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 call over to Melanie Carpenter of i-advize Corporate Communications. Ma'am, please go ahead.
Thank you, Katie. Good day, everyone. Thanks for joining the senior management team of Arca Continental to review the results for the second quarter of 2018. The earnings release went out early this morning. It's available on the website, arcacontal.com, in the Investor Relations section. There's also a webcast for you to listen to and to access the replay.
It's my pleasure to introduce our speakers. Joining us from Monterrey are the deputy CEO, Mr. Arturo Gutiérrez; and the Chief Financial Officer, Mr. Emilio Marcos; as well as the Investor Relations team. They'll be making some forward-looking statements today, so we ask that you refer to the disclaimer and the conditions surrounding these statements in the earnings release.
And with that, I'll turn the call over to Arturo Gutiérrez 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 second quarter and first half performance as well as some important recent developments.
Let me start by saying that this quarter, we celebrate our first anniversary as a Coca-Cola bottler in the U.S. It has been an excellent year for all of us, not only in terms of our performance, but also in our ability to integrate this operation seamlessly, building upon our successful track record of previous integrations. Over the last 12 months, we've delivered solid results, reporting sequential revenue growth and improvement in this business unit's operating performance. We have made great strides in standardizing best practices and capturing synergies. We will talk later in more detail of the progress in our synergy program.
This quarter, we announced a $250 million investment to build a new production and distribution plant in Houston. The new 1 million square foot facility is scheduled to begin operating in early 2020 and will allow us to continue growing productively to serve one of the most dynamic metropolitan areas in the U.S.
Moving now to our consolidated results halfway through the year. We are pleased to report that we delivered another quarter of improving performance indicators. Our second quarter and year-to-date results reflect the steady progress that we are making. We are focused on building a long-term sustainable business by achieving a balanced growth in volume, transactions and prices. Consolidated volume, excluding jug water, grew 4.8% in the quarter to reach 521 million unit cases driven by the integration of the new Oklahoma territories, growth in Mexico, the U.S., Argentina and Ecuador, which helped to offset the impact of Peru's loss. It's important to mention that in organic terms, we continued generating healthy growth, thanks to volume increases in water, sparkling soft drinks and still beverages as well as the positive price mix resulting from our revenue strategies. For our portfolio, we continue to broaden and innovate with new product launches for formulations of existing products to reduce their sugar content as well as acquisitions in growing categories like plant-based beverages.
Consolidated net revenues rose 7% in the quarter and 23.7% year-to-date to MXN 41.1 billion and MXN 78.2 billion, respectively. Consolidated EBITDA for the quarter grew 2.1%, reaching MXN 7.5 billion, representing a margin of 18.3%. While we are pleased with our progress, we will continue working steadily towards capturing additional synergies and operational efficiencies.
Now let's review the performance and highlights across our operations. I will start with Mexico, where we continue to drive market growth in the midst of an improving economic scenario. Our Mexico beverage business delivered its 12th consecutive quarter of volume growth, up 4.8%, excluding jug water, on top of a strong 3.4% growth from the same quarter of last year. A solid 3.4% growth in sparkling beverages; 10.6% still beverages and 12.7% in personal water drove this outstanding result.
Importantly, we outperformed once again the beverage industry in Mexico, increasing the value share across nearly all of the categories where we compete. We were fully capitalized on this -- we fully capitalized on the success of the FIFA World Cup marketing campaign. We hosted the Coca-Cola Trophy Tour in Guadalajara and Monterrey as part of its 61-nation journey. Several activations, including fan experience, packaging with FIFA World Cup branding, coupled with continuous promotions, generated strong consumer engagement.
Total net revenues in Mexico rose 6.4% in the quarter and 5.5% year-to-date to reach MXN 16.7 billion and MXN 30.1 billion, respectively. Average price per case, excluding jug water and exports, rose 3.2%, reaching MXN 56.56. EBITDA in Mexico increased 3.6% to MXN 4.1 billion in the second quarter, representing a margin of 24.7%. Margin contraction was mainly due to increases in key inputs, such as PET.
One of the highlights of the quarter we should mention that PetStar, the largest food-grade PET recycling facility in the world and a part of the Mexican Coca-Cola system, received the National Quality Award in Manufacturing from Mexico's President, Enrique Peña Nieto. This award recognizes outstanding quality and innovation in a company that promotes a culture of excellence and encourages competitiveness and sustainability in its operations. PetStar, a company owned by Arca Continental, Coca-Cola Mexico and other bottling partners, has proven that recycling PET in a sustainable manner with high-quality standards is both good for the environment as well as for the business.
Turning now to our operations in South America. Volume, excluding jug water, was down 3.3% for the quarter as a result of declines in Peru, which were partially offset by volume growth in Argentina and Ecuador. This past quarter, Peru was challenged by a market decline in consumption, resulting from an increase in the selected consumption tax. Total revenues for South America decreased 2.4% in the quarter and 5.2% year-to-date to MXN 8.9 billion and MXN 19 billion, respectively. EBITDA in the second quarter declined 8.1% to MXN 1.5 billion, representing a margin of 16.8%. On a currency-neutral basis, EBITDA declined 3%.
In Argentina, volume grew 8% in the second quarter, continuing the overall sequential improvements over the last 3 quarters. This growth was mainly driven by the sparkling and still beverage categories, up 2.8% and 50%, respectively. The integration of AdeS to our portfolio, not only boosted growth, but more importantly, drove a significant market share increase in stills.
The Coca-Cola sponsorship of the 2018 FIFA World Cup enabled us to strengthen the brand activity around Coca-Cola and reinforce its connection with consumers. As a result, Coca-Cola brand rose an outstanding 4.2% in the quarter. Nevertheless, we experienced a weaker consumer environment fueled by the devaluation of the country's currency and an increased inflation rate, which directly affected our consumers' disposable income. As you may remember, inflation for 2018 was expected at below 20% at the beginning of the year, but the outlook has changed to 25% or more. Despite the sharp slowdown in the economy, we posted solid top line growth in local currency terms. Our efficient price back strategy enable us to increase prices and pass through the effect of higher inflation rates. We continue to focus on cost discipline and efficiency optimization across the entire supply chain. At the same time, we reinforced our revenue management strategies, actively promoting affordability with returnable glass bottle initiatives and smaller-sized packages.
Moving on to Ecuador, where beverage business delivered solid volume growth, confirming the sequential recovery trend over the last couple of quarters. Volume for the quarter rose 4% driven by sparkling beverages, stills and bottled water at 1.7%, 3.7% and 20%, respectively. We continued innovating our portfolio by reformulating products to offer more low and 0-calorie options. Also in the quarter, we launched Fuze Tea [indiscernible], a new formula with natural flavors and affordable price point. Tonicorp, our dairy business, delivered low single-digit sales growth in the quarter. We captured additional market share across all relevant value-added categories such as yogurt, flavored milk and ice cream. This quarter, we launched Toni natural yogurt. This new low-fat, lactose-free and no-added-sugar yogurt is a natural choice for breakfast or as a snack, offering a perfect blend of flavor and hearty nutrition.
Our beverage business in Peru posted a volume decline of 11.3% in the second quarter. Lingering economic weakness and lower-than-normal temperatures continued impacting overall consumption. On top of such economic environment, we had the negative effect of fiscal measures enacted last May, including an increase in the selected consumption tax on several categories such as sweetened beverages. This unexpected action forced price increases literally overnight, restraining consumption even further. Total revenues in local currency declined 2.9% in the quarter. We were able to partially mitigate the impact of the new tax by replicating key lessons learned from similar situations in Mexico and Ecuador, including a flexible price-pack architecture to drive affordability, revenue management disciplines and advancements in returnable presentations. We have now launched a new 2-liter returnable bottle at an affordable price. We also capitalized on the success of the FIFA World Cup program via tactical market activations to strengthen connections with consumers. In addition to these market initiatives, we doubled down on our savings plan. As an example, we started to realize over $2 million in cost savings as a result of the closing of the Callao plant in Lima. All these efforts have led us to maintain healthy margins despite the adverse situation. We are optimistic that economic activity will rebound in the second half of this year, fueled by a ramp-up in public infrastructure spending for the Pan American Games.
Turning now to our beverage operation in the United States. Coca-Cola Southwest delivered its fifth consecutive quarter of revenue and volume growth. Our business realized solid top line results with sales up 4.6% this quarter and 4.2% year-to-date. Organic volume grew 4.3% in the quarter driven by the disciplined approach and strengthening point-of-sale execution. Our 3 main channels supported strong volume performance in the quarter. Once again, we gained value, share and solidified our market leadership. Favorable weather, healthy regional economy with low unemployment rates and oil and gas production coming back to West Texas also contributed to our growth in the second quarter.
It is worth mentioning that the U.S. bottling system, together with Coca-Cola in North America, implemented a price increase in the retail market effective this month of July. This price adjustment will represent important growth in rate in sparkling soft drinks in the second half of the year and will allow us to grow slightly above the U.S. inflation estimated rates. We continued to accelerate the use of our B2B electronic commerce platform, myCoke.com. We are rolling out this innovative portal to a growing number of customers in order to simplify and enhance their order-generating experience while optimizing our cost to serve. During May, we kicked off the fifth season of Share a Coke, which features over 1,000 first names, last names and nicknames across all packages. Throughout the summer, we are interacting with our consumers and customers with the Share a Coke kiosks, personalizing their Coke cans and providing ice-cold samples of Coca-Cola. This campaign has contributed to the growth of the media consumption packages. Furthermore, we continue to capitalize in the addition of Topo Chico's product portfolio to our red trucks. We doubled Topo Chico's consumer -- customer base and placed more than 600 coolers this quarter. With respect to the integration of Oklahoma, our team continued to focus on standardizing and enhancing their operations while delivering on strategic priorities. The University of Oklahoma renewed our partnership and signed a new 10-year contract with Coca-Cola. This shows how our team continue to serve customers while working to complete a seamless transition.
I will now provide an update on our synergy plan at Coca-Cola Southwest. I am glad to report that our comprehensive program is on track, and we continued to make steady progress during the quarter. We accelerated productivity initiatives across the value chain, rationalized the supply chain to lower costs and shared best practices in market execution. Benefits are coming primarily from the following pathways: revenue initiatives such as the expansion in coverage of Topo Chico and Mexican Coke and an improved vending machine operation; savings initiatives such as reduction in freight cost, lightweighting of bottles, cost reduction of labels and closures, infrastructure rationalization, savings in pallets and in secondary packaging, operational and production efficiencies, leveraging direct procurement and organizational optimization. Additionally, we're starting to see significant benefits, replicating best practices in revenue growth management and route-to-market commercial practices from our ACT model. And 2 strategic projects are also underway: the construction of our new production facility in Houston, resulting in savings close to $30 million per year; and the optimization of our shared services costs, which will also deliver significant efficiencies. Although these projects are now close to completion, we have seen only a fraction of those benefits in the first half of 2018. We should begin to see some of these savings pull through in the back half of this year and in the next 2 years.
To conclude with our operations review, let's move now to our food and snack business. Bokados posted sequential mid-single-digit sales growth for its 12th consecutive quarter, once again outpacing the salty snack industry in Mexico. The supermarket channel continued to be a consistent driver of growth, while the best-performing categories were extruded chips, marzipan and popcorn. Our operations in the U.S. delivered single-digit revenue growth in the quarter, mainly driven by the integration of Deep River and the acquisition of Carolina Country Snacks. Importantly, this quarter, we completed the rollout of the Wise portfolio across 14,000 additional Dollar General stores, driving incremental volume and brand availability nationwide. We'll also continue strengthening our sales and relationship at Family Dollar. Wise's cheese and popcorn categories are now available nationally through these outlets. Our strategy currently focuses on the development of greater distribution and expansion capabilities in new territories and categories as we continue investing in innovation and further promotion of our brands.
Finally, Inalecsa, our snack business in Ecuador, posted sequential mid-single-digit revenue growth driven by segmented revenue management initiatives as well as strong focus on promotions and discounts. We continue to gain volume and value share in the plantain, potato and tortilla chip categories, and we also captured additional share gains in the snack cake segment.
And with that, I will turn now the call over to Emilio to comment on our financial results. Please, Emilio?
Thank you, Arturo, and welcome again, everyone. We appreciate your participation to review our financial performance for the second quarter and first half of the year. We've posted mixed top line results in the second quarter. Volume continued its positive trend despite all the political and economic volatility in most of the countries where we operate. In this quarter, we just deployed tactical pricing initiatives in Mexico, Argentina and Ecuador, expecting to see their full benefit in the second half of the year. It is important to mention that this second quarter is not yet comparable due to the Oklahoma acquisition on the third quarter of 2017.
Consolidated revenue grew 7% in the second quarter and 23.7% for the first half of the year. On a currency-neutral basis and without U.S. beverages, net revenues increased 5.6% in the quarter and 5% in the first half of 2018. For the quarter, we posted solid net sales growth in Mexico, up 6.4% and 13.9% in U.S. while South America was down 2.4%. Revenues in the first half of the year in Mexico were up 5.5% driven by the solid volume performance from the deployment of commercial innovation initiatives and a favorable consumption environment. And South America decreased 5.2%, mainly by Peru negative volumes, results and the exchange rate conversion affected mostly in Argentina. Cost of goods sold were up 5.2% in the quarter and 25.3% year-to-date. This increase is explained by the continued high sugar prices in Mexico, up 6% year-on-year in second quarter, higher PET prices in most of our operations, partially offset by the foreign exchange rate hedges of our U.S. dollar-denominated raw materials in Mexico.
SG&A expenses increased 13.8% in the quarter and 30.3% in the first half. These items that mainly drove the increase were higher depreciation and fuel prices in Mexico.
Operating income for the quarter increased 3.2% year-over-year for a margin of 13.2%. As of June, this line increased 6.2% for an operating margin of 11.9%.
Consolidated EBITDA in the second quarter increased 2.1% at MXN 7.5 billion with 18.3% margin. Year-to-date, EBITDA rose to MXN 13.5 billion, reflecting a margin of 17.2%. Comparable currency-neutral and without the U.S. beverages, EBITDA increased 1.2% this quarter and 1% in the first half.
Income tax provision for the quarter was MXN 1.3 billion, an increase of 9.1%. For the first half of the year, this line reached MXN 2 billion, same level as 2017.
Effective tax rate for the quarter was 28.5% as a result of the new fiscal reform in the U.S. The comprehensive cost of financing during the quarter was down 34.6%, mainly due to exchange rate gains generated by the company cash position in dollars.
For the quarter, net income increased 30.6% to MXN 2.7 billion, representing a margin of 6.5%. For the first half of 2018, net income increased 6% to MXN 4 billion, reflecting a margin of 5.1%.
As of June 30, 2018, we had a cash balance of MXN 23.2 billion and debt of MXN 56.9 billion, meaning a 1.2x net debt-to-EBITDA coverage ratio. We continue working to maintain a solid balance sheet to be ready for any opportunity that could arise in the future.
Operating cash flow generation for the first 6 months of the year was MXN 8.5 billion. This was mainly allocated to CapEx, up MXN 4.9 billion and MXN 3.9 billion for dividends. The combination of sales through reprices, along with the full impact of our pricing initiatives, including price adjustment in the U.S. and the tighter expense control across all of our business units, should bring better profitability in the second half of the year. All of these will be aimed to continue delivering solid results to our shareholders in a challenging 2018.
And with that, I'll turn it back to Arturo.
Looking at the second half of the year, we will undoubtedly face many of the macroeconomic headwinds we have seen so far. However, we will continue building on our solid market capabilities, innovation pipeline and strong execution discipline to weather uncertainties as we have always done. I am confident that we will achieve our full year outlook.
I would like to close by stating that we are pleased with the progress we have achieved in our businesses, which gives us increased confidence that our strategies and actions are working. While we are fully aware that we continue to operate in a challenging macroeconomic environment, we are confident that Arca Continental is well positioned to continue capturing growth in alcoholic beverages, food and snacks in the Americas and doing it profitably. Thank you for your continued trust and support.
And operator, we are now ready for questions.
[Operator Instructions] Our first question will come from Lauren Torres from UBS.
I'd just like to follow up on some of the comments you've made with respect to pricing initiatives that you took. I assume in the second quarter that, as you said, more impactful than the second half. Emilio, I think you mentioned Mexico, Argentina and Ecuador. So curious to get any more detail behind the extent or the size of these price increases. Why they were taken? Was it a timing issue where you always planned it at this point or it's because of some of the cost pressure that you're feeling that you decided to take some incremental pricing? And I guess just as a follow-on to that, with the margins under pressure, is the pricing structure now in place to see a margin recovery as you talk about better profitability in the second half?
Thank you, Lauren. This is Arturo. Let me address the question on prices, especially starting with Mexico had the biggest impact. As we've said, the prices last year in Mexico did not increase on a straight line. So our price increases this year are really starting to be reflected in our comparison. We increased our price in June this year, June 2018, and that will get us to a second quarter growth of 3.2%. It is now fully reflected because there is an effect from the sale of Topo Chico. As you know, we were selling Topo Chico as an export product with a different price and a different economic model as it is now since it is a Coca-Cola brand. So that has an effect. But the real price in our territory, in our franchise territory is up 3.2%. And we -- to this date, we've implemented price increases in March and June, so we have not yet seen the full effect of that second price increase. Our monthly -- just to give you this particular piece of data. In June, just the month of June, we see an average price increase of 5.2% in the franchise territory in Mexico. So we plan to continue seeking for opportunities, but our expectation for the second half of the year is to get an average price above inflation by the end of 2018. In the case of Ecuador, well, it's a similar situation. Ecuador, we had a biggest challenge because we were coming from declining prices in 2017 due to the competitive environment. So the curve was kind of backwards at that point. So we implemented a number of initiatives to meet our objective of also being in line with inflation in the year. Although on a year-to-date basis, we're still below last year. Same cases in Mexico, kind of the curves are now crossing. And our price as of June, just the month of June is -- it's 3.1% above last year, so I think we're moving in the right direction in Ecuador as well. And it's not only the prices themselves, the rate at which we increased prices, it's also the way we manage discounts. For example, in the case of Ecuador, this year, we have reduced our discounts as a percentage of sales from 7.6% to 6.9%, so that gives you an idea of how things are improving. And finally, the case of Argentina, at the end of 2017, there was an expectation of inflation being below 20%. So our target for the year was in line with that, around 19%. But very quickly, the outlook changed. Now we're looking at more than 25%, probably. So we had to adjust our price strategy in line with the expectations for inflation. We have accelerated price increases. We increased in April, and then we increased again in June. And we also have been improving our mix of single-serve packages. So the -- as a result of that, we are still below inflation. That's about 19.5%, I guess, up-to-date. So we still have work to do. But again, as in the case of Mexico and Ecuador, we expect the second half of the year -- first, we have -- we going to have the Easter comps, and we're confident that our pricing will be around 25% or so for the year. So I know that answers your first point. I'll turn it over to Emilio to address the second part of the question.
Thanks, Arturo. Regarding margins, in South America, well, despite the economic condition in Ecuador and the volume drop in Peru, we have been able to maintain margins in both countries during the first half of the year. Really, the impact -- the negative impact on margins in South America are coming from Argentina. As Arturo have explained, we were -- we had a price increase based on different inflation that were leaving, so the inflation really went up is -- we had a higher inflation. So we really have in place a new price strategy, and we also have a specific cost-reduction plan. We have increased consumption from our sugar mill, internal sugar mill that will improve our cost. We have some lightweighting in some of our presentations, and we also have some cost-reduction planning on freight and some other items, so we really foresee better second half on margins in Argentina and of course South America. Regarding Mexico, we also -- as Arturo also explained, we have prices still below inflation. But with the last increases that we have and with no new increases in raw materials, we also expect better margins for the second half of the year.
Okay. And I guess just the follow-up then to that. I mean, when you say better, is it just less of a decline or we could even see something more stable or flattish for the year?
No. I'm talking about better compared to the second half of last year, so in comparable to last year.
Our next question comes from Álvaro García from BTG.
Appreciate the color on margins in Mexico. I actually have a bigger-picture question. Arturo, I'd like to get your thoughts in sort of given Coca-Cola's increased willingness to add new types of products to the big red trucks. So you had examples in Chile, so you had your distribution agreement and you have examples in Japan as well. Do you envision any of these opportunities in any of your territories?
Thank you, Álvaro. You mean other products other than our current soft drink products, right, or beverage products?
Right. Alcohol, in particular, for example.
Yes. Well, we already have distribution of products that are not within the normal scope of our portfolio in Argentina, and that's the way it's been for a number of years, more than 10 years. When we acquired that franchise, we were already distributing beer in those territories, and that obviously came before us. And it was -- the reason behind it is that they want to have the right -- the critical number of SKUs and the necessary drop size for distribution in that territory. So that's the only exception that we have so far. We have not explored any other possibility of distributing alcoholic beverages within our current system.
Have there been any discussion with Coca-Cola on the matter? Or is it just something that you haven't explored yet?
No. We have not discussed it with Coke or we have not explored it ourselves. I think we have a number of other possibilities to grow our business. On the one hand, we believe that just becoming a total beverage company within the nonalcoholic ready-to-drink beverages, there's a great opportunity. If you look at what -- how we're growing categories where we have low participation, like in the case of dairy and stills -- some of the stills category like tea and juices, in most of our markets, we have huge opportunities there to become either leaders or just increase the size of the category. And that is where we would be focused at this point like soy-based drinks or all the different variations of AdeS. In the case just of flavored milk and regular milk in Mexico and in Peru, we believe there are great opportunities there, and we would explore that before going beyond the scope of nonalcoholic ready-to-drink.
Our next question comes from Alex Robarts from Citigroup.
Yes. I guess I'd like to go back to the U.S. and explore some of your thoughts around this organic volume growth that you're getting there, the 4.3% that you posted in the quarter. Can you help us understand some of the drivers behind the growth? And I appreciate you showing us between the sparkling and the non-sparkling, but it seems that there's a quite a bit of growth from the water category. And if you could kind of give us a sense of how much is the water category in the United States driving your ongoing volumes in the territories on an organic basis. Do you feel that that's going to be really the main driver going forward? Is this 4% a kind of a run rate that you think is similar to the industry? Are you above industry? And how can we think about the volume rate in the back half of the year? Is there a reason to suggest that we could have similar growth, less or more growth? So that's kind of the volume question we've got for you, guys, in the United States.
Thank you, Alex. Well, certainly yes. In the U.S. and Southwest, we've had very healthy growth, especially in the second quarter of this year. I think we're starting to see the benefits of improving point-of-sale execution, really, through our fundamentals culture. And we've made a deep transformation of how we operate into having not just one scorecard, one single scorecard, focusing on the key metrics that are -- the most basic operational metrics from availability of products from visits to customers, from order taking, from out of stocks, just the basic stuff, but we've implemented tools where you can track that up to the customer. We trained ourselves for that. That would -- I would say that it's been the biggest effort, the biggest implementation we've done so far, and I believe that a lot of what we're seeing right now is the benefit of that initiative. So we had a very strong May and June, by the way, so that means that things are improving as we move on. The sparkling soft drink categories are growing year-to-date, 1.8%. Even trademark Coke is growing year-to-date, almost 1%. It's -- I think it's 0.8%. And all of our regions are growing, and growth across channels is also very solid. Large stores with some of the packages, especially transaction packages, what we call small stores, are growing 2.7%. The on-premise channel, which is an area of focus for us, grew also volume, 1.6%. So there are some external factors that are influencing, healthy economy in Texas, low unemployment, what I mentioned before, the oil and gas production coming back to West Texas. But we believe that what we're doing has a lot to do of how we're improving. We are certainly growing faster than the industry. We have strong NARTD value share growth, and this has been going on for some time now. And in both sparkling and stills categories, we grew share in both. And when you talk about -- when we talk about categories, yes, water is growing at a very good rate of 10% in DASANI; 11% in Smart Water, but we're growing Powerade in the second quarter, 16%. We're growing energy. We're growing tea, and we're growing again the most basic of our SKUs like the 12-ounce cans and brand Coca-Cola in general. So I think that we are certainly starting to see the benefits of what we're doing, and it's very important to change also the mindset that prevails many times in markets like Mexico and the U.S. that some of the more "mature" categories don't have a lot of space for additional growth. We really don't believe that. I think we've shown that in Mexico. There's still a lot of potential for growth and in the U.S. as well, even in the sparkling space.
Our next question will come from Isabella Simonato from Bank of America.
Just a couple of questions on my side. On Mexico first, is there any idea how elections or the World Cup helped on volumes this quarter? If you could quantify that effect so would look more of a normal organic trends of growth there so volumes were actually quite strong. And when we look at the U.S., I understand that part of what impacted your margins this quarter were sale to other bottlers. If you could try to include that effect and look at margin trends for the rest of the business, that would be very helpful.
Thank you, Isabella. I will address the first question, and hand it over to Emilio for the second part. While in Mexico, certainly, the World Cup was an important event. Mexico didn't move forward to the quarterfinals though, but we did have a lot of activity around the tournament. We had a lot of initiatives and promotions in connection with that event, which is something that we do every time that we have that possibility and leveraging the sponsorship of Coca-Cola -- of the World Cup. But if you look at our growth, growth in Mexico has been consistent in the last months and in the last 2 quarters. So obviously, that helps. It's hard to assess and quantify how much comes from that effect. I will take -- the elections don't have that significant impact, but they came out positive, which was the good thing from the political standpoint. But in Mexico, we've been growing consistently this year on top of strong growth in 2017. So we continue to see strong growth in every region. And that, in fact, occurring very evenly. For example, this year, we grew more -- and that was just a natural thing from regions that had grown at a slower pace last year. So if you consider the 2-year growth, it's very even across our 4 regions in Mexico. And that is allowing with the -- how the consumer is behaving. Consumer confidence is up. And also, you see that across the channels. We see that the traditional channel grew -- it's growing 3.5% this year, very solid. We're growing in each of the important channels. We have significant growth and the same thing with categories. We grow sparkling and water and stills. We're actually growing stills at a higher rate than water or sparkling category in Mexico. And there's one additional channel that also gives you an idea how consumption is very strong and continues in recent weeks. The home business -- the home delivery has increased 16% versus previous year for us now. It's getting close to 4 million unit cases in the first half. And we still have a lot of opportunity to capture the potential of this channel because we have not really transformed much of the way we operate in the direct-to-home channel with technology or an app that would be used by the customer and by the consumer. Dairy, for example, has been a great opportunity. Dairy is now 10% of the mix in the home delivery channel. So I think what we've seen is growth across categories, across regions. And it is also supported by things that we're doing in the market as the way I explained it for the U.S. In Mexico, we have the same basic scorecard of fundamentals where we track how are we performing in terms of things that we need to know for execution at the point-of-sale and for our route-to-market models. And all of that has also been improving throughout the year. So it's not a coincidence that when you have better coverage of your basic SKUs, you reduce your other stocks or you increase your customer visits, you would have better performance at the top line basis. So that's why we believe this is something that will continue to give us a solid growth in Mexico. And I'll turn it over to Emilio.
Thank you, Arturo. Well, regarding the margins in U.S., with and without the effect on we call it agency, but the sales to outside our territory, it's really impacting us 80 basis points during the quarter and year-to-date. So if we do not consider, that's the way we should do it. The agencies or the sales to other bottlers, margins should be 80 basis points higher than the one that we are reporting. That's for only the U.S. business. On a consolidated basis, at the AC level, the impact is 35 basis points. That's regarding the agency impact. Then, this quarter, we also have an impact on Oklahoma. Oklahoma, we have it in 2018, but last year, the second quarter, we did not have Oklahoma. So since Oklahoma has lower margins, we also have an impact on this quarter. And without considering Oklahoma, basically, we have very flat margins compared to last year, only Coca-Cola Southwest. Again, without including Oklahoma. That despite the impact and increases in several raw materials. You know that aluminum prices, PET prices, fuel prices are going up or we have much higher prices the first semester than last year. So we're offsetting all these price increases with our synergy plan that Arturo has mentioned. So basically, we still have some of the initiatives and synergies that will start the second half of the year that will also help us to improve our margins. We don't see any additional impacts on aluminum, since we hedge, basically, 90% of our needs on one of the -- on the biggest component on pricing, which is the LME, the London Metal Exchange price component on aluminum. And the other part that is the Midwest premium, we haven't hedged that part. But we still see some price increase on that component on pricing on aluminum, but the main component has been already covered.
That's very clear. Very helpful. Just a quick follow-up regarding the sales to other bottlers, how much would that represent of revenues in the U.S.?
Well, overall -- on volume, it's like 10% of our volumes. So it's 10%. In revenue, it's not the same because the cost is much lower. But in terms of volume, it's 10%. But I think it's important, we're not including that volume in what we are reporting. So that volume is not registered on what you see. Okay?
Our next question comes from Antonio Gonzalez from Credit Suisse.
I just have a very quick follow-up on Argentina, from what you've said so far. And then, I want to ask a different question on Mexico. In Argentina, I guess, we see the picture. Inflation worsened materially relative to what anyone was expecting at the beginning of the year. But so far, volumes have held up relatively well. And when we grab, I guess, a broader read of the economy, there's been some signs of deceleration that would point to volumes significantly weaker than what you've delivered so far, no? So I just wanted to ask, what sort of volume dynamics would you expect for the second semester once full pricing actions that you're implementing as we speak, get absorbed by the market? So that's the first follow-up. And secondly, I wanted to ask a quick one on Mexico. You mentioned in the press release some data analytics initiatives. And my understanding is that, you were deploying some of these initiatives in roughly 1,000 stores, small stores, in Mexico. I wanted to crosscheck with you whether that's a correct number. How fast can you grow? And what reach that you'd like to have in, I guess, a couple of years time in these programs? And how are you thinking of monetizing this programs? Is it just improving your execution even further by gathering information from this small mom and pops? Or are there other avenues of monetization that you could explore eventually?
Thank you, Antonio. Maybe answer first the question on Argentina. And I think it's a great question because when you look at our volume up to date, it does not really reflect the recent trend. We had a very solid first half. But just in the last few weeks, the month of June and how we're starting this second half of the year, we already noticed that it's going to be much more challenging as we move forward. And I would say that this is not necessarily from price increases because the whole industry is increasing prices. The whole country is increasing prices for everything and inflation is very high. But it's that -- there is an economic situation that is much different than what we've seen in previous months, and consumption has been declining. So for us, it's going to be challenging in terms of volume as we move forward. We still expect to have volume, growing volume, in the second half of the year. Probably the third quarter will be more challenging, and then, the fourth, we're going to start to have recovery again. But what we're going to do to face that is -- things that we already know how to do this in this kind of environment. We are, obviously, are leveraging our capabilities, especially for returnable packaging, which is very important in this type of environment. We are looking for opportunities for savings and efficiencies. We have implemented a savings and efficiency plan in Argentina as well to make sure that we maintain a healthy operation from the perspective of profitability. But certainly, it's going to be more challenging environment from the volume perspective. If you -- let me move now to the question on Mexico. When we talk about the analytics initiatives in Mexico, it's not only what we're doing with the small mom-and-pop stores. So it's 2 different things. Let me address it just in general that in Mexico, we've been exploring different use cases to leverage all the information that we have from the customers and the market, basically to reduce our stock, to prioritize what we do in the market. And we are now piloting a suggested order tool based on analytics of big data collected from the traditional tray. And this is a huge product that we're piloting in Monterrey, and -- but the implementation of the suggested order will reduce our other stocks in the traditional mom-and-pop market significantly. The results so far are very promising. We know that the math works. It's just a matter of finding how we could implement it to the highest degree. We're seeking a target of at least 40% of success in our suggested orders in that market. And if we get to 40%, it's going to be transformational. So we're getting close to that now. So that's an example of one of the things that we're doing in terms of transforming the business with big data and advanced analytics. The other part that you were asking about is what we're doing with the small mom-and-pops and providing point-of-sale technology to those stores. And this is a startup company that we actually acquired and we made part of our operation now. And we've been growing -- we started with a few hundred customers. We expect to be beyond the 3,000 threshold by the end of the year, probably 3,500, where we provide this point-of-sale device for them. And the first benefit is that, as you've seen, the Siglo and [indiscernible] customers that we have in Mexico, the first thing is that it increases traffic. We know that it increases traffic to the store because it has new things to offer to their customers in terms of services they can pay for, in terms of additional service they can provide to their own customers. So that's a benefit in itself. For us, there are some added benefits, which is basically knowing about the sellout of the stores and the inventory of our customers, which we have never had. And that will help us manage much better our service and our sales and avoid out-of-stocks in the stores. So that has even a bigger impact. And obviously, having the information will get you to a whole new number of possible benefits that could be a later stage for the project as well. But initially, just having the information of the sellout of the customers is something that will allow us to serve them much better, execute better at the store, knowing what's ideal to invest in terms of cold drink equipment or any other investment that we do at the point-of-sale. And ultimately, develop more the potential of this channel going forward. So it is a very important project for us. Our aim would be get, probably, to the 20,000 level of -- I mean, the customers, in Mexico. And this is something that could be easily replicated in other Latin American markets because the metrics are the same.
Our next question will come from Leandro Fontanesi from Bradesco.
So our question is if you have implemented any price increases in the U.S. so far, even considering July? And if you could share also what's your expectation in terms of the price elasticity for this market?
Thank you, Leandro. Well in the U.S., yes, we have implemented price increases in the U.S. We have some carryover effect first from last year of increasing prices in the U.S. market from last year. And first, it's important to point out that price dynamics in the U.S. for the Coke system are different than what we do in the Latin American markets. This is something that has to be coordinated with the system, especially for the national retail accounts. And so there is a rigorous planning behind all those price increases. So there were some increases in 2017 that we had the benefit of carrying over partially in 2018. And then we had an additional price increase that was implemented this month, the month of July, so we have not obviously seen the effects of that. And that will impact positively, I would say about 70% of our volumes. So it's a price increase of many of our products, and that will help us, no doubt, offset the impact of growing costs, particularly aluminum, PET, transportation, et cetera. So that is coming into effect. It's going to get us, in 2018, we expect to be above inflation for the year at the end of the year. And also, it's going to give us some carryover for 2019. But we are now working on the 2019 pricing plan with -- along with the system. So this has been in collaboration with Coca-Cola North America. I think we've been able to establish a very strong collaboration with the bottlers in the U.S. and with The Coca-Cola Company based on capabilities for RGM. And that will, obviously, not only give us the benefit this year, but also on the years in the future, which is this is a very important part of what we're doing in every market. In terms of elasticity, this kind of increase we don't expect much because this is just a normal part. It's slightly above inflation, but we don't expect a big impact on elasticity based on this particular price increase.
Our next question comes from Lucas Ferreira with JPMorgan.
So my first question is regarding Peru, how you're seeing elasticity there post the tax implementation. And considering your past experiences, if you are already seeing an improvement in consumption per capita post an introduction of the tax? So what we should expect in terms of volumes and prices for the second half? And the other question is, first as a confirmation. You -- Emilio mentioned about the hedges that you guys have for your input cost for the second half that you pretty much covered. But I just wanted to confirm if the 2019 number, how does it look versus '18, if you have a heavy cost base building up for '19? And finally, my last question on your selling expenses. I'm seeing that it's a -- as a percentage of sales, is tracking slightly above last year. So wondering if this has to be with the taxations? Or if you can comment a little bit on that? If we could bring it -- if we can bring it down in the quarters to come?
Thank you, Lucas. Let me address the first part, and I'll turn it over to Emilio for the discussion on hedges and expenses. So in the case of Peru, well, as you've seen, the volumes in the second quarter had a significant decline. And for the whole year, so the taxes implemented in May, but we already had a very difficult situation trailing in Peru for some months. Even the end of last year, we started to see a decline in consumption. So in this year, we have all 3 factors, main factors, that come into play for our decrease in volume, the increase in taxes, obviously, to sweetened beverages. That was announced on May. And that was effective immediately, which was a big challenge for our operation. The second effect is a lower-than-expected economic activity. And this, again, has occurred even before the tax was implemented. We still see some of that impacting our volume. And also, in addition, there's a third factor, which normally we don't want to talk about in this case, it was pretty significant, which was lower temperatures as compared to last year. So what you're seeing now in terms of the decline is not truly the result of the tax in itself. So I would say that elasticity is lower than what it seems, just looking at the decline in volume, if you compare that with an -- what a, probably, 8% of additional increase in prices as a result of the selective consumption tax implementation. So what we expect -- and we have learned from the experience in other operations that were affected by this kind of taxes, in Mexico and in Ecuador, that it is the first months after the tax that elasticity is really higher. It cannot tends to normalize in the following months. So we had that experience in 2014 in Mexico, and in Ecuador more recently. And we also know how to cope with the situation and not only mitigate the impact, but find a way to come out strengthened at the end of the day, and that means continue to invest strategically in the market and leverage our returnable presentations and returnable portfolio, and execute according to the situation at the point-of-sale. So what we expect for the remainder of the year is we're still going to see a third quarter that is still challenging, but the decline is going to be less than what we've seen. And then, we're going to have a much better fourth quarter. That is what we expect for the remainder of the year because we're going to have much easier comps at the end of the year. So it's part of recovery, and it's part that fourth quarter of 2017 was not really very good. So that is what we expect in Peru, and I'll turn it over to Emilio now.
Thank you, Arturo. Let me start with selling expenses. First, we need to consider that, as I mentioned, that this quarter, we have the effect of Oklahoma. Last year, we did not have Oklahoma. So without Oklahoma, the G&A grew 10%, instead of the 13.8 that you see there. And in the year, well, we also have, well, 6 months this year of the U.S. operation. And last year, we only have 3 months. So if we compare -- if we take out the U.S. operation, G&A during the year grew only 5.2%. That's one comment. But as also we have mentioned, and Arturo talked about the campaigns related to the workup, we have this first half of the year, this marketing campaigns related to this event in basically all of our operations that will -- that made the selling expenses a little bit higher than usual. Additionally, we also have a higher depreciation, mainly in Mexico. And fuel prices are increasing, basically, a little bit in Mexico and in U.S. I think what is important to mention is that, nevertheless, we're online with our budget. We knew that the first half of the year, selling expenses, besides the fuel prices, we're going to be a little bit higher. But we're expecting to end the year with a ratio of selling expenses over sales, very similar to last year, a little bit less than 32%. So we should see a second half with a different pace on expenses. Going to the second question, regarding hedges, I just want to summarize what we have for this year. In Mexico, as you know, we hedge over 100% of our high fructose needs. And we also hedge 80% of our exchange -- I mean, thanks to U.S. dollar-peso needs for the raw materials that denominated in dollars. We hedged that at an average price lower than the average of this year, and lower than the average of 2017. So a very, very, very low -- a very competitive exchange rate for Mexico. We also have us some hedges offshore in Peru, lower price than 2017. And as I mentioned already, we also have some hedges on U.S. for aluminum for the biggest component of pricing. For 2019, we started to hedge some of our currency needs or U.S. dollar needs in Mexico for the first quarter of 2019. We have just hedged the first quarter for a little less than 50% of our needs, and that's basically what we have hedged for next year. We're looking for options or windows to hedge some aluminum for next year and some high fructose, but we haven't closed any yet.
But if I can make a quick follow-up. Even the depreciation of or actually depreciation of the dollar and an increase in some commodities, are these hedges for the first quarter already looking like -- or are these cost base looking already very challenging for the first quarter of next year versus this year? Just want to have a sense of how much your cost base could increase in '19.
Well, regarding the exchange rate, we do see that it's going to be very challenging to have the same levels that we have this year. The average exchange rate that we have is less than [ 18 50 ]. It's around [ 18 40-something, 44 ]. So it's going to be really challenging to have those for next year. And high fructose prices are very stable. So we see -- we don't see any changes on that. And sugar prices for Peru, we haven't seen any changes. So basically, the one that I think is really challenged to get the same levels of this year is the exchange rate for Mexico on the U.S. dollar.
Our next question comes from Luca Cipiccia from Goldman Sachs.
I only have a follow-up. I wanted to ask about the U.S. Maybe if you can expand a bit about the new plant project to the extent of giving us a better idea of what this facility will let you do that you cannot do today. How relevant is that for the U.S. project? And also, how relevant it is for the U.S. Coca-Cola system overall? If I understand, there hasn't been a new plant open or built in a long time. So I'm curious to see whether you will, in a sense, show the way or how much of a testing ground will it be for the system overall? And how much do you feel that it's not responsibility, but there is a type of expectation. Maybe if you can give us some more color on that. That will be my only question.
Thank you, Luca. Well, certainly, this was a very important project, and this is our biggest project. And it is not a new project, in fact. This is something that had been analyzed by CCR for quite some time. So there was a lot of analysis behind it. And the rationale is that you can improve your operational costs by modernizing your infrastructure and building this new facility. So certainly, in a market that doesn't have a lot of growth in the sparkling categories, you have to make sure that you have -- are going to become more efficient because growth is not going to justify an investment of this nature. On the other hand, it makes it a much more solid project in terms of its evaluation because it's based on being more efficient, rather than just based on the expectation of growing the business beyond the natural trend, I would say. So the new facility is going to begin operating in early 2020, and it will give us close to USD 30 million in cost savings and operational efficiencies that, again, we've been analyzing over and over. And that is part of our synergy burn. The other benefit is that we are going to be able to divest some of the properties that host our -- some of our current production facilities and distribution centers, which will offset the investment -- part of the investment for the new plant. So this is going to provide, again, efficiency, flexibility for production, and it is a value creation project. The plant in itself is not that relevant for the system as a whole because most of what we're going to produce there is going to be sold to our own -- within our own operation. It's going to be useful within our own operations. It's not going to be sold to third-party bottlers. We're going to be -- from there, probably, maybe 1%, I guess, just how it's going to be used for sourcing third-party bottlers. So it is not significant in terms of the network of production facilities in the U.S. or how that changes. It's always coordinated. In the U.S., we are coordinating in terms of our supply chain, but Texas, being a large market, it's pretty much an operation that's contained within itself. So that -- this is certainly will mostly be to serve the Texas and Oklahoma market. So we're very excited with the project. It's already underway. We're about to finalize, formalizing some of the contracts, and we are on track to begin operation in about 1.5 years.
Very clear. Maybe, just to clarify, I guess. My question was also, are there other projects in the pipeline in the U.S., overall, that could follow a similar blueprint, this is going to be sort of a first or sort of a death case, let's say, for...
Well, it's possibly, because they have -- every case would be unique. They have to be supported by an analysis that is similar to ours in terms of how much can you improve your operation and to what extent you need to relocate your facility to do that. Because many times, what you can do is improve your efficiency by acquiring a new line, a more borrowed equipment within your own facility. So I'm sure that many of the bottlers are doing that already, but not necessarily that would mean that you will have to build a new facility in another site. So it depends in any particular case, the layout of each plant and the situation that they have in terms of the operating cost and their infrastructure.
Our next question comes from Juan Guzmán from Scotiabank.
I have a couple here. Would very much appreciate if you coul give us some additional color on your plans to improve margins in Argentina. And what is the timing that you're planning for that margin recovery? And second question, a quick follow-up on Peru, is how are you moving up with your Malaysian strategy in that country in order to mitigate some of the excise tax and the upcoming labeling regulation?
Thank you, Juan. So let me talk about Argentina. And yes, in Argentina we're facing this challenging environment. So there are a number of things that you need to do to kind of mitigate that. First of all, is that we have a savings plan. Savings and efficiencies in many of the OpEx items and also on costs, we're looking at light weighting of PET bottles, for example. Because PET has been one of the biggest impacts that we've seen in our operations. So you think about Argentina, the impact of the cost of PET, plus the valuation and the effect of prices not increased in line with lightweighting inflation early in the year, I think those 2 factors are among the most relevant. So we cannot control PET prices in the market, but we can control lightweighting and bottlers, for example, use of returnable presentations. And we can throw some of our own operational expenses, which we are working and optimizing. Second is pricing. And certainly, in terms of pricing, we've already taken action. And as I've said, we're going to continue to take action as we move forward because we have to be in line with the expected inflation. So that would be the second part that's important. And the other thing is that we're still thinking about opportunities to grow our top line in Argentina, even though the consumer environment is -- might be adverse. We have some very clear opportunities, and I would mention 2 that are pretty obvious. One, would be AdeS, how we launched this new brand that we had not acquired, and the potential for continuing to develop that market, together with the rest of the stills categories. And then, the Coca-Cola without sugar that has already been launched. And it is growing. At this point, it's growing 17% versus the volume that we have with Coke Zero. So those are the opportunities that we have to continue to pursue, and they are -- they have a lot of potential regardless of the environment. And same thing with tracking our fundamentals. We have identified some of the KPIs that have the biggest opportunity in Argentina. Although Argentina is a market where we execute fairly well, we were awarded with the first place in execution, the South Latin business unit. But having a very rigorous scorecard allows you to identify opportunities to improve. And one of them would be, for example, out of stocks in Argentina. They are higher than what we would like. So we have a focused plan to improve that. And at the same time, we continue to invest strategically in the market. So these are cycles that we've gone through, we've lived in Latin America many times. And the objective at the end of the day, and what we're confident about, is that we're going to be secure the long-term profitability of the business. Your other question was about Peru and opportunities with the low calorie. The problem in Peru is the way that -- tax was structured is -- doesn't work the same as in other cases, and the case of Ecuador. But our strategy to increase our mix of low calorie and mid-calorie products has started that we're going to follow in many market regardless of the tax situation. We believe this is the direction in which we would be moving in every single market, both in having reduction in sugar content for regular drinks and increasing the mix of our 0-calorie categories in our other markets. So -- but certainly, one of the things that we are going to pursue in every market in Latin America and the U.S. as well.
I'm currently showing no further questions in the queue. I'd now like to turn the call back to Arturo Gutiérrez for closing remarks.
Thank you. Thank you. And as always, thank you all for your continued interest in Arca Continental. Please contact our Investor Relations team for any further questions you might have. And have a great day.
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.