is a little bit, let's say [indiscernible]...
No, but like when I look at revenue growth in U.S. dollars in the U.S., these agencies sales, are they actually helping you in that revenue year-on-year growth?
No, no, no. We don't do anything on that regard. I mean, by the way, just for the standard basis of accounting, we have to put it there. But...
We don't control the volume.
We don't control volume, we don't control -- I mean, obviously, there is some limits, no. I mean there's limits in terms of volume that some third parties can ask from us. But the process that we will have -- I mean it's like having [indiscernible] it's like having a [indiscernible] like, manufacturing for somebody else, no, which means other processes, so in my perception, I mean, I've been talking with external auditors to avoid confusion on this, that we should work in a way with these bottlers, which by the way, are 2 of them, to just have a contract that they can quote costs, provide the raw materials and I can quote costs, make a tolling or manufacturing for them. If we do that, that state will not be there and the cost will not be there and we will avoid confusion, okay? We are going to pursue that possibility. But certainly, we have to convince the -- this process of all bottlers so on and so forth. Give us some chance and you will not have that confusion in the future. We don't like to have it that, but such is life, no?
Ladies and gentlemen, at this time, we have no further questions in the queue. I would like to turn the call over to Mr. Garza Egloff for closing remarks.
Well, before saying goodbye, I just want to remark something. That the actions that we've been taking in, let's say, synergies and prices of raw materials and hedging the FX and so on and so forth. And certainly in the fixed cost, together with the actions that we are taking in prices and in our recent level of volume growth that we see, we feel confident that having a better performance for the rest of the year and to reach the goals that we have mentioned, definitely through 2018, was a good thing that we have. Again, as always, thank you for your continued interest, and certainly your trust and support to Arca Continental. And please, feel free to contact our Investor Relations team or ourselves directly to any further questions you may have. We will be always very happy to be in contact with you and answer. And have a great, great day and a great weekend. Thank you very much.
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.