Arca Continental SAB de CV
BMV:AC
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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, and we hope you're all well. Thanks for joining the senior management team of Arca Continental this morning to review the results for the second quarter and first half of 2020. The earnings release went out this morning, and it's available on the company website at arcacontal.com in the Investor Relations section. It's now my pleasure to introduce our speakers. Joining us from Monterrey is the CEO, Mr. Arturo Gutierrez; the CFO, Mr. Emilio Marcos; and 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 that are based on information that's currently available. So we ask that you refer to the disclaimer in the press release for guidance on this matter. And with that, I'm going to turn the call over to the CEO, Mr. Arturo Gutierrez, who will begin the presentation. 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 recent developments related to the coronavirus pandemic.
First of all, we fully acknowledge the COVID-19 outbreak and its impact on people's lives, our communities and the global economy. And as a food and beverage business, we recognize the important role we play in this crisis. Of course, the safety of our associates, customers and consumers, remains our highest priority. We have established all precautionary and hygiene measures, deployed strict social distancing, sanitation protocols, working from home initiatives as well as additional safety measures to support associates in the field for our production plants and distribution centers.
In the second quarter, the COVID-19 pandemic created challenges that were certainly unlike anything we've ever seen. Late March and April were particularly difficult, as confirmed cases began to add up, global economic growth was contracting, restrictions scaling up, closures were accumulating and the resulting impact on consumer mobility had a significant effect on our performance. Despite this, we saw an improvement in our results in May and June, as population mobility increased after economies gradually began to reopen.
Throughout the quarter, we maintained our focus on serving our customers and consumers. Moving now to our consolidated results. I'm pleased to report that our business performed relatively well through this unprecedented level of change. Our second quarter and year-to-date results reflect the steady progress that we are making. Our market focus and operating flexibility allowed us to thrive in a complex environment while maintaining profitability and market share.
Total consolidated volume declined 9.2% in the quarter, reaching 527 million unit cases. Volume performance sequentially improved throughout the quarter. Consolidated net revenues rose 2.3% in the quarter and 3.7% year-to-date to MXN 42.9 billion and MXN 81.8 billion, respectively.
Effective pricing and better management of promotions were key to improve the top line. We fine-tune our price packs strategy by country. The sparkling category showed great resilience and continues to play an important role in our category mix. Premium brands continue to be relevant for consumers. Returnable packages are again a proven vehicle to deliver affordability to consumers, particularly multi-serve returnable packages.
Consolidated EBITDA for the quarter grew 1.8% to MXN 8.2 billion, representing a margin of 19.2%. We're moving steadily with our disciplined plan to control our operating expenses and capital investments and to manage our working capital effectively. There is no doubt that COVID has impacted our business in many ways, but a closer look at the recent trends gives us a much clearer picture of where we need to continue to focus our efforts to come out stronger after this crisis.
Now turning to our operations review for the quarter. Let me start with Mexico, where mobility restrictions were not as strict as in other countries. Total volume in the second quarter declined 4%. The COVID-19 pandemic had a negative effect on volume in most of our trade channels, particularly On-Premise, entertainment and education due to stores and venue closing for several weeks across our territories. Although the pandemic resulted in general volume contractions across our product portfolio, some segments achieved favorable results. Colas being our biggest segment, grew 0.8% in the quarter.
The traditional trade performed very well with a 6.4% volume growth in the second quarter, driven by solid growth in Colas, Santa Clara Dairy and Topo Chico Sparkling Water up 11.2%, 7% and 31.2%, respectively. Total sales in Mexico declined 0.6% in the quarter, reaching MXN 17.9 billion. Average price per case in Mexico, not including jug water, rose 3.9% to MXN 63.5, sustained by our segmented revenue management initiatives.
In the first 6 months of 2020, we gained value share across nonalcoholic ready-to-drink beverages, outpacing the industry in Mexico, driven by water category and sports drinks. Our wide portfolio of products played a key role in addressing the changing dynamics in the consumer landscape during this critical period of the pandemic.
EBITDA increased 8.9% to MXN 4.9 billion in the second quarter, representing a margin of 27.3% for an expansion of 240 basis points. EBITDA margin for the year rose by 150 basis points, resulting from our effective pricing, combined with our disciplined focus on cost optimization and a more benign commodity market. We launched the program, Mi Tienda Segura, or My Safe Store, to support customers in the traditional trade by providing sanitizing kits and other protection elements to ensure storeowners and consumer safety. These activities reached over 200,000 customers and helped to reopen many closed stores.
Moving now to our beverage business in South America. Total volumes dropped 28% in the second quarter and 16% in the first half of the year, as early lockdowns battered economies by historic proportions. This is by far the region that was hit the hardest mostly affected by tire mobility restrictions, lockdown measures and social distancing mandates. Nevertheless, volume trends in our 3 countries have been steadily improving, as more points of sale are starting to reopen. And this trend is getting better week by week.
Total revenues were down 20.8% in the quarter, reaching MXN 6.9 billion, while EBITDA declined 48.5% to MXN 825 million, representing a margin of 12% for a contraction of 650 basis points. The pandemic is set to push the region this year into its worst economic contraction in over a century.
Let's turn to our beverage business in Peru, where total volume in the quarter was down 34.8% (sic) [ 34.2% ] and 20.7% in the first half of the year. The downward trend in daily positive cases and the stabilization of active cases allowed the government to end the national quarantine on July 1 and gradually reopen the economy. During the quarter, we executed targeted commercial initiatives focused on protecting portfolio affordability. We accelerated the introduction of multi-serve returnable packages supported by our new universal bottle packaging with a wide variety of returnable products.
The traditional trade proved its resilience during this time of crisis. With close to a 16% volume drop in the quarter, it had a sequential improvement. And in June, it delivered 3% growth reverting the negative trend of recent months. We also deployed new direct-to-home routes, adding over 7,000 customers to this new service model. During the quarter, we doubled down on the deployment of our AC digital platform, providing customers with the ability to place direct orders using a mobile app. Currently, over 20,000 customers utilize this new capability.
In Ecuador, volume in the second quarter and the first half of 2020 declined by 28.2% and 15.7%, respectively. The COVID-19 outbreak quickly escalated to one of the worst in Latin America. A nationwide quarantine was announced in mid-March and mobility has been gradually eased since early May. We adapted our service models to better service customers and consumers. We optimized our dynamic routing methodology to deploy new models such as home route, telesales and e-commerce.
Same as in Mexico, we continue strengthening our long-standing relationship with our customers in Ecuador and launched My Safe Store program. We also reconfigured our portfolio and focused on core SKUs, optimizing the operation of our value chain to guarantee availability of our most important products and play special focus on providing affordability to our consumers. Notably, our sparkling portfolio is already in a recovery trend, highlighting that Coca-Cola and Inca Kola delivered positive results in the month of June, up 3.3% and 11%, respectively.
Tonicorp, our value-added dairy business in Ecuador, posted a double-digit sales decline in the quarter. Despite the slowdown in the economy, Tonicorp sustained value share across core dairy categories. On a side note, we were honored to host President, Lenin Moreno, and other senior members of his cabinet to visit our plant last June. Our associates were praised for their outstanding work to secure supply of our products during this pandemic. Shifting gears to our beverage business in Argentina, volume declined 10.3% and 3.4% in the second quarter and first 6 months of this year, respectively. After the success of strict social isolation measures, the recent acceleration in COVID cases prompted authorities to announce a rollback of the limited flexibility put in place weeks ago. Mobility was restricted again, while all nonessential stores were forced to close.
Nevertheless, we continue to focus on those things we can control. We maintained rate pricing in line with inflation, while actively promoting affordability with returnable bottle initiatives. Our mix of returnable presentations grew by a high single-digit in the quarter. The recent launch of Aquarius flavored water in a 2-liter returnable presentation is a great example of innovation and agility to provide affordable products during a major contingency. We adapted our route-to-market capabilities to address mobility restrictions by expanding our telesales channel. We are balancing these customer contacts with our regular presale activity.
Also at the end of April, we accelerated the rollout of the AC digital corporate platform in order to expand our B2B capabilities for the traditional trade channel.
Turning now to our beverage operation in the United States. Coca-Cola Southwest Beverages closed out the second quarter with a solid performance. Total revenues in the quarter declined 1.7%, while we sustained value share in NARTD. Price per case for the quarter grew 2.7%. Price/mix performed better due to the recovery of consumer trends and supported by our price pack architecture, which aimed at pushing higher revenue packages, such as mini cans and large stores, sparkling beverages and immediate consumption presentations and BodyArmor. EBITDA grew 3.2% to $106.2 million, representing a margin of 14.6%, a solid expansion of 60 basis points. This result was achieved despite a volume contraction of 4.2% during the quarter, which was largely driven by store closures and restrictions in the market due to COVID-19.
In April, we saw the full impact of the crisis in our volume with a 14.4% decline for the month. Since then, the volume has sequentially recovered, closing June on a positive note, up 4.5%, even with many FSOP customers still closed. E-commerce has gained more relevance as we continue to adapt service models for our online business around myCoke.com and e-retailer customers. Just in the second quarter, 38% of FSOP customers utilized myCoke.com as a primary order method, improving our profitability.
Our e-retailer business has more than doubled year-to-date. This channel consists of major customers such as Amazon, walmart.com, Boxed, goPuff, and sams.com, among others. Synergy plans in our U.S. operation continued to deliver solid results. Despite the challenges presented by COVID-19, we were able to start full production and introduce the most advanced technologies at our new Northpoint facility in Houston. As the plant continues to ramp up, we are laying the foundation to deliver savings from consolidation of production and warehousing in the region. This health crisis demonstrated that we can effectively adapt to change deploying a new operational model to fit current market necessities.
Let me now close our operations review with our Food and Snack business. Wise snacks posted a high single-digit sales decline in the second quarter. Deep River and small bag chip sales were impacted by shelter-in place restrictions, particularly affecting foodservice On-Premise customers. Grocery channel was able to partially offset this decline with solid growth mainly driven by potato chips, popcorn and pork rinds categories.
The e-commerce channels performance remains strong, reaching its highest point in history. We continue developing more click and collect opportunities to capture a larger share of the digital shelf at key grocery chains. Bokados in Mexico posted sequential low single-digit sales growth and solid profitability, driven by the traditional trade channel despite the impact of store closures. And Alexa, in Ecuador posted a mid-single-digit sales decline in the second quarter. Something worth highlighting this quarter is in Alexa's distribution expansion. Its recognized plantain chips brand Tortolines, is now available through amazon.com.
And before I turn it over to Emilio, I want to acknowledge the hard work and dedication of all our associates. They have worked tirelessly through this difficult time, and I am very proud of their efforts and commitment to serve our customers and consumers. And with that, I will turn the call to Emilio. Please, Emilio.
Thank you, Arturo. Good morning, everyone, and thank you for joining us. As Arturo mentioned, the second quarter was very challenging, with April being the most impacted month. We saw different levels of impacts across our operations due to mobility restrictions put in place in each country during the quarter. We had a sequential improvement in volume and profitability in following months, driven by customers' gradual reopening, combined with operating efficiencies.
Since the beginning of the crisis in March, we deployed a detailed action plan and executed a crisis management strategy, which demonstrated our flexibility to adapt to adverse situations. As we mentioned last quarter, we focused our efforts in operating expenses like marketing and labor, where we already saw positive results across the quarter.
Consolidated revenues in the second quarter grew 2.3%, mainly driven by an exchange rate benefit from our dollar operations, partially offset by volume declines in all operations. The tailwinds we experienced from lower raw material prices, mostly in PET and aluminum, outpace the changes in mix, channels, categories and presentations. Therefore, contribution margin expanded by 40 basis points when compared to last year.
Our current foreign exchange hedges cover 80% of our 2020 needs and an average exchange rate similar to last year. Our aluminum hedging strategy is set up in a way to protect our business and at the same time, take advantage of marketing conditions. In 2020, we hedged 75% of LME and 50% of MWP at lower prices than last year. We will continue to capitalize on the lower spot prices for our current and future needs.
In terms of expenses related to COVID-19, this reached MXN 327 million in the second quarter, which is higher than the previous quarters as we began to register these expenses in mid-March. EBITDA in the second quarter increased 1.8% to MXN 8.2 billion, representing an EBITDA margin of 19.2% for a 10 basis point dilution compared to last year. The top line pressure was compensated by better raw material prices and operational efficiencies. Excluding the operating expenses related to COVID-19, EBITDA margin for the quarter would have expanded.
Year-to-date, EBITDA rose 3.5%, reaching MXN 14.9 billion. Synergy plan in our U.S. operation continue to deliver solid results. We are on getting closer to achieve $90 million in synergies over the 3-year period. For the first half of the year, net income reached MXN 2.3 billion, a 17.1% decline, representing a margin of 5.4%. This was largely due to the lower operating income, along with an exchange rate loss resulting from our dollar cash position and the appreciation of the Mexican peso in the quarter. CapEx for the second quarter was MXN 2.7 billion, around 40% less than last year as we have been reassessing all CapEx investments to focus on how to best serve our customers during the pandemic, while at the same time, protect our liquidity. We expect CapEx for the year to be less than 6% of sales. As of June 2020, we had a cash position of MXN 30.6 billion and debt of MXN 59.5 billion, resulting in a net debt-to-EBITDA coverage ratio of 0.9x. This demonstrates our capacity to preserve liquidity and maintain a healthy balance sheet.
In the second quarter, we paid off a maturing AC Lindley bond in the amount of $62.5 million, lowering our non-local currency debt exposure to $47 million in Peru. During this crisis, we will continue to look forward and capitalize on opportunities to be a better company. While some of our operations have not yet stabilized, we remain positive in our ability to respond to challenging environments and rebuild our revenue streams. Although we are still facing uncertainties and difficult situations, we are confident on the resilience of our industry.
We have faced uncertainty in the past, and we have the right plans and people in place to come out stronger. And with that, I'll turn it back to Arturo.
Thank you, Emilio. Many of you have followed Arca Continental for a long time, and you know our business has endured several process. It is part of our DNA to always be market-oriented and to remain competitive. So with each crisis, we learn new ways to stay lean, stay nimble and to have the creativity to develop more competitive advantages. Of course, the crisis we are living today is of an unprecedented magnitude. But our approach has always been successful, keeping a long-term vision and focusing on preserving and strengthening our relationships with our customers, consumers and the community. We believe that the negative impact of the COVID-19 pandemic on our business has already passed through the toughest point. Now if we look ahead to the second half of the year, we expect our business to perform better. Our company is built on the foundation of strength. We will continue to collaborate and leverage learnings across our entire organization to build on these strengths.
To conclude, let me say that Arca Continental is well positioned to adapt and succeed over the long term. We are confident in the resilience of the food and beverage industry and of our portfolio of brands, and we'll continue to seek opportunities for regional expansion. Thank you for your continued trust and support. Operator, we're ready to open the floor for questions.
[Operator Instructions] Our first question will come from Ben Theurer with Barclays.
First of all, congratulations on the good results in the quarter. I hope you all safe and sound. Now I wanted to ask about returnable, your strategy there. I mean, clearly, we've seen the benefits of returnable in the regions where you operated with a shift from nonreturnable into returnable, which obviously helped you a lot on some of the base of Cola volume. Now looking into the U.S., there is -- it seems like there's almost none in returnable. Thinking more ahead, like in the context of ESG and affordability in combined waste, what's going to be your strategy on the returnable side to make this a consistent driver of volume growth and also maybe the opportunity to elaborate within the returnable versus nonreturnable portfolio in the U.S.?
Yes, returnable has been an important part of our strategy in Latin America for a long time. And it's based not only on affordability because it allows us to have a more flexible portfolio and provide different options for consumers, and that's when we're very effective, especially in times like these and to see how it's worked in most of the countries. And it's not having the packages. It's about having the whole operation and the culture within our operation to work with returnables. There's many factors and variables and metrics that you need to track, it's not only launching packages. You need to have the infrastructure, the supply chain and route to market adapted to that. Also you need to, obviously, work with the consumer to create the habit of returnable. And if you see what we've done in some countries, this has been -- I have it -- that has been solid in the market for years. It's in Mexico and now Argentina. We're trying to create more of that in Ecuador. So that's been the strategy in Latin America. It also has that other dimension, which would be probably the sustainability aspect of those packages. And we've seen some of that, as you know, in Europe and other markets. And it could be a possibility of the future. We have not -- we do not have current plans to do that in the U.S. right now, but certainly something to analyze as we move forward. One very interesting initiative that we have in Latin America that would connect with that idea is the Universal Bottle that provides flexibility and makes it easier to manage the different brands and the complexity of the portfolio using a single bottle. We even use that for stills beverages in Argentina, as you know. So once we learn more about how that works and how -- what kind of investment it requires, probably that would be an important learning as we move into other markets.
Okay. Perfect. And then just from leverage, I mean, you're well below what I think your target is, I mean, what are you going to do with all the capital, once the crisis is over and you don't need the liquidity anymore?
Yes. Well, we've been focusing currently on the crisis, but our capital allocation priorities are clear. CapEx is still a priority. We need to analyze. What are the requirements going forward. And certainly, we're going to consider dividends or additional dividends in the future. Maybe, Emilio, if you can comment more on that.
Sure, Arturo. Well, as Arturo mentioned, our capital allocation. First, the first priority are always CapEx that remains our top priority. So -- however, we're still focusing on spending only on the optimum. As we have mentioned, we implemented a strategy to reassess all CapEx investment in the year. As you could see, our CapEx for the first half of the year, it's much lower than the previous year. So again, we are reassessing all CapEx in each country depending on the situation that COVID-19 is leading us. And again, as Arturo mentioned, the second priority would be dividends. We pay dividends a couple of months ago. As you know, we have a payout ratio of at least 30% of our net income. We have paid around 40 -- a little bit more than 40% in the past. And again, the Board could analyze the option for additional dividends. If we see an improvement on this and if we don't find any M&A opportunities. As you know, we are always looking for opportunities, evaluating any opportunity that could arise from this crisis. So again, we have CapEx, dividends and M&A evaluation. However, we're focusing primarily on a day-to-day operations, protecting liquidity. We have some maturities in the second half of the year around $200 -- I mean $200 million, and we have that covered. So we don't see any issues on that.
The other thing we should mention, Ben, as you know, the shareholders of the company delegated to the Board the approval of additional dividends, if that would be the case for the remainder of the year.
Our next question will come from Isabella Simonato with Bank of America.
I would like to explore a little bit more the expenses related to COVID, right? I understand that you classified some of that as nonrecurring and some of that is recurring. If you could elaborate a little bit, what is in each pocket, right? What is being classified as recurring? And in each countries, those are more allocated? And also when we think about -- what Coke mentioned about July volumes, right, can you give us a little bit more color how you're seeing sequential volume improvement across the different countries?
I'll take the first one, Arturo if you don't mind. Well, regarding COVID-19 expenses, we have registered the expenses in 2 different lines. And the main criteria is if it's onetime or very -- particularly for COVID-19 or if there's an ongoing expenses that will last for several months while the situation normalize. So on o 1 hand, as of June, we registered around MXN 270 million in nonrecurring that related to some specific actions, as I mentioned, that we incurred during the quarantine period. Just to give you a couple of examples. In Peru, we normally pay for employees transportation to get to the plant. And due to the quarantine, we needed to more than double the shuttles to give -- assure and keep the social distance measures. So, therefore, this cost of transportation is -- it's been more than double. So the additional expense, it's on the nonrecurring line. It's just a temporary one.
And another example is -- for example, employees that had to be quarantined and has temporarily -- they're staying at home were temporarily cored those employees, and we're paying double salaries. So the additional salary it's nonrecurrent and the other ones are on OpEx -- as normal OpEx. And on the other hand, we registered around MXN 135 million in OpEx and these are mainly sanitary expenses that we expect to have for the remainder of the year. For example, consumables such as sanitizer, mask, gloves or any additional like office sanitation or some cabins that we have on our plans. So we are investing to protect the health of our employees since we are working as an essential industry. So looking forward, we expect to have some recurring expenses, as I mentioned but should be declining to the stand that we get back to the new normal.
Yes. I'll take the second part of your question, Isabella, relation to volume. As we anticipate, our volumes in April and part of May in most countries were the most affected. And we have begun to see a better trend in June. In every country, actually, we had sequential improvement month-over-month in the quarter. So as you know, South America is still the hardest hit of our operations, but with gradual recovery.
Mexico and the U.S. are better so far, as you saw the numbers for the quarter. But we were cautious with a surge of COVID-19 cases in those countries. So what's important here is to look at what is the factor that's affecting demand. There's a clear correlation between mobility, mandatory lockdowns and our volumes in the markets where we operate. It not only impacts consumers, it impacts mobility of our frontline sales force.
Many times they require sales -- salesforce require public transportation. So that's what happened in Ecuador and Peru. Most severe impact again was in April and in May. So as soon as restrictions are lifted, sales react. Our categories and brands are very resilient. So what we're looking at July, we don't see any big surprises, any big negative surprises there. Mexico, a similar trend to May and June. In Peru and Ecuador, which are the markets that were most impacted, we're still seeing declines, but gradual improvement to what we've seen, again, in the final part of the quarter. Argentina has a tough comparison in July, but I think it's pretty much the same market situation as we saw in the final part of the second quarter as well. And the U.S. is also stable. Maybe a flat or slight decline in a month, something like that, but it's not different to what we're seeing in the last few weeks of the quarter. So the trend remains and we're cautiously optimistic of the second half. It depends on, again, if restrictions are again imposed or not. But so far, we're sequentially improving.
Our next question will come from Felipe Ucros with Scotiabank.
So the first one I wanted to focus on and kind of a follow-up on what Isabella already asked, and it has to do with the sequential improvements. Obviously, you laid out that this has to do a lot with mobility, but in some countries or in some regions of the country, the COVID curve is increasing, right, and following a different path. So I wanted to ask specifically about Texas, where the curve is still increasing and at a pretty rapid pace. Do you see any risks in the third quarter that maybe you will see a reversal in that region? And then I had a second question, which had to do with all the digital and analytics programs that you guys have been implementing and doing so well. A lot of these measures that you have taken are reliant and algorithms that use historical data. So I wanted to ask you how those algorithms have been performing. For example, the suggested order, during this period, where everything that worked in a certain way, historically, has kind of flown out the window and is working differently. How did that digital aspect performed during this phase?
Thank you, Felipe. Let me talk about the U.S. first. As you saw, we closed the quarter with a solid performance, a very good month of June, by the way. And if you look at the channels in the U.S., we know that the foodservice On-Premise channel is the most affected during the quarter. It was, I guess, something like 48% down versus previous year. But it was better in June than May and better in May than April. So we still have a positive trend there. We don't expect that to improve much. The large stores, mostly are getting that volume from the away-from-home market. The smaller stores, the convenience retail, is also improving. And so, as I said, we expect the trend to continue to be improving in the third quarter. But we're cautious about it. As you said, there are some restrictions that could be imposed based on the surge of cases. The last few days in Texas have been better. The trend has been improving in terms of new cases. So that's good news. And obviously, that will result in the decisions of public policy for the state, which would affect the mobility and the reopening of customers. So what we're discounting is that On-Premise is still going to be down and maybe for the second half of the year, some of those outlets might not even reopen. But still, the volume is solid from the large store and small store segments. Just to give you an idea of mix, our large store and small store in the U.S., in the second quarter, were 91% of the mix of volume. And On-Premise food service was about 9%. So again, even if that remains slow, we're still going to be able to have good volumes as consumption shifts across the channels.
Talking about digital, I guess the key here has been to integrate those digital initiatives into our current processes. I will let Pepe talk a bit more about this, but it's not a separate list of projects that we're pursuing. It's how we enhance the processes that we already had in our commercial activity. So one of them would be, as you said, the advanced analytics tools optimizing our discounts and promotions has been one important initiative. And the one that you mentioned, the suggested order quantity, that algorithm has proven very effective, not only in Mexico, we're also using it now in Peru. And the same principles applied to the U.S. operation as well.
The other important thing there is the data. One thing is to create the models, and another thing is to have the quality data and the big data from the market. And we are in a very good position there as well to incorporate data that we collect. And we're collecting more data as we also roll out other initiatives like what we used to call Brio, and now it's called [ beyond the ] company. That is collecting significant data from the market. Data that is the sellout of the customer that we didn't have. So we incorporated that we're incorporating that into our analytics approach. And that gets us to a more refined model every time. So we're not working on the next best SKU model for convenience stores in the U.S., it's an example of how we have one basic idea, and then you continue to improve that with enhancements of the original model. But maybe Pepe could add to that. Pepe please?
Thank you, Arturo, and thank you, Filipe, for your questions. I think one of the key benefits of having an in-house analytics team as we have, is that we have been able to adjust our models realtime. In the beginning, we -- in earlier, we changed, for example, our suggested order algorithms to a defensive portfolio to make sure that we could direct our sales reps and our applications to what we wanted to focus on selling. And we've been adjusting them. Obviously, we took a hit in conversion rates in the first weeks. But we've been adjusting them as we go with, as Arturo said, with different information and now we are -- as of now, we are getting pretty much the same type of conversion rates that we had before the pandemic. So we are adjusting -- we are getting information, and we are moving realtime. We have focused -- we had a pretty ambitious advanced analytics agenda, but with the crisis, we have focused on mainly 4 things. As Arturo said, number one promotion that was -- is and was one of our main goals to make sure that every single promotion dollar we spend is well spent, and we've made great progress there. Suggested order, making sure that the suggested order is really helpful for our customers and for our sales reps. [indiscernible] asset allocation, making sure that every asset that we take is placed in the right place, and focusing on the growth of direct-to-consumer and how to capture and respect the best consumer household base. So we've been adapting, and I think we've got very good results from our advance analytics efforts. I hope that's helpful.
Our next question will come from Marcella Recchia with Crédit Suisse.
Just 2 quick questions here from my side. The first one would be about margins in Mexico and U.S. if you see this level of margin sustainable for the rest of the year going forward? And the second one is about U.S. synergies. If you believe that synergies can go beyond the $9 million plan expected in the beginning of the process?
Thank you, Marcella. Let me first talk briefly about margins in Mexico and the U.S., maybe Emilio can expand, and then I'll talk about U.S. synergies as well. The margins in both countries are the result of several factors, as you know. First is our effective pricing, and this is not only our rate because mix has impacted negatively our average price, but also the better managing of discounts and promotions, connecting to what Pepe just mentioned. I think we've been much better doing that, and we have incorporated new tools to do that. So that's one part. And that certainly is sustainable in the future.
Second, we've had, as you know, tailwinds in some of our basic raw materials, particularly, PET. Although there's an impact in Mexico for -- from the devaluation, so kind of offsets that. But we have good pricing for PET resin for aluminum. Not necessarily for sweeteners, but certainly for those other basic inputs. The other part that's been so important is that we've launched this savings program in our operation. And we've been very, very effective in our savings and efficiency plan. We have been working to manage expenses through the crisis, committing to reduce OpEx across the board without affecting our operations. So I think that is a very effective way to adapt to the current circumstances. And we have a team effort in place. We're using the same methodology that we're familiar with in the integration of businesses in other cases. So we've been doing a number of things. And many of those are learnings, I would say, that would be sustainable going forward. So we are very positive about margins. And I think we've even implemented some things that we needed to do anyway and sometimes a crisis situation forces you to do it faster. So that's the reason why we're confident about OpEx going forward. Certainly, this was a spectacular quarter for Mexico in terms of margins. And going forward for -- if you look at the year-to-date numbers, probably that's something that we could aspire for the remainder of the year. But maybe, Emilio, you want to add to that.
Well, regarding Mexico, only maybe 2 things, one is that, as you mentioned, mobility restrictions have not been as strict in other countries. And also another aspect, the traditional channel, as you know, is our most important channel. It has been growing in the last 2 months. So that's also been an important aspect on the results and the margins that we have in Mexico. And as Arturo mentioned, we've been able to reduce OpEx on the quarter compared to last year as a result of this crisis management program or initiatives to control expenses.
Let me talk now about -- briefly about synergies in the U.S. because we're in track with our plan to get to our $90 million in synergies. This is going to be implemented throughout this year. There is some carryover for 2021. And based on actions that we're taken during 2020. So we're good there in terms of most of the hard synergies. So if you look at our operational synergies or very important is our Northpoint plant in Houston that is delivering -- it has delivered up to now about $13 million synergies, some in 2019, some in 2020 and still we'll be seeing some of those going forward. Same thing for procurement, lightweighting of bottles, moving to different kind of pallets. A number of things. Those are the hard synergies, and we expect to get our target. But talking about upside opportunities, we have not included in our plan. Some of the things are hard to measure and to track, especially on the revenue side of synergies. And because we want to be very rigorous about how we measure our optimization of the operation. But certainly, there are some things that are even more transformational, I would say, on the revenue side that should bring additional value to our operation. It's hard to see them now in the middle of the crisis, but basically, they would be in 2 different areas: One would be the better execution of the point of sale. We've been improving that and if you look at our picture of success, execution and how we're improving our interaction with the customer in every channel, that's certainly something that is going to bring additional value. And connected to that our go-to-market models, the models that we've been involving, first in the On-Premise channel, which, again, it's not being reflected now for obvious reasons. Those are things are going to be delivering value in years to come. And we're going to be incorporating new models to the large store segment as well. So if you think about those initiatives, together with the revenue management or maybe the 3 more transformational things that we're doing in the U.S., and those are not accounted for those 2 in our $90 million plan.
Our next question comes from Emiliano Hernandez with GBM.
Just a quick one here. Considering FX cost pressures may come in Mexico once your hedges expire? How do you see levels for raw material prices during the rest of the year? And is it in your plan to increase prices in Mexico in the near term?
Maybe you can take that question, Emilio?
Sure. Thank you for your question, Emiliano. Well, as we have mentioned, regarding raw material prices in Mexico, we have much better prices on PET in all countries. So that's a benefit that we have in all our operations. Then sugar, Arturo also mentioned, sugar is the only one that it even that we have our own sugar mill, sugar prices are higher than the last year. So that's the only raw material that we have a higher price than last year. On high fructose, high fructose prices in dollar are better than last year. And we also consume some aluminum. Aluminum also -- aluminum prices are lower than last year. So overall, we have a better cost structuring on raw materials in Mexico and basically in all operations.
Regarding FX, in Mexico, we have 80% of our U.S. dollar needs covert at an exchange rate on levels of last year. So we have that benefit on our costs, on raw materials. And in fact, we started hedging some needs for next year. When I think it was 1.5 months ago, when we saw a window below MXN 22, so we started covering for next year. So overall, in Mexico, we still have or see the same benefits for the second half of the year as the ones that we have in the first half. And regarding prices, I don't know Arturo, if you -- well, our strategy is always, as we have mentioned also, to increase prices above inflation. So we're on track on that. And that's basically in all countries. I don't know if you want to add something else, Arturo, regarding pricing?
Yes. Well, basically, that's our goal this year, no exception.
Our next question comes from Alan Alanis with Santander.
I have a more strategic question regarding categories of sparking versus steel and specifically regarding bottled water? And how do you see this evolving? I mean I'm a bit surprised that the biggest collapse that you've seen is -- I mean the only one actually double-digit decline year-to-date in your sales has been water, bottled water. But noticing that both -- for many years, the driver of your growth was still beverages. So could you help us understand how this whole pandemic is evolving or shifting the consumption patterns of still beverages and specifically regarding water? And how can that affect your long-term profitability? And what actions would you take to address those issues?
Well, Alan, thank you for your question. What we've seen in categories, and probably I will let Pepe elaborate on this. But what we've seen in categories in the last few months is something very, very unique to the situation that we're going through. I think we're going to be cautious about maybe extrapolating some of the trends that we've seen in the past months about what is going to happen in the future because there's some consumer habits that change, but many of those are affected by consuming at-home versus away-from-home. And just the crisis situation that we're going through. I guess most of the trends that we had seen before are going to continue as we move into more of the low calorie, more into the stills beverage. As you know, stills has been growing more than sparkling in most of our markets, I would say, in all of our markets, I guess, in the last few years. So we expect that to continue. I don't think the -- in that regard, the pandemic has revealed anything different. I would say that if you ask me, what were the changes they're going to probably remain are more in the channel dynamics and the -- our go-to-market and how we get to the consumer. I think some of those changes that we've seen during the pandemic are going to stay, like digital platforms and those kind of things. I would think that in categories, things are going to continue to evolve, similar to what we've seen in the past. But I will let Pepe elaborate or add to that idea. Please, Pepe?
Thank you, Arturo. And I think you pretty much said it all. What we have -- what we've seen here is something very specific for the pandemic. I don't see that, that these 3 months have changed the way people interact with our brands and our categories. Specifically, in terms of water, water is a category that is mainly consumed in single-serve packages in away-from-home occasions. And precisely, those are the occasions that have been reduced a lot since the restrictions in mobility. So water have dropped because of that. And when you see still beverages, for example, one of the categories that is suffering the most is juices and one of the biggest consumption occasion for packet juices is the breakfast away-from-home occasion. And for example, that occasion has also been reduced a lot and people are making juices at home, same thing with isotonics. People are not going to gyms, they're staying at home. So to complement what Arturo was saying, we don't see, at least in this stage, an important shift in the -- in what was happening before the pandemic, but it's more a reaction to the current closures and mobility restrictions to the channels.
That makes sense. So basically, you're saying this is very temporary to this situation. Now a quick follow-up on that same line of thought, the milk category, Santa Clara. What dynamics are you seeing there in terms of consumption, share and so forth?
Yes. For example, in the milk Santa Clara, wait a minute let me get the numbers, the exact numbers here. Santa Clara category is growing 10% in the last. And that's -- and we're seeing the same thing in Ecuador, for example. One thing is that plain milk has been growing and value-added -- and value-added dairy that, for example, the deserts and the yogurt that kids consumed at schools, those are not growing also because of the reduction in mobility, but, in general, the dairy category is growing double digits.
Our next question will come from Carlos Laboy with HSBC.
Arturo, you have -- you had higher penetration of FSOP as a top priority coming into 2020 in the U.S. With the COVID-19 disruptions, do you have a sense of maybe what proportion of your clients in Texas might not reopen? And how this affects the FSOP channel opportunity and your plans? But if you could also take a step back and kind of give us the big picture on how you see it unfolding over the medium to long term, it would be helpful.
Yes. Carlos, thank you for your question. That's a very important point, the one you make about the -- how On-Premise is going to evolve. I think that is a single most relevant factor when we look at volumes for the remainder of the year. We believe a significant percentage now that you ask it of those outlets, we're not going to be reopening for the rest of the year. And we don't know exactly what that is. I've seen different estimates from the team. I think we would need a crystal ball to know exactly, but it's not going to be insignificant. That's what we believe. Again, it's still only 9% of our mix in the past quarter. But how that, again, recovers in the next 12 months or so, it's going to be important to how we recover volumes. One thing that it's important to consider there, Carlos, is that some of that volume was not that profitable. And to the extent that it's replaced, even with a case pack of cans, it's more profitable than some of that found volume that was up through the On-Premise. So that's probably the positive note there. But certainly, that is the single factor that would affect our volumes going forward because we're already seeing large store and small store recovery. If you look at the month of June, large stores in the U.S. -- in our operation in the U.S., grew almost 14% and small stores grew 6%. But On-Premise was still down 30%, even in a month that we saw the reopening of Texas. So that tells you a lot about maybe what we'll be seeing in the market in months to come.
You don't get a lot of opportunities to see a business like this restart from 0 across so many stores. So I mean, you view that as an opportunity it seems like?
Right. It's going to be an opportunity because as you know, we're serving better those customers, and we need to also reevaluate the portfolio that we have in those customers. As we go into more of the immediate consumption, more into the Topo Chico or the transaction packs that we know are better for our business.
Our next question will come from Mohammed Ahmad with FGP.
Just 2 quick ones. One, can you just -- if everything stays as it is in terms of FX rate and overall raw materials rate, based on what you said, does that mean that there will be substantial headwind from Mexico margins next year since you'll be probably rolling from peso rate of sub-22, 23 kind of range? And the second question is, can you just give us a mix in Texas between FSOPs, well, which you did already 9%, but small stores and large stores as well?
Yes. Mohammed, I'll answer the second part. And Emilio can take the first question about FX and margins going forward. Maybe I'll just make a general comment. If we look at margins in the U.S., traditionally large stores have been about half of our volume. For example, in the second quarter of 2019, it was about 53% and small stores was 30% and the On-Premise was something like 15% or 16%. Obviously, those mixes have changed significantly in the last few months, just based on the performance in each of those channels. So large stores didn't have a very good month of April after the pantry load that we saw in March, but then they recovered and grew double-digit in the month of May and June. So that got the mix of large stores close to 60%. And so again, the mix are changing as a result of the current crisis and the pandemic. But as a general rule, large stores will be like half or bit more than half, small stores will be 30% and the rest will be around 16%. But On-Premise, you have to think about that not only as restaurants and bars, we include there every other customer of any kind in that large segment, but it's still the smallest of all. And again, now it's only 9%.
With respect to Mexico, we see the improvement in margins, as you've seen even -- compared to last year, even under the current situations. So we're seeing a very good scenario for raw materials this year. And we are also getting good pricing and our savings efforts have been successful so far. So I'd say that we're satisfied with the margins that we're seeing. They're one of the best, I guess, that we've seen in any single quarter in Mexico probably haven't checked that, probably that's one of the best that we've seen, historically, the margin in Mexico for the second quarter. So it's hard to improve that. But maybe Emilio, you can add to that?
Yes. Well, if we're talking about the second half, as I mentioned, we don't expect any changes on raw materials. And again, the volume trends will always depend on the mobility restrictions here in Mexico and the reopening of some of the channels, especially FSOP. But if you're asking about next year -- well, next year, the only variable that I'm sure will not be better than this year is exchange rate since we have a very good hedge this year. But for sure, we will have a better volume trend. So that should be compensating the effect of the negative on the FX for next year. And well, for next year, also raw materials, we don't see any main changes on pricing yet. So again, there's -- among the main barriers, I think volume will be better next year and exchange rate will be the only one that for sure will be higher than the one that we have right now, since we have a very good hedge, as I mentioned.
And the other point is OpEx, where even though we've seen a very good rate of OpEx to revenue, it's not really fixed. If you look at our business, especially in the summer months, where we have seasonal hiring of people. So we've been very effective in managing that. If volumes recover, you necessarily have to adjust your OpEx to that as well. So just for you to...
The other positive thing is that if we have the other channels reopening, those -- the mix of single-serve will improve compared to this year. So that also will benefit our contribution margin for that mix. So again, it's going to be a combination of all these variables. But again, we expect some positive effect for next year. Again, volume mix, single-serve in some markets.
Our next question will come from Sergio Matsumoto with Citi Group.
Arturo, you mentioned a little while ago about the U.S. On-Premise that you are planning on a go-to-market model. And you mentioned -- you used the word transformational. Just curious if you could elaborate on that on what type of go-to-market model you are implementing? And the second question is on the mini can. Can this be deployed in other countries? Or is it mostly a U.S.-centric thing based on the consumer habits in the U.S.?
Thank you, Sergio. Well, with respect to go-to-market in the U.S., as I've said, this is one of the transformational things that we have been doing and based on our experience in other markets. And certainly, the structure of the market in the U.S. is different, but the basic building blocks are the same. And when you talk about go-to-market models, you want to be as effective in your relationship with the customer and controlling your cost to serve at the same time. What we observed in the U.S. is that we were doing a lot of activities that were not as productive or created value as they should. And we were not serving customers where we didn't have that personal connection that we thought we should have with customers in the U.S. and if you have online ordering, for example, it works very well for order taking, but there has to be some activity to develop the accounts. And when you get closer to the customer, naturally, your business improves. So that's a very simple description what we're trying to do. And it translates into new roles, into new routines, into new metrics of people of what we try to accomplish and accountability of people that are visiting, obviously, more visits to customers that may be in the past we thought that we're kind of taking care of themselves because they were ordering sometimes online or it was just a routine of order taking. Now we're trying to really create shared value with the customer, and that is what we're all about. Think about what we do in Mexico, or in Latin America, South America, it's the same thing. We approach the customer, not as a delivery system. We actually create value with them. And that is what we needed to do more in the On-Premise market in the U.S. So we have rolled that out in the last maybe a year or so with very good results. Obviously, they're not shown now, but I think that's something that's very promising for the future.
With respect to mini cans, I think that's an interesting opportunity, not only in the U.S., but it's different in other markets. As in Mexico, where cans were also a premium package. So we've had many cans in Mexico and larger cans and mini cans, we have all the different variety of packages that work for the different consumption occasions. So we do have them here in Mexico, and it's another opportunity to have the smaller packages and for the immediate consumption, they work really well, and they are profitable package also.
Our next question will come from Paul Trejo with Goldman Sachs.
Arturo just wanted to check on one thing. I know reemphasizing the focus on ROIC and being more stringent in terms of CapEx. Can you talk about working capital? And how you guys have tried to be more efficient on that side of the business? Any update there?
Well, working capital, we didn't mention that, but it's a very, very important aspect of the operation. Especially in times like these, where everybody is facing a complicated situation. So we are following and tracking that with -- very rigorously. And that has been also improving across our operations even under the current circumstances. Maybe, Emilio, you can elaborate on that, please?
Yes. Well, I should say that the operations had been dealing with this very well, as Arturo mentioned. The situation is not easy. Many customers are not even opening. The management of account receivables, as you can see in our balance sheet, has been improving and it's been -- we have been reducing the receivables. On the other hand, we've been working also with our main suppliers in order to improve our terms. It's also -- that also reflects on our working capital. So as you can see, we have an improvement on working capital in the year. And again, that's a result of a very good management on all operations. That's one key aspect of the business that we follow very closely in all of our meetings, following one of these aspects of the business. Liquidity, we're protecting liquidity as we have mentioned, not only on working on these issues but also on expenses on -- and controlling any expenses that are not really needed under this situation.
Emilio, can we expect some of the gain to hold from now on, especially on kind of the accounts payable side?
Expect any gain? Yes, the accounts...
The adjustments that you guys have done so far extending, I guess, somewhat terms is that kind of like the new normal? Or was it just something special because of this coronavirus situation?
Yes. Well, some of the terms that we have been negotiating are going to stay and some others are just some temporary terms. So we should -- again, that's one of our main priorities on working capital, and we should be able to maintain those levels.
At this time, I would now like to turn it back over to management for closing remarks.
Thank you. On behalf of Emilio, Pepe and the IR team and myself, I'd like to thank you for the trust you placed in Arca Continental and for taking the time to join us today. We're available for any follow-up questions you may have. And thanks again, and stay safe.
Thank you, ladies and gentlemen this concludes today's conference. You may now disconnect.