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 the conference over to Melanie Carpenter of i-advize Corporate Communications. Ma'am, please go ahead.
Thank you, Katie. Good morning, everyone. Thanks for joining the senior management team of Arca Continental this morning to review the results for the first quarter of 2021. The earnings release went out this morning, and it's available on the company website, as always, arcacontal.com in the Investor Relations section.
It's now my pleasure to introduce our speakers. Joining us from Monterrey, we have the CEO, Mr. Arturo Gutierrez; the CFO, Mr. Emilio Marcos; the Chief Commercial and Digital Officer, Mr. Jose Pepe Borda as well as the Investor Relations team. They're going to be making some forward-looking statements. Per usual, we just ask that you refer to the disclaimer and the conditions surrounding those statements.
And with that, I'm going to turn the call over to the CEO, Mr. Arturo Gutierrez, to begin the presentation. So please go ahead, Arturo.
Thanks, Melanie, and good morning, everyone. I want to thank all of you for joining us today to go over our first quarter performance. Let me begin by saying that 2021 is off to a good start with positive top line growth, strong underlying margin expansion and volume acceleration. The unwavering dedication and commitment of our associates was fundamental to overcome a still challenging business environment and weaker consumer sentiment due to the ongoing COVID-19 pandemic.
Total consolidated volume grew 0.4% in the quarter, reaching 514 million unit cases. Once again, our beverage business in Mexico and the U.S. remained resilient and delivered a notable improvement in organic revenue growth in the first quarter. Total consolidated net revenues rose 4.1% to reach on MXN 40.5 billion. Consolidated EBITDA grew 15.7%, reaching MXN 7.7 billion, representing a margin of 19% for an expansion of 190 basis points. This is the highest EBITDA margin we have recorded for the first quarter in 4 years. First quarter results reflect the steady progress that we are making. Our financial and operating discipline, along with our market focused, enabled to take another step in the right direction in every market and deliver solid top and bottom line results.
Now let's review the performance and highlights across our operations. Our beverage business in Mexico continued to show positive momentum, delivering another solid quarter of volume growth, up 1.4%. Volume growth was driven by a robust performance in colas, sports drinks and personal water categories, up 7.6%, 14.8% and 2.5%, respectively. The traditional trade channel continued to stand out with 7.6% volume growth in the quarter, while the decline in supermarkets and convenience stores moderated. The mix of returnable presentations in Mexico grew 1.3% as we continued investing in our new universal bottle to address the new buying patterns and consumer preferences for affordable, multi-serve presentations.
Total net sales in Mexico rose 9.4% in the quarter to reach MXN 16.6 billion, marking the 19th consecutive quarter of net revenue growth. Average price per case, not including jug water, rose 6.5%, reaching MXN 68.37. Moreover, we were able to grow value share in NARTD beverages due to the excellent market performance in still beverage categories, such as water, sports drinks, soy beverages and juices and nectars.
On the profitability front, EBITDA increased 24% to MXN 3.8 billion, representing a margin of 23.2% for an expansion of 270 basis points. This is the 8th consecutive quarter of margin expansion as compared to the same quarter of the previous year. Notably, this is the highest first quarter margin in Mexico since the merger of Arca and Grupo Continental.
Turning now to our operations in South America. Total volume was flat in the quarter, resulting from declines in Peru and Ecuador, which were offset by growth in Argentina. The major concern now is the resurgence in COVID-19 cases and some countries are entering second and third waves. The resilience of these economies is linked to the success of targeted restrictions and the underlying strength of business spending. Total revenues in the region were down 5.8% in the quarter, reaching MXN 8.8 billion, while EBITDA declined 3.4% to MXN 1.8 billion, representing a margin of 21% for an expansion of 50 basis points.
We continue driving affordability, doubling down on execution and focusing on cost discipline to mitigate the impact on profitability. We are optimistic that after a pandemic-driven recession, the economy in the region is expected to start a tame recovery in 2021 on the back of East mobility restrictions.
In Argentina, our operations delivered sequential volume growth in the first quarter, up 4.7% cycling a strong 2.7% growth from the same quarter in 2020. Volume growth in the quarter was driven by both sparkling and still categories, up 2.2% and 51.7%, respectively. Brand Coca-Cola showed its resilience, up 8%. Growth in stills was led by the juice category, followed by sports and energy drinks. From a channel perspective, supermarkets and wholesale delivered strong improvements.
This quarter, we launched in Argentina, Coca-Cola with coffee in a 250 milliter PET presentation. This is part of the strategy to continue innovating our sparkling portfolio and offer consumers more alternatives in the zero-calorie category.
Turning to our business in Peru. Volume was down 1.2% in the quarter. We gained value share in NARTD beverages, driven by both sparkling and still categories and supported by our affordability initiatives particularly in multi-serve formats. Brand Coca-Cola grew 10.8% in the quarter. Fanta also delivered strong 7.3% growth, thanks to our affordability initiatives with 1.5- and 2-liter returnable packages. The traditional trade and wholesale were the best-performing channels with 9.6% and 11.8% growth, respectively. We accelerated the rollout of our AC Digital platform, expanding our B2B capabilities to more than 59,000 customers in the traditional channel, interacting with us and placing orders to our mobile app on a regular basis.
Also in the quarter, we launched a new 7-liter package of our Benedictino brand to continue driving affordability in the water category. We are encouraged by the latest economic reports showing that GDP and employment are accelerating in Peru due to the reopening of various sectors, such as mining, manufacturing and commerce. These areas have helped activity levels recover from last year's lows.
I will conclude my commentary on South America with our business in Ecuador. Volume in the quarter was down 1.6%. The country faces the third wave of the pandemic with a sharp rise in new cases. The gradual easing of restrictions has been put on hold and tighter measures were reintroduced, mainly relating to movement in curfews, but with some more stringent lockdowns in the most affected regions. We executed targeted commercial initiatives focused on protecting portfolio affordability as we continue expanding returnable presentations. The mix of returnable packages increased 5.4 percentage points in the quarter.
We launched Sprite Peppermint and Coca-Cola with coffee in limited editions and with great acceptance in the market. Tonicorp, our value-added dairy business, posted a double-digit sales decline in the first quarter. The overall dairy industry in Ecuador continued to be impacted by the effects of the pandemic. Despite the weakening consumer demand, Tonicorp grew value share driven by yogurt and flavored milk categories.
Moving to our beverage operation in the United States. Coca-Cola Southwest beverages closed out the first quarter with an outstanding financial performance, delivering solid profitability improvements and its 11th consecutive quarter of EBITDA growth. Revenue grew 4.2%, reaching $692 million. Net price grew 5.9% with a true rate increase of 4% and 1.9% growth on mix, driven mainly by high profit per case transaction packages. Value share in nonalcoholic ready-to-drink beverages grew, driven by Monster, BodyArmor and sparkling water fueled by Topo Chico and AHA combined strategy. Volume was down 1.6%, cycling strong 3.9% growth from the same quarter last year caused by consumer pantry loading.
Moreover, the February snowstorm significantly impacted all of our operations in Texas and Oklahoma. As you remember, this winter storm was one for the ages. Our associates were impacted in one way or another, whether it was from the record-breaking low temperatures, power outages, broken pipes, lack of water or freezing roads. Despite this, our teams, throughout the region, were pulling together, supporting each other and helping our communities and customers.
From a channel perspective, large stores delivered positive volume in the quarter. Small stores also started to grow for the first time since the pandemic as we cycled closures that happened in early March of last year. The FSOP channel closed with a double-digit volume decline, cycling the last period of pre-pandemic volume.
During the first days of April, we have seen encouraging volume recovery as FSOP customers reopened. We also saw an increase in volume during spring break as consumer confidence increased following the availability of vaccines and lifting of mask mandates in Texas. Importantly, the Dr. Pepper portfolio had a strong start to the year with high single-digit growth. On the profitability front, EBITDA for the quarter grew 26.1% to $99.5 million with a 14.4% margin, a solid expansion of 250 basis points. This is the highest EBITDA margin for the first quarter in any year since we acquired this operation in 2017. We continue focusing on accelerating rollout of our digital playbook. This quarter, we reached 51% of our eligible FSOP customers accessing mycoke.com. We hit the ground running with advanced analytics in 2021. We began by implementing the next best SKU initiative across our convenience retail channel with excellent results.
I will now finish our operations review with our Food and Snacks businesses. Why Snacks in the U.S. posted a double-digit sales decline in the quarter, still impacted by store closures due to the pandemic, particularly in large metropolitan areas, such as New York City. Deep River is starting to rebound in food service with a strong month in March, delivering a double-digit increase and on pace with 2019. We're actively pursuing new avenues to regain growth momentum by capturing additional points of sale with key customers such as Target, Walmart, BJ's and Walgreens.
We are maintaining strong growth in the e-commerce channel, with sales more than double compared to last year. We're interesting product innovation as well as a new price architecture to continue capturing share in the digital shelf. This year, we are celebrating the 100th anniversary of Wise. This is an important milestone for us and proof of the long-standing connection between our brand and consumers.
Bokados in Mexico posted double-digit sales growth, driven by solid improvements in the traditional and wholesale channels and better management of discounts and promotions. We accelerated deployment of our AC Digital mobile platform across our Snack operations in Mexico. We are replicating core revenue management capabilities to improve profitability of this business unit.
Inalecsa posted a low single-digit sales decline in the quarter. Despite the slowdown in the Ecuadorian economy, Inalecsa consolidated its market leadership and captured additional value share in core salty snacks categories, such as plantain, tortilla and potato chips as well as in the confectionery segment with the [ Graton ] and Inacake brands.
I will now provide an update on the most relevant ESG activities in the first quarter. Together with the Coca-Cola Company, we launched a new 13.2-ounce bottle in the U.S. made entirely from 100% recycled PET. We launched the new bottle for Coca-Cola, Coca-Cola Zero, Diet Coke, Sprite and Fanta. Next July, a 20-ounce version for Smartwater will follow suit. We also became one of the first bottlers to launch 20-ounce bottles made from 100% recycled PET across our territories in the U.S.
In another important highlight, our operation in Argentina was recognized by the United Nations entity for gender equality and the empowerment of women, also known as UN Women, for promoting gender equality through both internal initiatives and the work we do in the communities.
Furthermore, Tonicorp was granted the Violeta award for best corporate practices by the government of Ecuador. This is in recognition for active promotion of jobs for women, our efforts to prevent violence against women and strengthening equal opportunity processes within the framework of the policies promoted by the Ministry of Economic and Social Inclusion. This reinforces our commitment to working on initiatives focused on supporting the role women play in the value chain, while striving to achieve gender equality in every country where we operate.
I will now turn the call to Emilio to go over our financial results. Please, Emilio.
Thank you, Arturo. Good morning, everyone, and thank you for joining us today to review our financial performance for the first quarter of 2021. First and foremost, let me give a big thank you to our entire team for their commitment and hard work, which has been the key to consistently delivering strong results. We're entering 2021 with a solid momentum, building on the strong foundation that led us to the pandemic, our ability to adapt to an ever-changing business environment, and our discipline to protect profitability and yield strong results.
Moving to the financial results of the first quarter, consolidated revenues increased 4.1%, driven mainly by a positive volume performance in Mexico and strong price/mix in Mexico and the U.S. This top line growth, combined with our pricing, and an effective hedging strategy in raw material prices, helped us expand the contribution margin by 70 basis points. We still expect pressure in some raw material prices beginning in the second quarter, particularly in PET as witness. However, our hedging strategy will partially offset the rising trend in spot prices. We reported an operating margin of 13%, representing a robust expansion of 290 basis points versus the same period of 2020.
Consolidated EBITDA reached MXN 7.7 billion, an increase of 15.7%, a healthy expansion of 190 basis points to reach a 19% margin, being the highest EBITDA margin for a first quarter since 2017. This is largely driven by the expansion of contribution margin, combined with a reduction of SG&A coming from our disciplined expense control.
In line with the latter, the SG&A to sales ratio decreased by 150 basis points, mainly from a reduction in sales and marketing expenses, while administrative expenses remain stable. Our goal is to maintain OpEx aligned with revenue growth throughout the year.
As volume recovers across our regions, we expect that some SG&A expenses that were temporarily reduced during 2020 will barely increase in the following quarters. We look towards sharpening our revenue management initiatives and increased our holistic cost management efforts to mitigate some of these incremental costs. Net income in the quarter decreased 3.5%, primarily related to the harder comps from last year, where we registered a foreign exchange gain of MXN 1.4 billion from our strong cash position in U.S. dollars, coming from a significant depreciation in the Mexican peso at the beginning of the pandemic.
Now moving on to the balance sheet. On April 15, a cash dividend of MXN 2.94 per share was approved at an annual shareholders meeting, totaling MXN 5.2 billion for a payout ratio of 50% in line with our historical average. This dividend will be paid on April 27. Cash and cash equivalents in the first quarter stood at MXN 35 billion with a total debt of MXN 56 billion, resulting in a leverage ratio of 0.6x. CapEx for the first quarter was MXN 1.1 billion, a decrease of 30% versus the same period of last year. We expect to invest close to 6% of sales during the year to reach around MXN 11 billion, prioritizing the allocation towards strengthening and innovating production lines, distribution and execution capabilities as well as promoting digitalization and sustainability projects across our operations.
The strong results of the quarter continue to prove our ability to drive and adapt during challenging times. We'll continue to capture and create value for our shareholders through a disciplined execution oriented towards volume recovery, deploy commercial and revenue management initiatives to maintain pricing in line with or above inflation and improve cost efficiencies to protect our margins.
And with that, I'll turn it back to Arturo.
Thanks, Emilio. With the first quarter behind us, we see a challenging health and economic landscape continuing throughout the remainder of 2021. Despite this, we're executing on all fronts to drive performance and share gains. We started the year with a clear objective to uphold the momentum of our business. This momentum is evidenced by our value share, which we grew or maintained across our territories. We expect volumes to remain positive, mainly the traditional trade, supermarkets and all channels related to at-home consumption. The on-premise channel should start to recover as the COVID vaccine becomes more widely available.
Single-serve nonreturnable packages should evolve favorably across our portfolio with returnables leading our affordability strategy. As we have said before, it is imperative that we keep focused on the long-term vision of our business with an aim on preserving and strengthening our relationship with customers, consumers and the community. As we look ahead, we will continue to invest and execute to advance our priorities. Investments will span across our supply chain and go-to-market initiatives and include an acceleration of our digital transformation and sustainability agenda.
It is important to mention that it has been 2 years since we made our first venture capital investment. We're actively engaged in both VC funds and start-ups, which has enabled us to stay at the cutting-edge of technological developments and to start piloting solutions that are strategically relevant and can help make our business more efficient, sustainable and future proof.
In closing, all of us, who are part of Arca Continental, are proud of the results we have achieved so far. We remain keenly focused on becoming more efficient and swifter in adapting to the new market conditions. This requires an even greater commitment to leverage our scale and continue growing, striving for excellence in everything we do. Thank you for your continued support.
I would like to now open the call for questions. Katie, we are ready for questions, please.
[Operator Instructions] Our first question comes from Fernando Olvera with Bank of America.
Arturo, Emilio. I have to two, if I may. My first question is about Mexico. Can you elaborate more on how are you thinking about volumes recovery the remaining of the year? I mean because it seems that you could return to pre-COVID levels sooner than expected.
And my second question is, what's the main driver of the margin expansion during the quarter? How should we think about margins ahead, given that raw materials continue increasing?
Thank you, Fernando, and good morning. Let me address your first question first about Mexico. And certainly, we performed very well throughout the pandemic in the first quarter, as you saw, we had an EBITDA growth of almost 24%, the margin was 25%, one of the highest margins we've ever had, 290 basis points expansion. And this was the combination of solid volume. Even though we were cycling growth in the first quarter of 2020, as you know, in Mexico, the pandemic started affecting only the final days of the first quarter of 2020.
So it still was a tough comparison. But we had a very good price architecture. We were very disciplined, still disciplined in our OpEx in this quarter and very good execution. It's important to mention that we actually were recognized by The Coca-Cola Company with the Legacy Cup award for 2020, which is the recognition of the best execution in the marketplace in our operation in Mexico.
So the volume, as you know, was driven by the traditional channel. And that has been the case throughout the last few quarters. And we have very good performance across categories. As you know, even our core categories continue to grow, Colas and flavors grew in this quarter. And so I think it's a combination of an economy that continues to have strong performance from the consumption standpoint, the traditional trade that also has been the engine for growth in Mexico and in South America.
And if you see particularly the month of March, you can realize what would be the path for recovery in Mexico. In the month of March, you continue to see a strong traditional channel, but you start to see a recovery of the on-premise channel. So I think that, obviously, as we have the baseline of 2020 for the on-premise, would start to look really good for the remainder of the year.
Raw materials were not a big impact in the first quarter in Mexico, I would say, in general, in our operation, and maybe Emilio can expand on that. So we are very optimistic of the performance in our Mexico market for the rest of the year. Volume, even though it's not going to be spectacular, we did have a significant decline in volume last year anyway. So we -- even if we don't recover the volumes of the pre-pandemic scenario, the business is profitable. We have better execution in the market.
And we're rolling out many of our digital initiatives. I think we -- sometimes we don't talk about that in the middle of the crisis, but we are convinced that, that has been making a difference, and it's going to continue to make a difference in the market. As we are improving in our performance in reducing stock-outs through our suggested-order algorithm in our B2B platforms, AC Digital is being rolled out. There are a number of things that we believe are very important for this year and for the future in Mexico. So this continues to be a very, very solid business here.
With respect to margins going forward, our goal for 2021 is to protect margins. As you know, our margins have been very, very high in the last quarters. We've been growing consistently margin quarter-over-quarter. And we're going to have some headwinds going forward with some of the commodity pricing. It's not the case in the first quarter, and we have some hedges that are going to be important to mitigate that impact as we move forward.
So I would mention probably a few factors. One is our pricing strategy, in line or above inflation. We plan to keep that. The mix of our categories and channels are going to be relevant for the margin. And we -- it's hard to predict at this point how that is going to evolve. We do have some carryover, positive carryover of pricing from 2020 into 2021. So that's going to be good for our margins. We are being more effective in the management of discounts in all of our operations. That, also, is going to be very effective. And our efficiency plans are still delivering good results in our OpEx ratio to sales. So those, I would say, would be the main factors. Maybe Emilio wants to expand on that.
Thank you. Thank you, Fernando, for your question. I just like to add regarding the first quarter. We expanded margin 190 basis points. Seven of them are coming from pricing, as Arturo mentioned. We did not experience any increases, basically stable raw materials in the first quarter, so that's positive. And then volume is well, a little bit positive, but it's a positive effect going forward. And then there's 150 basis points coming from -- for our efficiencies and expense control. Some of them are coming from synergies in U.S., some other efficiencies implemented in all the countries. It's important to mention that we improve margins in all the operations, in all the countries except Peru. So that's also important to mention.
So we have a positive trend in the future, as Arturo mentioned. So basically, in summary, our pricing, the mix is really important. It has a positive impact on margins and then the efficiency plan that we implemented last year.
Great. And just very quickly, one last question. How are you thinking about the recent changes in outsourcing? And what impact do you expect?
Well, yes, we've been -- our operations based on what has been approved. We do not expect a material impact as a result of that. The number of people under that model for us in Mexico and where we need a restructure is not that significant -- will not be a significant impact. There's still some work to do. And we are working to integrate them to the structure that would be in compliance with the new regulations. So we will continue to work in that regard and mitigate any impact we could have in the operation.
Our next question comes from Ben Theurer with Barclays.
Arturo, Emilio. And obviously, congratulations on the results, that was really strong. Now in Mexico, you've made everything clear, so I want to switch focus and gears a little bit on the U.S.. And what's your expectation outlook there, particularly now that you're basically 1 year into the launch of the facility? So just to -- if you could share with us what your expectations are going forward in terms of where profitability is heading once food service comes back in and how you think about the shift between multi-serve, single-serve going forward? We still saw that obviously impacting. But we're seeing already strong margins, but that even with not-so-strong volume environment. So just to get a sense of where could margins be if volumes are actually in a normal level.
Yes. Thank you, Ben. Well, certainly, we're very pleased with our performance in the U.S. This is our 12th consecutive quarter of EBITDA growth and the 9th consecutive quarter of margin expansion in that operation. We've just celebrated our fourth anniversary of integration of the U.S. business unit into Arca Continental. So I think we can demonstrate the resilience and strength of the strategy that we followed throughout the years and we're reaping some of the benefits of projects that we started a few years back. And that, has resulted also in margin expansion, as we saw.
Despite the volume contraction in the quarter, and we were cycling high volume for first quarter of 2020 and also, we have to have in mind that we had this February snowstorm that impacted all of our operations almost for a complete week in the month of February. So even with that, I think, we performed really well. The economy in the U.S., especially the state of Texas, is improving day by day. The consumer confidence has increased and as you know, the capacity of businesses and on-premise venues has been increased as well. And the statewide mask mandate has been also -- has also ended. So it's a much better environment.
We've been able to sustain prices at a very good level even with the change of the mix. Remember, that in the U.S., the shift in the mix of channels works in a different way sometimes as what you see in Latin America. So if you look at the channels in the U.S., large stores have been driving growth for the last few months and quarters. In the month of March, we had a decline in large stores but this was, basically, with the comparison of first quarter, pantry loading in 2020. But we did have an increase in the on-premise channel for the first time in the month of March.
It increased almost 11% in volume in March. So that is a positive sign of recovery, although you also need to be aware that sometimes the on-premise market might result in consumption that has less profitability than the at-home market. So we're trying to drive consumption towards the bottles and cans formats also on the on-premise market, something to have in mind.
The other important impact in our U.S. operation is that we're still seeing some of the benefit in the carryover of our synergy plan for last year, even though we completed the projects in 2020, we still have some positive carryover. And an example of that is our Northpoint facility that you mentioned. We're very, very proud about how that facility is operating where we have, as you know, five production lines, the PET lines within line blowing, that provides significant efficiency, and the cost per case significantly improved.
Water usage is at a very good level, 1.3, and we have a number of other things there also, for environmental standards to be best-in-class. But we've seen our picking -- semi-automatic picking system in Northpoint, which builds a pallet according to customer orders, now fully operational. That also brings efficiency and savings to our U.S. business unit. So we think that we are in a very good position to capture growth as we move forward. We are also in a good position in terms of commodity pricing for the year based on the hedges that we have for aluminum, both LME and Midwest premium for the rest of the year.
And we report also that we continue to build capabilities and to roll our capabilities in the marketplace. Both digital capabilities, new models to service our customers in the U.S. And there's growth to capture there as things return back to normal in the market and we move to a more balanced consumption mix across the channels.
Okay. Have you actually tried to quantify the impact from the storm?
From the snowstorm in February?
Yes.
Well, it's hard to quantify. If you look at isolated, the whole week was -- the operation was really paralyzed. But then you have some additional consumption after that. So it's hard to isolate just a week. If you look at the week separately, you will think it's a much higher impact, probably at the end it would be.
I think we were able to mitigate most of it in what we did in the market the following days. But still, we don't have a specific number for that.
Our next question comes from Alan Alanis with Santander.
Emilio, Arturo, congratulations for the report, very, very, very impressive. A couple of questions. One around capital, the co-employment and dividends. The first question would be, I mean, you are under onetime net debt-to-EBITDA, very, very comfortable. What's the likelihood that you will increase your dividend beyond the payout ratio that Emilio mentioned, the 50% of the net income? That will be the first question.
And the second question, I mean, I know that the agreement with The Coca-Cola Company is confidential, and you cannot get the details and so forth, but you do mentioned that some of the increase in the cost came from an increase in the concentrate. So we have to ask about that. What can you tell us specifically about two things? The timing of how frequently the agreement changes? Is that a quarterly, an annually thing? And second, is it based now on profits, at the operating income level versus how it was juts in the past when you had -- when it was directly at the revenue side?
Those would be the -- I guess, 3 questions or 2 questions with the one with 2 aspects.
Yes. Thank you, Alan. Thank you for your questions. Let me address the first one first about dividends. And well, as you know, we -- last year, we had additional dividend payments throughout the year based on precisely that analysis of what's our leverage and what are the uses per capital and what are the expectations that we might have for that particular year.
This year -- actually, last week, we had our annual meeting, our annual meeting for the company. And as you know, in Mexico, that's where dividends are approved. So aside from the dividend that was approved to be paid now, we were -- the shareholders authorized the Board to approve additional dividends for the rest of the year. So that gives you the idea that it's something that would be under consideration based on the circumstances for the rest of the year for sure.
Yes. So but we cannot share anything, of course. The second point.
Yes, yes, of course. [indiscernible] variables.
Yes. But what's important is we don't have to convene another annual -- another -- I mean, shareholders meeting to do that. We can do that at a Board meeting.
So regarding our relationship with the Coca-Cola Company. Well, we have an agreement with them, and it's really a more complex relationship that we've had before but it's also, I would say, much more balanced relationship. We think that negotiations are now more equitable and more stable. This is not something that changes on a quarterly basis, to your question. We do have some annual revisions of where we are standing. And again, this is not only about incidence pricing and concentrate, it's other issues that are on the table. So you've seen -- even though concentrate prices have increased in the case of Mexico, also their participation in some key areas and investments, marketing expenses and even co-investments in CapEx and product development have also changed.
So this is part of the negotiation. That's why we don't want to kind of convey the message that this is kind of a one-variable negotiation. There are many other things that are on the table. So think about the universal bottle in Mexico that we've rolled out, and this was very important for our strategy, for the company strategy. So they contributed to that investment significantly. I think that was around $10 million, Emilio will correct me if not, that they would participate.
So again, this is an example of how those negotiations take place and how we manage this relationship to preserve our margins. I think our margins are also a good indication that this is a good model, and it's turned out to be beneficial for them.
Again, congratulations for the results.
Thank you, Alan.
Our next question comes from Lucas Ferreira with JPMorgan.
Gentlemen, Arturo, Emilio. My first question is I wanted to go back to that margin discussion. Certainly, you guys are in a very sweet spot now in the first quarter, given the price increases, not much impact on the raw material side yet. But even listen to Ku's comments in their conference call, it feels like this cost discussion is going to be much more of like a 2022 discussion than a 2021, right, for you guys.
So my question is a general question, looking at the market dynamics, your channels, looking at your pricing models. How comfortable you guys feel about maintaining your profitability going through this kind of massive wave of increasing costs like not to mention PET, sugar, aluminum and others, eventually kind of later this year or 2022, when eventually going to feel like the full impact of all this massive inflation we are seeing today.
So many CPG companies, other food and beverage companies already increasing prices. So if you guys feel comfortable about maintaining the profitability going forward with the levers you have in hand. And then I can ask the second question later.
Yes. Thank you, Lucas. Let me talk about profitability, starting with pricing, I guess, which is a very important factor. As you know, our goal is to capture prices in line or above inflation. We've been leveraging our RGM capabilities. And we've implemented effective price pack architectures in every market. So, so far, I think, we've been successful, and this is based on, again, on renewed capabilities in our operations. So if you look first at Mexico, we kind of had a positive carryover from last year in terms of pricing and in the U.S. as well.
So we expect that to be in line with our target. There are some effects there in Mexico. Obviously, returnability has an effect on price sometimes. But it's a good effect. Even though overall price might not be as high as one-way packages, profitability is still very high. The evolution of the on-premise market is a very important factor also in Latin American markets. And connected with that is our mix of single-serve presentation. So it's hard to predict where that is going to go in the next few months, and that's why we're not providing guidance at this point.
And -- but we think it's connected also with the mobility restrictions in -- especially in South America. But prices in South America have been impacted by mix more significantly that we -- it's important to mention that. But I think we're in a good place in every country with respect to price and also, with respect to the management of discount. This is one of the two largest digital initiatives that we have in the advanced analytics space, which is how to better manage our prices and promotions.
And maybe Pepe can add some additional comments to that because it's very important for our profitability going forward. The other elements are raw materials and pricing of commodities that we know where that is -- we'll know where that is going. Our volume was certainly help because the volume continues to grow in Mexico and the U.S., it's going to have a significant recovery. We expect that in Ecuador and Peru. And in Argentina, it's growing. It's one of those units were probably has -- it had a less challenging baseline to begin with before the pandemic. So price is certainly going to help.
And the other is our efficiency in the management of our OpEx. I think all the learnings that we capture during the pandemic are going to be very useful going forward. So I think the combination of that, even though with the scenario of commodities for the future is still a positive scenario for us in general. But I don't know, Pepe, maybe you want to add about what we're doing in terms of promotions and management of paid promotions.
Yes, Arturo. Thank you. And thank you, Lucas, for your question. Just regarding pricing, we are in a very good position. Specifically, in March, we have -- when we analyzed price versus previous year, that was positively impacted by category mix, where we're cycling high volumes from water panning purchases, March, maybe a little high. But going forward, we see 4 main impacts with different impacts by margin: the carryover from the increases made last year; the immediate consumption recovery across countries although with different speeds, but all going in the same direction; new package launches, especially in the U.S., like the 13-ounce bottle that is very profitable, and we are going to roll out.
And then as Arturo mentioned, the trade promotion optimization as we rollout the capabilities in other operations. This capability was deployed in August '20 in the Mexico business where we've been able to reduce and productive promo spending by almost 20 points. In Latin America, we are already replicating this capability, and we will deploy it gradually in Coca-Cola sales as beverages starting with local accounts, focused on the retail channel. So we feel confident that we have the tools to manage the pricing. Thank you, Lucas.
Perfect. Thanks, Pepe and Arturo. My second question is somewhat correlated to this, you guys mentioned a couple of times in the introduction about investments in digital, about, let's say, the hard seltzers and roll out of new products in the portfolio. So my question is regarding this SG&A. How much investments you're going to have to do this year relative to last year, which was more of a turbulent year, I would say? So my question is basically, if you're going to have to speed up a lot of your investments, and we should see that specifically SG&A line growing, let's say, more than inflation or going relative to your sales.
Yes. With respect to investment, 2020 was not a typical year, that's for sure. We had a much less rate of investment in -- throughout the year. And 2021 will go gradually back to normal. It was not in the first quarter, we're still cautious, and I'm still comparing with pre-pandemic scenario. But as we move forward, we expect CapEx to be probably around 6% of revenue in the year, which is I would say, pretty much a normal ratio for our operation. Maybe Emilio, you can expand on our investments and CapEx.
Yes. Thank you for your question, Lucas. Yes, we expect this year -- as Arturo mentioned, last year, was around 4%. So this year, we expect around 6%. That's -- it's going to be allocated towards, as I mentioned already in my speech, some production lines improvement; some coolers, of course, as always; go-to-market capabilities; and to enhance our competitive presence and execution in the point of sales. And as you mentioned, also some investment will go through automation and digitation processes across our value chains and modernize some IT systems. So that's part of the CapEx.
And also, some investments towards sustainability benefits for communities and some investments in energy efficiencies and our distribution channels. So -- and talking about countries, I think, around 50% will go to Mexico. And I would say, around 25% to U.S. and the other -- and the rest of -- to Latin America countries.
So basically, you're right, some of those CapEx will go to our digital initiatives that we have.
And with respect to SG&A, that it's going to increase versus our baseline 2020, but that would be also in line with our growth in revenues throughout the year. So we maintain healthy ratios for our OpEx.
Our next question comes from Felipe Ucros with Scotiabank.
Arturo, Emilio, congratulations also on the results. I'll say myself up to everything that everyone else said, very strong results. Let me start with a question on digital analytics. You guys talked about the suggested order and how it had another good volume contribution in Mexico. I was just wondering if you have an accumulated number for how much this has contributed since it was rolled out. If I remember correctly, I think, the first time we had you to talk over with us about this about 4 years ago, you had a pilot and it was -- the pilots were already contributing, but it seems you continue adding to that contribution.
So I don't know if you have an accumulated number that you can give us on that. And if you -- and if you have thought about what's the peak contribution from this? And I have a follow-up question after that.
Yes. Thank you, Felipe. Let me explain to you how this operates in our commercial processes. So that you have a better idea of what we're doing. What we -- at the end, trying to do is to reduce our stocks, so increased availability of our ideal portfolio and at the point of sale. So you have to make some assumptions on how that is going to translate into additional sales as you capture those white spaces probably in the traditional outlet. So we've measured out of stocks, and we have demonstrated that the model reduces effectively out of stocks in the marketplace.
So -- and that -- then you have to try to analyze and figure out how much is that -- that is going to convert into additional volume. So we started actually making some pilots and comparing with control groups, and we had growth of 1% to 1.5% around that of volume versus the control group. But as you continue to roll that out, then you don't have a control group any longer. So you just have assumptions based on your initial calculations, of how that is impacting.
But then we had the pandemic. So the situation certainly changed. So it was harder to estimate in isolation, what is the true impact of the suggested order. So the number we had originally was -- I guess, the average was 1.3% of [indiscernible] sales versus the control group. But then you start rolling that out gradually across the operations. So I'll let Pepe expand on that, please.
Yes. Thank you, Arturo, and thank you, Felipe, for your question. Yes, Arturo was saying, this is an ongoing process. We started -- the first models we built were just focused on reducing out of stocks on the key packages of the portfolio, mainly suggesting quantities of those packages. And we got very positive results, and that's probably what we discussed in the previous meeting. Then after that, we rolled that out, and then we included the sales potential by category per customer. And then that helped us to develop portfolio suggestions per customer. And as Arturo was saying, we then roll that out and then we didn't have a control group to measure with.
And the third step is to develop the next best SKU model. And we have a model that has the 3 -- have the 3 models and then balances per customer, the weight of each of those models. So as Arturo was saying the numbers that we have found looking target growth versus control groups have been around 1.3, 1.5 volume increase in Mexico, around -- between 2 and 2.5 in South America.
And we are currently enrolling the next best SKU in the convenience retail in the U.S. what we've seen up to now is that we have expanded 5% in SKUs with a repurchase of nearly 70%. So it looks like we are offering the right SKUs for the right customers. I hope that answered your question, Felipe.
No, that's fantastic color. And congratulations on what you guys are doing on that front. It's really leading the sector on that side. Maybe if I can do a follow-up, Arturo, on the Midwest premium. I was looking at the series [indiscernible], I think, the highest that it's been in quite some time. I have thought that we would see somewhat of a normalization with the change in government and all that, but it seems that it hasn't happened. I don't know if you can talk a little bit about what's pushing that dynamic.
Yes. Well, we've seen levels, as you say, of Midwest premium throughout 2020, probably over 300. We were under 300 at some point and, I guess, in the second quarter when many things change in terms of commodity pricing. And that has, again, stabilized at the end of 2020 above 300, which is still a lower number that we had at some point when some of the aluminum duties were imposed, remember, maybe -- what, maybe 3 years ago.
So -- but the scenario going forward is that it's going to be still at that level. We have the advantage, as Emilio explained, that we have hedged some of our requirements. So most of our requirements, I would say, for aluminum in the U.S., maybe around 90% of our requirements for both LME and Midwest premium pricing. So it's going to be that very positive for us. But certainly, as we move forward, the number -- the spot price for the U.S. is going to come up for the remainder of the year. That's the expectation. It might go again in the 400-plus level. That is what it's expected, but that's not going to impact our own results because we have hedged that in the level of pretty much of what you saw in 2020.
Okay. That's great news. Then maybe the last one really quickly on the possibility of buybacks. Arca has been sort of reiterating continuously over the last few years. At which point, I know buybacks are not at the top of the list of your capital deployment, but at what point do you start discussing whether it would be a good statement at a certain valuation to start buying Arca shares?
If there's ever been a criticism from the market about bottlers, it has been the multiples at which they have done M&A., and it seems that at this point where you guys can buy the best bottlers at the cheapest prices in a decade. We're sort of not seeing it. What's the importance of making that statement to the market?
Yes. Thank you, Felipe, for your question. Well, as we have explained our capital allocation, first, always, CapEx to our operations. And last year, we did, as Arturo already mentioned, the number -- second, capital allocation for us has been dividends. And last year, we paid 2 additional dividends. And Arturo already explained that on the shareholder meeting, the we have now at the Board level in order to pay any additional dividend. So that's another option for capital allocation. But number three, and that's something that we been working really hard on the past months and years, it's M&A.
We're always looking for inorganic growth. And we also -- we always have some on the pipeline some analysis in order to close a deal. So we always have that expectation and that priority.
And talking about buybacks. It's -- there's other considerations in order to -- it's not that -- you see, there is some other issues and complexity for buybacks. So that's why for us, we still have the other options as main priorities before any buybacks. Now the share price has been going a little bit higher. So that's good for everyone. But again, we still have the other priorities before any buyback. But there's always an option.
Our next question comes from Carlos Laboy of HSBC.
Yes. My first question is -- relates to refillable bottles. If you could expand for us, please, Arturo. And where you are as a percentage of mix in your main markets on refillables? But more important than that, what I'm really after is your vision on how much higher these might go over the long term, especially now that the ESG value of these refillables is really increasing.
While we're on the subject of refillables, if you could also comment on how these are helping you as a premiumization tool for driving pricing to open up your price pack ladder on the upper end of the scale. And do you see an effort from The Coca-Cola Company to market the environmental merits of these refillables further helping you and putting, [ in NOI ], an environmental halo of nobility over the entire portfolio that maybe helps you with the pricing further?
Yes. Thank you, Carlos. Good to talk to you. I think refillables continue to be a very important strategy. And now with that added factor that you mentioned, traditionally, as you know, in Latin America, they have been very important to provide affordability in a portfolio like ours. And that's what the role they've been playing, and that's why they've been so important across our market. So let me give you some numbers about the mixes that they represent across our markets.
In Mexico, refillables are, this year, about 1/3 of our volume, 33%; and in Ecuador, it's about 29%; in Argentina, it's higher than that. It's more than 40%. And this, obviously, as a result of the situation that we've seen in that country for a number of years. It's becoming much more important strategy. And in Ecuador, it's also getting close to 30%.
And that -- in the case of Ecuador, particularly, we've been very focused on that strategy, which was not as strong in the past. So it's so important as we also structure our price architecture versus our competitors to know those markets. So -- and it provides different options for consumers, and it's been very, very effective, especially in times like these and in downturns of the economy. So we think that we have the conditions to continue to pursue that strategy in Latin America, we have the expertise.
This is not only about introducing bottles. You have to have the commitment, and there's a significant investment there. But it's also -- you have to have the expertise of how to run in returnable package model. And it's a culture that needs to be created in the market and with our customers.
Then the factor sustainability is becoming more important as we move forward, especially in developing countries -- in developed countries, excuse me. In Mexico, as you know, we've introduced the universal bottle that also provides a new opportunity to promote refillables in our markets and even with a more efficient management of our bottle stock inventory, which we've been doing in the last year.
So that provides also some possibility of thinking in our U.S. market in the future as well, thinking about that other dimension, which is the sustainability aspect of the packages, as we have seen in Europe, and other markets. So we have been considering a pilot test also for the U.S. We continue to analyze that possibility. In the meantime, it's going to be, I would say, a fundamental part of our strategy in Latin America and now strengthened with the universal model roll in, rollout in all of our markets.
To add to that, you mentioned all the important points, Arturo, and I think for -- in the midterm, we see a lot to gain with the deployment of the universal bottle in all of our markets. As Arturo mentioned before, we're investing a lot behind this. And this permits us to have repairable bottles for products that we weren't able to have because we had to invest in specific glass float for that.
So we're we're seeing better volumes in flavors, in still beverages, and that is going to be an important revenue engine within the next years. Where are we going to get? What's the feeling? I think it's too early to say, but we plan to have increasing revenue mix from refillable bottles in the next years.
Just one quick comment. You made a passing comment on diversity at the end of your comments today. But it can come across as corporate speak so often, but I want to congratulate you and John [ Coadab ] because when I go to the U.S. and I look at your markets there, there's so many brilliant women in your senior management ranks, in sales and marketing. And this is really rare for us as analysts to see in this industry.
And so many of your retail counterparts are women, and the way they engage with your clients is impressive. So congratulations. I hope you can do do this even better. It's obvious when we go through the marketplace that this is a real issue for you, not a corporate-speak issue.
Yes, it is. And -- but we also acknowledge that there's a lot to do. We still have a long way to go.
Our next question comes from Victor Tanaka with Morgan Stanley.
You touched based on M&A. So I was wondering if you could provide us an updated view of M&A across the regions where you see the most compelling opportunities post pandemic. And related to this question, what would be the maximum levels of leverage you will be willing to achieve in the case you see M&A opportunity? That would be my question.
Thank you, Victor. Thank you for your question. Our approach to M&A has not really changed. And before the pandemic and throughout the last few months, what we've been thinking about is opportunities within the beverage and snack space and in the geographies where we operate, basically, it's the Americas. And it's in our current businesses and mostly focused on beverage opportunities in partnership with The Coca-Cola Company as is our core business.
So we think we're in very good position for that because as was mentioned before, we have the financial capacity. We have been also perfecting some of the commercial supply chain capabilities, which are so important. After 4 years in the U.S., we feel much more confident than we could be successful integrating businesses throughout the region in the Americas.
So -- and also, we have a strong partnership with The Coca-Cola Company. We talk about that frequently, and I think that provides additional opportunities for the future as well. We've also been working on our own talent pipelines to be prepared for that. So it's hard to predict where something could arise, and at the right, also valuation.
So we will continue to look for transactions, as I said, in the Americas, with special focus in the markets where we operate. And for that, going back to our financial capacity, we're going to have a conservative approach to leverage. We're usually aiming for a 2:2.5 leverage ratio, something that we would feel comfortable with, I would say, going forward.
And just a follow-up on your top line evolution. Can you give us any color of what you're already seeing in terms of volumes in April for both Mexico and the U.S. and how your volumes are trending relative to why you were expecting before April started, taking into account the tricky comparison base now?
Yes. We're going to be looking internally to both last year as is normal, but also to our original pre-pandemic baseline as we look at volumes for the rest of the year and look at 2019. So -- but just look at the recent trends. And if we see what's happened in this first quarter, and what happened in the month of March, or at least in the final days of the month of March, it gives you an idea of how those -- how volume is going to evolve for the rest of the year. And it's different in our different markets.
As we know, U.S. has a faster recovery and same for Mexico. So we're not going to see a growth in volume as high as maybe in South America in the second half of the year because the comparison is different. South America, on the other hand, is still struggling with mobility restrictions and and some of the effects of the pandemic in Peru and Ecuador.
So that's going to take a little longer, we believe. But we had a much more severe contraction in volume in the second quarter of 2020. So we're going to see that recovery gradually in the next quarters of the year, probably stabilizing by the end of the year. And then 2022 would be our most likely return back to our original baseline during that year in 2022.
Thank you. At this time, I would like to turn the call back over to management for closing remarks.
Thank you. As always, we appreciate your interest in Arca Continental. Please reach out to our Investor Relations team for any questions you may have, and have a great day.
Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.