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.
Melanie, you're on mute.
Can you guys hear me?
We can now.
I'm sorry. I don't know what -- I was on hold. I'm here. So you said, we're going to start?
Please go ahead. I've already turned it over to you, Melanie.
Thank you, Katie. Good morning, everyone, and we hope that everyone is doing well. Thanks for joining the senior management team of Arca Continental this morning to review the results for the second quarter and the first half of 2021.
The earnings release went out this morning and is 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, and we just ask that, per usual, you refer to the disclaimer and the conditions surrounding those statements.
And with that, I'm going to turn the call over to the CEO, Mr. Arturo Gutierrez, to begin the presentation. So please go ahead, Arturo.
Thanks, Melanie, and good morning, everyone. I hope you and your families are well. Let me begin by saying that we are pleased with our second quarter and first half results. We delivered a strong performance across the board, showing our continuous progress and positive momentum. As we reach the midpoint of the year, we continue to see volume recovery across all our markets. All 5 beverage business segments performed well as consumers gradually return to prepandemic activities. Our results reflect our strong market focus, diversified portfolio, agile supply chain and disciplined market execution.
With this as a backdrop, let me now provide key highlights of the quarter. Total consolidated volume grew 9.6%, reaching 578 million unit cases. Volume remained positive across our largest channels. The traditional channel in Mexico and supermarkets in the U.S. grew by low single digits year-to-date, and with both channels already above 2019 levels. Total consolidated revenues rose 6.7% in the quarter and 5.4% year-to-date to MXN 45.8 billion and MXN 86.3 billion, respectively. Our revenue management capabilities allowed strong pricing power combined with optimizing our price pack architecture and better management of promotions.
Consolidated EBITDA for the quarter grew 14.1%, reaching MXN 9.4 billion, representing a margin of 20.5% for an expansion of 130 basis points. Despite the specter of rising inflation, we mitigated the ongoing input and transportation cost pressures. Our timely hedging actions and strategic negotiations with suppliers allowed us to offset pressures while growing earnings faster than sales. This is the fourth consecutive quarter of margin expansion and the highest EBITDA margin for the second quarter since 2016. We continue accelerating our digital agenda with initiatives such as AC Digital. More than 100,000 customers are already actively using our mobile e-commerce application to place orders directly from their smartphones in real time.
Let me expand on the results across our geographies. In Mexico, our beverage business maintained steady momentum, delivering another solid quarter of volume growth, up 5.3%, driven by resilience of the traditional trade and recovery across major channels such as supermarkets at work, on-premise and entertainment. This was the third consecutive quarter of volume growth for Mexico despite the COVID-19 pandemic. We are beginning to see encouraging signs of sustained recovery, particularly in the on-premise channel. Remarkably, we are already achieving prepandemic volumes, with 1.1% growth compared to the same quarter of 2019.
Among the quarter's highlights, volume growth was supported by all categories, sparkling with 2.2%; stills, 26.2%; and water at 30.6%. Total net sales in Mexico rose 15.5% to reach MXN 20.7 billion, marking the 20th consecutive quarter of net revenue growth. The average price per case in Mexico, not including jug water, rose 8.2%, reaching MXN 68.63, sustained by our disciplined execution, revenue management and affordability strategies.
We strengthened our market leadership position as we gained value share in NARTD beverages this quarter, driven by still beverage categories, mainly juices and nectars, sports drinks and energy drinks. We look forward to another significant push for Powerade this summer with the sponsorship of the Tokyo Olympic Games.
Single-serve mix grew 6.8% as mobility restrictions began to ease and lockdowns were lifted. We will continue investing in targeted market initiatives to boost immediate consumption and capitalize on the recovery as more points of sale have reopened across our territories in Mexico. EBITDA increased 11.5% and to MXN 5.4 billion in the second quarter, representing a margin of 26.3% for a contraction of 100 basis points.
Moving now to our various business in South America. Total volume in the second quarter grew 30.7%, resulting from solid positive volumes across all our operations in the region. We see a sequential positive trend quarter-on-quarter across channels despite curfews and mobility restrictions reinstated due to a new wave of COVID-19 cases in the region. Volume growth has been supported primarily by the traditional channel while the on-premise channel is showing sustained recovery.
Total revenues for South America rose 9.9% in the quarter to MXN 7.5 billion. In comparison, EBITDA increased 46.5% to MXN 1.2 billion, representing a margin of 16% for a robust expansion of 400 basis points.
Our Argentina beverage business posted a solid 15.1% volume growth in the second quarter, driven by colas, personal water and still beverages, up 8% and 25.1% and 129.1%, respectively. Coca-Cola posted a favorable performance up 8%. The remarkable growth in stills was driven by Powerade, Monster and AdeS in the soy beverage category. We continue to invest in returnable bottles for both sparkling beverages and flavored water. These packages support product affordability while reducing our overall production cost.
Let's turn to Peru, where total volume in the quarter grew 41.2%, once again, led by the traditional trade and on-premise channels both growing at double-digit rates. We grew value share across NARTD beverages, driven by still beverages and water categories, sustaining the recovery trend.
Still beverages also posted substantial share gains driven by the sports drinks, flavored water and juice segments. Our commercial initiatives focused on protecting portfolio affordability during the quarter via an accelerated introduction of multi-serve returnable packages. A key element of this plan is the 2.0-liter PET universal bottle package, which provides a wide variety of products at very competitive prices. Notably, the on-premise channel has started to recover despite the mobility restrictions that are still in place due to COVID-19.
As part of our digital playbook in Peru, this quarter, we reached a significant milestone of 52,000 customers in the traditional channel, utilizing our AC Digital B2B platform, regularly placing orders using our mobile app.
Moving over to Ecuador. Volume grew 27.1% for the quarter. Volume recovery was driven primarily by the traditional trade, supermarkets and on-premise. On-premise recovery is driving increases in the immediate consumption mix. In fact, single-serve in Ecuador has increased 10.8 percentage points year-to-date.
This quarter, we relaunched Coca-Cola Sin Azucar with a new formula and a new visual identity. This new version offers consumers a great taste and refreshment that is even closer to the iconic Coke original taste and with no sugar or calories.
Tonicorp, our value-added dairy business, posted a low single-digit sales increase in the quarter while capturing additional value share driven by yogurt, flavored milk and ice cream categories. The more trade led the recovery from a channel perspective, driven by the value-added milk category, which includes skim, semi-skim and lactose-free and innovations in the premium segment. We continue adapting our portfolio to address the new market dynamics with products that combine high nutritional properties and affordability. We were able to achieve these encouraging results in Ecuador despite nightly curfews and restrictions on business operations and mobility implemented as part of the country's effort to contain the spike in COVID-19 cases.
Now turning to our beverage operations in the United States, which delivered another quarter of strong volume, revenue and profit growth. Our solid price package strategy yielded great results with net sales growing 13%, reaching $819 million in the quarter. Net price grew 7.3% with a true rate increase of 4.1% and 3.3% in mix, driven mainly by the shift in volume mix to high profit per case channels and packages.
Volume grew 5.3% in the second quarter, driven by the large store channel. Also, the FSOP channel posted the fourth consecutive month of positive volume as we see businesses reopen. We also continue leveraging myCoke.com and now have 53% of our FSOP customers ordering through the platform, generating cost-to-serve savings as the FSOP channel reopens.
EBITDA for the quarter increased 30.4% to $138 million, representing a margin of 16.9% for a strong expansion of 230 basis points. Notably, this is the 12th consecutive quarter of EBITDA growth and the highest in any quarter since we acquired this operation in 2017. Also in the quarter, we completed the rollout of our new service models for home market across all our sales centers. We also reinforced our commercial capabilities with implementation of the new sales force customer relationship management tool. This has been a game changer for FSOP go-to-market strategy, enabling us to have more productive conversations when we visit our customers.
We continue driving innovation in our beverage portfolio. This quarter, we launched BODYARMOR EDGE in 4 different flavors and Dr Pepper Zero Sugar, which already achieved over 90% market penetration. This quarter, we made important investments to further improve the safety of our drivers and those around them by implementing a collision avoidance management system and a cellphone usage management system as well.
Shifting gears to our food and snacks business, starting with Bokados in Mexico. Bokados posted a double-digit sales increase with EBITDA ahead of sales, capitalizing on the resilience of the traditional trade and the recovery of the supermarket segment. We are also accelerating the program in Mexico to expand partnerships with global CPG companies, such as Kellogg's and other leading confectionery brands, generating incremental sales and greater productivity of our distribution system.
Wise snacks in the U.S. posted a low single-digit sales decline in this quarter. Deep River potato chip sales in the U.S. continued to rebound as the foodservice channels recover. We're placing strong focus on the "up and down the street" segment to capture small bag sales as business returns, particularly in the New York City metro area. The e-commerce channel in the U.S. continued its strong performance by expanding our online presence and working with Instacart to improve ad activity and become more relevant in the online environment.
In Ecuador, Inalecsa posted a high single-digit sales increase in the quarter, supported by the recovery of the traditional channel. We continue to spark consumer-centric innovation in our portfolio with the launch of a new portfolio of mixed snacks. We began to participate competitively in this new segment and capture additional value share in salty snacks.
And now to wrap up our operations review, let me provide you an update on the most relevant ESG activities in the second quarter. As part of our World Recycling Day, Arca Continental, together with the Coca-Cola industry in Mexico, announced a 3-year plan to invest MXN 11 billion in infrastructure projects aimed at the country's sustainable development. Our joint initiatives, which are focused on the recovery and recycling of PET waste have so far created more than 2,900 direct jobs over 35,000 indirect jobs to date.
Moreover, our beverage operation in the U.S. recently announced its commitment to double the amount of recycled content across the entire plastic packaging portfolio and significantly reducing the use of virgin plastic. By the end of 2021, recycled PET will account for 50% of every new plastic bottle that we produce. These initiatives are an integral part of our business growth strategy and part of our efforts to promote a circular economy.
And with that, I will now turn the call over to Emilio. Please, Emilio.
Thank you, Arturo. Good morning, everyone, and thank you for joining us. After start to the year, we continue to see solid momentum in our markets, supported by a steady volume recovery along with strong pricing and continued discipline in OpEx to mitigate the pressure in commodity prices.
Let me now provide you with further color on our financial results. Consolidated revenues for the second quarter increased 6.7%, primarily driven by solid top line recovery in all regions and a strong price mix in Mexico and the U.S.
Currency neutral, net revenue grew 16.5% since we're recycling a 14% appreciation of the Mexican peso against the U.S. dollar. Consolidated revenue for the first 6 months of the year rose 5.4% to MXN 18 billion, and 10.9% on a currency neutral basis.
Gross profit grew ahead of revenue at 7.6%, reaching MXN 2.8 billion, representing a contribution margin expansion of 40 basis points. This improvement was mainly driven by strong top line growth, pricing strategies and an overall mix increase of single-serve presentations across all markets.
As we have been discussing for some time, we have reached an agreement with the Coca-Cola Company for an increase in constant trade for sparkling beverages in Mexico. Similar to the one in 2020 and effective as of July 1 of this year. This agreement is part of our business partnership over the long term, allowing each other to focus and strengthen the Coca-Cola system. As part of the agreement, we're investing together to enhance our infrastructure to constantly evolve and improve how we serve our customers in Mexico, which will be beneficial to both parties.
Our OpEx to sales ratio decreased by 200 basis points as we continue to maintain a tight control of SG&A expenses and favored by the strong top line performance. This resulted in an increase of 27.3% in operating income to MXN 7 billion, for a robust expansion of 240 basis points.
Consolidated EBITDA for the quarter reached MXN 9.4 billion, an increase of 14.1%, a healthy, healthy expansion of 130 basis points to reach a 20.5% margin. This is the highest EBITDA margin for the second quarter since 2016.
If we neutralize FX, EBITDA in the quarter grew 21.1%. Year-to-date, EBITDA margin expanded a solid 160 basis points. Compared to prepandemic levels of the second quarter of 2019, EBITDA grew 16.2%. EBITDA increased at 2x the rate of revenue, demonstrating the important operating leverage of our business. We continue our holistic cost management plans to optimize OpEx. And together, with our value management initiatives maintain a healthy ratio of OpEx to sales throughout the year.
Net income grew 34% quarter-to-quarter. For a robust net margin expansion of 140 basis points as we saw a decrease of 8% in the comprehensive financial results, coming from a reduction of 15% in interest expenses. The latter resulted from our effective financial management as we deploy initiatives to refinance and improve terms of our outstanding debt. For the 6 months ended in June, net income rose 14.9% with a 50 basis point expansion.
Now let me expand on our successful green bond issuance, which was completed during the quarter. Consistent to our financial discipline and in line where sustainability strategy and environmental commitment, our subsidiary AC Bebidas placed our first green bond on the Mexican Stock Exchange for a total amount of MXN 4.65 billion, as one of the lowest spreads for a corporate issuer in the recent history in the contract. Proceeds from this bond will be allocated towards 3 projects that mitigate emissions for production activities, compensate for water consumption, reduce waste and maximize recycling programs, renewable energy, pollution prevention and clean transportation. These [indiscernible] are aligned with those recognized by the green bond principles and the Sustainable Development Goals of the United Nations.
Now moving to the balance sheet. As of June, cash on cash equivalents stood at MXN 31 billion with a total debt of MXN 52 billion, resulting in a leverage ratio of 0.6x. CapEx was MXN 2.4 billion, around 12% [ less] versus same period of last year. While we expect to face headwinds in raw material prices in the coming quarters, we're optimistic on the positive momentum of our top line to return to prepandemic levels, supported by the recovery of the on-premise channel. This will continue driving increases in single-serve presentation, which, along with our pricing strategy, will allow a better price mix. In addition, we'll continue pursuing efficiencies in OpEx to maintain a strong profitability.
And with that, let me hand it back to Arturo.
Thank you, Emilio. As we enter the summer and vaccination efforts are accelerating, we see consumer dynamics also improving. This is already becoming evident in retail, travel, dining and entertainment. As we navigate our way through the end of the pandemic, we remain cautiously optimistic with new mobility restrictions as well as the new variants of the virus, it is clear that adversity is not completely behind us. Nonetheless, our business momentum remains strong.
While some consumer behaviors and preferences may shift as population mobility increases, we are well positioned across categories and channels to succeed and win in the marketplace. This implies an even greater commitment to leverage our scale and continue growing, focused on excellence in everything we do.
Looking forward, we will continue to invest in our business for the long term, led by our sustainability agenda and very importantly, led by our digital transformation.
In summary, our solid financial position, our balanced geographical presence, and our firm commitment to serve our customers and consumers are the basis from which we will continue seeking profitable growth opportunities.
And before we open the floor for questions, I would like to close by saying that we are celebrating our 20th anniversary as a publicly traded company as well as the 10th anniversary of the merger between Arca and Continental, certainly a period of significant milestones in our history.
Today, led by the effort and commitment of our associates, we are one of the world's largest Coca-Cola bottlers, but most importantly, we are a better company in every way. The outstanding results we have obtained reaffirm our commitment to expand the business opportunities in all the markets we serve, thereby fulfilling our goal to generate maximum value for customers, associates, communities and shareholders while always satisfying the expectations of our consumers with excellence.
That concludes our remarks. Katie, we are ready for questions, please.
[Operator Instructions] Our first question will come from Ben Theurer with Barclays.
Arturo, Emilio, first of all, congrats on the strong results. Just a question around like the input cost challenges, and you've mentioned that July, you're going to see an increase in the concentrate prices. So could you elaborate a little bit on what you think going forward in terms of the pricing strategy in the region, just to kind of start working offsetting that through? And also what are your considerations in light of other input cost materials that have gone up? That would be my one question.
Yes. Sure. Thanks for your question. Well, as you know, pricing has been very important for us in developing this capability on RGM that's been instrumental in achieving the profitability and margins that we have attained so far. So we're going to continue with the same idea of adjusting prices in line or above inflation. We're confident that we are going to be able to do that.
We've had a positive carryover, especially in Mexico and the U.S. from increases that we've made before. And at the beginning of the quarter, even last year. And also as immediate consumption has been recovering in both of those markets, we are now seeing a positive mix effect in price.
South America, the story is a little different. Our priority is to focus on affordability, mostly with returnable presentations, which are also profitable but have a different effect on average pricing. But that gives us a solid architecture in those markets. But we do have an impact on mix in South American countries, as you know, a negative mix effect both in Peru and Ecuador.
In Argentina, we've been able to retain prices in line with inflation, although inflation has been quite challenging this year as the years before. But we have seen some prices rising for raw materials. We didn't see a significant impact in the quarter. That's in part thanks to our hedging strategy, particularly aluminum. So I will let Emilio elaborate a little more on that on raw material pricing. But basically, I would say that in the second quarter, the most noticeable increase would be aluminum, and we have hedged our prices in the U.S. It's where we mostly require that input.
Yes. Thank you, Arturo. Benjamin, yes, as Arturo mentioned, we're experiencing price increases across all our main raw materials. And we expect in the following quarters further pressure, primarily PET, aluminum and sweeteners. But as Arturo mentioned, we have hedges in most of them, for example, aluminum, we have 90% hedged on the needs for 2021 at a lower price than 2020 and much lower than the current market prices. We have a partial hedge on PET, only 30% above 2020 prices but lower than the market prices. Also, we have a 90% hedge, our high fructose price is a little bit higher than inflation, a little bit -- but for U.S. needs and some of the Mexican needs.
In Peru, we also hedged 83% of our needs for sugar, some diesel for U.S. So basically, what I'm trying to say is that really the impact this year for us will be mainly on PET prices. All other raw materials are hedged. Or as you know, in sugar, we were integrated with PIASA in Mexico and with sugar mill in Argentina. So we are offsetting all this with the price strategy that Arturo already mentioned.
And not only the pricing strategy, as you know, we've also launched a thorough cost savings and efficiency plan across our operations to look for opportunities in OpEx and costs in other areas, including strategic sourcing, management of labor over time, routing, cost to serve, et cetera.
Our next question comes from Felipe Ucros with Scotiabank.
Congrats on the results, again. Let me ask you a question about the visits, the store visits in the U.S. It was very evident in the data from your commentary that you're visiting clients at a higher frequency and also doing it more efficiently. Obviously, that's great news. So congrats on that front. I was hoping you could talk a little bit more about how much of this is coming from the simple reactivation of the economy? And then how much of it is coming from your efforts on myCoke.com, which I assume is freeing up time for sales associates to do more visits?
Yes. Thank you, Felipe. Well, as we've said before, part of our transformational effort in the U.S. market was to evolve in our service models with our customers. And these were -- some of those synergy projects that probably were not really accounted as hard synergies initially, but we really believe that these were very transformational and that will create this new foundation of the business for years to come and that we're going to be reaping the benefits of those initiatives and -- over time.
So one of those is precisely how we evolve our service models. Initially was the FSOP market that has a very important element of that is precisely the order taking or the myCoke.com operation. And those have progressed very nicely. We have reached more than 50%, actually 53% of our eligible FSOP customers with the platform in the U.S., myCoke. So it's -- the effect is double as the channel again recovers, and we're not back to where we were in the prepandemic number of customers operating in volume. But we believe we're operating more efficiently, and it has to bring both benefits. It's more efficient from the perspective of cost to share of those customers and also, it provides better service.
I think the ideal model is where customers are satisfied with service through myCoke and also the combination of our visits, but visits have to be for different purposes. So it also requires the retraining of our frontline sales force so that they can create different value dialogues with our customers and also increase coverage of new products and a number of things that we continue to do in the on-premise market.
Also, it's worth mentioning that the evolution of the service model is not only for FSOP. That was the initial step, but we completed the rollout of our go-to-market 2-point share of service models for home market as well, and that would be for every sales center where we operate. And this also has improved our execution. We've increased our visits by 28% versus the previous quarter, which is quite significant, and that generates more orders. And I would say it generates also more customer intimacy, which is basically where we want to accomplish through these products. So I don't know, Pepe, if you want to add something to that.
But certainly, these are very transformational things that probably, we're not part of the conversation during last year because of COVID. But I think they're the most relevant things that we're doing in the market.
Yes. Adding to that is both the usage of these tools permits us to increase the number of visits and generating cost-to-serve savings and at the same time, increasing the number of orders. So at the end, we have more time to deploy to get our business focused on more value-added activities.
So the only additional thing I would mention, Felipe, this requires significant change management in our operations because this is something that we're not only doing in the U.S., as you know, we're deploying our AC Digital platform in Mexico and the rest of Latin America. And what I would say in that regard is that we require not only the digital technological effort, but also the change management effort with the sales force. And that's why we think we're very well positioned to capture the value of that opportunity and that, the incorporation of that technology into our system.
Fantastic. That's great color. I'm not sure if I can do a quick follow-up, but I was hoping you could tell us how far you are from prepandemic levels of your mix, of your packaging mix in each country. It seems that in some countries, you're very close to 100% on the mix, but just not sure how far you are in each country.
So you refer to the categories and packages or to the channels? Because the channel mix is where we see the most relevant effect precisely because of the impact on the on-premise channel in all of our markets. So if you look at that and compare the mix, how it's been recovering in all markets, let me talk about the biggest markets. In the U.S., it was 9%, second quarter of 2020. It's now 12.5%, second quarter 2021. In Mexico, it was 3%, and now it's 5.5% if you compare quarter versus quarter.
Doesn't mean that we're back to the prepandemic level. There's still some opportunity there. And South America, it's pretty much the same story. I think we're a bit far behind, I would say, in recovery. So we expect second half of the year to have a similar volumes in that particular channel. If you look at our overall volumes, we already are seeing, comparing 2021 with 2019, which is what we're doing, we already have growth in Mexico and in the U.S. and in Argentina. And we're going to expect that to happen also in Peru and Ecuador in the second half of the year. Talking about overall volume and comparing it with 2019, as you know, the prepandemic baseline.
Our next question comes from Fernando Olvera with Bank of America.
Congratulations on your results and your anniversary. I have two, if I may. The first one is related to Mexico. Can you give us more color on what caused the margin pressure? And how do you expect margins to behave in the remaining of the year? And my second question is related to CapEx. So far, you have invested around MXN 3.5 billion. So how do you expect CapEx to be anything in the second half, considering your guidance for the year?
Thank you, Fernando. Let me address the first part of your question, and then Emilio can take the second part. Well, Mexico, as you've seen, has had fantastic margins the last few quarters. We have had a combination of many good things, starting with recovery in volumes. Although, as you know, 2020 was not as impacted through the COVID crisis or the worst of the crisis as compared to other markets. So we fared fairly well last year. And still, we're not growing our volumes in, I would say, in every category in Mexico. And we've had still beverages, water, sparkling and the different channels also showing that recovery.
Second, we've had a very good pricing results so far, and this is a combination of a good pricing strategy and a positive change in mix and also the good management of promotions. And this is something -- just to mention separately because we are also capturing the benefits of our analytics project on trade promotion spend. So this is also having an impact now.
The traditional channel that continues to grow is very important for our profitability. As I said, on-premise is showing some improvement, although we are not yet reaching prepandemic levels. So we have an upside there. In terms of mix, single-serve is also growing. And we are not only managing the crisis, which is not really behind us, but we are also doing new things. We're launching new products. We're continuing our rollout of the universal bottle, which also contributes to our good margins and profitability. So there are a number of things that we're doing. And at the same time, if you see our OpEx management, that's been very, very effective. If you look especially at OpEx ratios.
And also, Emilio already spoke about that, raw materials, although prices have been on the rise, have not impacted us significantly or all impacts have been mitigated by our pricing strategy. So it's been a very good combination going forward. Certainly, there are some challenges, particularly the increase in some of those raw materials, PET would be, I would say, the most relevant since aluminum in Mexico is not that impactful. And also, there's the impact of exchange rate and some of our experts has made a significant, well, like slight [indiscernible], I would say there, also in our numbers. But in general, margins look really well for the remainder of the year also.
So I think even though we're seeing record margins. The -- I'd say that the basic building blocks of our P&L look very good for the rest of the year. I don't know, Emilio, if you want to elaborate on that and also address the CapEx question.
Yes. I only want to explain a little bit what happened in the second quarter of this year since we see a dilution in margin. There's basically two factors. One is that the exchange rate last year -- thanks to our hedging that we had last year, we have a very low exchange rate around MXN 19. And this year, we have a little bit more than MXN 1 more in an exchange rate. So that's impacting the cost of goods on our Mexican operation, and that's also impacting our margin.
And the second one is that we are comparing the second quarter of 2020, the margin was 27.3%. So it was a really good margin. But even if we compare the second -- the margin of the second quarter of this year, with second quarter of 2019, we can see a 140 basis points improvement.
So what I'm trying to say is that 26.3%, it's a very good margin. And the comparison is not helping to see the dilution. And what we expect, as Arturo mentioned, is to keep the good trend that we have improving margin in Mexico as we have done in the first half of the year. So we're still positive on that and continue to expect the positive trend on margins in Mexico.
And talking about CapEx, yes, you're right. We -- CapEx stood for MXN 2.4 billion in the first half. We are really disciplined on this, as we mentioned last year. So primarily, we're investing in returnable packaging, coolers, go-to-market and distribution capabilities. What we expect on the second half of the year since we see a good recovery on the top line, we expect to invest around MXN 8 billion. So at the end, it will be lower than the budget that we announced of MXN 11 billion. So we expect to end around MXN 10 billion, and that's going to be like 5% to 6% of sales for a total CapEx of 2021.
Our next question comes from Lucas Ferreira with JPMorgan.
All right. My question is, I think, a more qualitative question on the U.S. So given all the success in the operations there, guys, you're already touching the 16% margin, if not mistaken, that was more or less the margins you guys were expecting to reach, synergies mostly delivered.
But when you look at the operations today and the success you guys had in pricing to have some room to improving in the digital front, eventually channel mix, also probably the economy also helping, so do you guys think you can go beyond and actually deliver better profitability than you were forecasting probably 1 or 2 years ago? Is this something that's doable? And the obvious question is, do you guys think you can replicate the success in other territories in mid and near future?
Yes. Thank you, Lucas. Well, certainly, I think we, so far, achieved really a better profitability that we expected, particularly this year. And this has mostly been the result of some of our more immediate effect projects at the -- our initial plan and all the synergy projects and all of that was successful. And this is the last year when we just capturing the whole benefit of our synergy plan. And that includes development capabilities as well. I think we're very satisfied with how we manage pricing, we're satisfied about productivity throughout our supply chain and also how we've been developing some of the new categories that are growing in the U.S. market. I think we have, certainly, opportunities to continue to grow.
Basically, as we develop some other categories, as you know, sparkling is not the segment that provides most of the growth. We've been seeing our growth from energy with Monster, with BodyArmor, with Smartwater, with Topo Chico. I would say those are the main sources of growth so far, and there's still quite some room to continue growing there.
Also, if you think about long term, the capabilities that I mentioned before are things that are not, I would say, fully implemented. The evolution to go to market is kind of a work in progress, our digital initiatives as well, the trade promotion optimization is something that has opportunity. Even our supply chain has opportunity as we have been integrating with the rest of the system in new projects.
There are also a few things that are challenges and headwinds that we're going to be facing, both in the very short term. I would say the biggest challenge that we face right now is just staffing and availability of labor for very important roles. I'm sure you've heard this not only from our industry, but from many other industries in the U.S. This has been a challenge in the second quarter. And probably it's going to continue for some time. So we're adapting to those circumstances and managing that unexpected situation.
As we move forward, the obviously, cost pressures are going to be more relevant, particularly in 2022, I would say, is aluminum prices go up. So that's why it's important that we are very effective in our pricing, that we also make more progress in our segmentation. I think that's an opportunity that we haven't really completely capitalized because it's not that simple. We have new packages now. As you know, we have this 13.5 ounce, and we had to have a more diversified portfolio as we have in other markets to have and achieve this, what we call this healthy complexity of our price-pack architecture. That's certainly an opportunity in the U.S. So there are a number of things that are longer term that we continue to explore so that's why we remain optimistic.
And thinking about how we can apply these capabilities, I think the experience in the U.S. has made us more confident about how this basic processes and building blocks in the Coke system around the world, certainly could be applicable and adaptive to different markets. So we were successful in Latin America. The U.S. was a different type of challenge, a very complicated market and also competitive market, and we've been able to succeed so far. So that means that we certainly have the capabilities to apply that as we have the opportunity to integrate other businesses in the future. So if you combine that with our financial capacity, with our good relationship with the Coca-Cola Company, with the commitment that we have here also from our company and our Board, I think that presents new opportunities in different markets as well.
Our next question comes from Alan Alanis with Santander.
Congratulations for the anniversary, for the ESG objectives. My question has to do more with the categories, how you can expand the social strategic question. Arturo and Emilio, how much are you seeing that the growth of a particular category in one territory -- in this case, the United States -- is being replicated as a consumer trend in Mexico and the rest of the territories? For instance, you mentioned the ready-to-drink coffee has been growing a lot in the United States. You mentioned the Coca-Cola with coffee. How much are you seeing that get into a future trend into Mexico? That's the first question.
The second really quick question is repeat purchases on your Topo Chico hard seltzer. I guess the 2 questions to be connected also as well, the hard seltzers is a trend that we're seeing in the United States. But what is your repeat purchase of that imported trend that you want to from the United States in terms of hard seltzers, now that you have all this coverage in Mexico?
Yes. Thank you, Alan. I will turn the second part over to Pepe. But first, let me talk in general about trends. And this particular time, we're seeing every category grow significantly. So that's why, as I said before, we're trying to compare with 2019 or some prepandemic baseline to see how we're performing. And still, every category is performing well in our different markets. But we certainly see that trend that you mentioned that is more noticeable in the U.S. where some of these -- even subsegments or subcategories of certain beverages are growing, like in the case of sports beverages and then you have BodyArmor, like a subcategory within that group, and that's providing significant growth. The mix of energy in the U.S. is also a trend that is much more developed in that market and enhanced waters, a number of other things.
I would say that this -- it's kind of a window for what will happen in other markets, certainly, but it's a gradual evolution. It's not something that occurs overnight or in a single year. It's just a slow trend that we're going to be capturing as we also build stronger capabilities for how we approach the market to be more active in promoting and selling those categories rather than just providing service, which was kind of more of our DNA in the past.
So I think what's happened in Mexico, for example, with sports drinks with Powerade is a good example of the last, maybe, what, 15 years, and how that category has been truly developed based on a trend that existed previously in developed markets like the U.S. So I think that's going to continue.
And the other good example of that is particularly Topo Chico hard seltzer, which this is a category that is attracting consumers, they are looking for the same things, refreshing, lighter alternatives to other alcoholic beverages, and we've reached significant coverage. But it's still truly a category that will develop differently than in the U.S. I would say it's not as explosive, but we want to be one of the leading brands. And it's going to be just part of this development of the flavor and alcoholic beverages in our market.
So I don't know, Pepe, do you want to elaborate on Topo Chico hard seltzers?
Yes. Topo Chico, the old portfolio in general, we still see growth coming from the cola segment. I think that the recent launch of Coca-Cola no sugar, new formula is we expect a boost also in colas from that. We're seeing recovery -- an important recovery in flavor. And as Arturo said, in many of the still beverage categories with the very, very high growth in many of our markets. So there's still a lot of runway to grow in existing categories.
And in the new categories, as Arturo said, of the coffee category in the U.S. is very right for us to grow. It's in a very initial development, the way to drink, but we're starting to work with cost out there to capture that growth, Coca-Cola coffee in Mexico. And specifically, in terms of Topo Chico hard seltzer, Arturo said it's still a very small category in Mexico. And as we've said before, we strive to be the top 2 players in Mexico to be ready to be there if and when this category will explode. We already have launched in 6 major cities in Mexico. We have over 65 firms coverage, represent coverage in the territory that we have launched. So there are many of these avenues for growth. And Topo Chico is just one opportunity within the flavored alcoholic beverages category. And most probably, we will have more news in this within the next months.
So it's moving in the right direction, but it's a gradual evolution of the category.
Our next question comes from Vidal Lavin with BlackRock.
Yes. Could you please comment on the major industry global trends, particularly on the one hand, I would like to hear your comments about less carbonated soft drinks and higher water consumption. On the other, the less in regional acquisition activity that we have seen among the [indiscernible], despite some companies are increasing cash flow and have a stronger balance sheet. But the sector have degraded and what are that Arca Continental as far as this in this regard?
Vidal, can you repeat your first question, please, because we cannot hear well?
Yes. The first one is regarding the less carbonated soft drink consumption and higher water consumption, so the main trend that we are seeing in the industry. And the second is related to the merging and acquisition activity.
Yes. Sure. Thank you for your question. Well, yes, certainly, the stills categories have provided significant growth not only now but in the last few years. So if we break that down into the main components, you will see certainly water and sports drinks in Latin America, juices. And then you see the growth of energy drinks up mostly in the U.S.
So the stills during the quarter grew 29%, which is significant, but also we're comparing to a very typical quarter last year. Growth has come up mainly in sports drinks and juices in Mexico. In the U.S., it's been mostly BodyArmor performance. It's growing more than 50%. In South America, Argentina is growing mainly in juices, with -- and with returnable presentations and some of the stills beverages, which are very, very important in that market. In Peru, growth is coming mostly from isotonics and sports drinks. Same thing for Ecuador and juices. The juice category is one that's been not quite developed in some of our South American markets, and now we are capturing that opportunity.
Then the water category grew 34%. And as we have explained before, there's a higher correlation with mobility in this category. So as restrictions have been partially lifted in some countries, we've seen a solid performance in the category, particularly in Mexico, 31%; in South America, 82%. So if you look at these categories, water and stills, in the quarter, they grew 34% and close to 30%, respectively. And in every market, we've had growth. And even if you compare to the second quarter of last year, the growth has been much higher. We grew water at 34% this quarter. And the second quarter last year, we did have a decline, but decline was less than 30%.
So we've increased our volume as compared to 2019. Same thing happens in -- particularly in the largest markets in the U.S. and in Mexico. And if you look at stills in the second quarter last year, we did have a decline, but that was about 17%. And now we're growing close to 30% and the rest of sales in this market. So this is just kind of the short-term recovery of the category, which has been quite strong. But there is also a longer trend towards growth in stills beverages. And Pepe, probably you want to expand on that?
Yes. On top of what Arturo was saying, we're seeing and we're capturing an important growth of the noncarbonated categories and water is revamping, getting closer to prepandemic levels.
Looking forward, we were making on value-added water and hydration solutions that are more profitable. As you can see with our launches of flavored water or the focus we're putting in the mineral water and with Topo Chico, Smartwater with different alkaline, flavored water, BodyArmor water, Powerade water, so all these alternatives that compete in the hydration arena are going to be things in which we're going to invest a lot more in the future.
Let me address the second part of your question about M&A. And to mention that we continue to be open to evaluate opportunities. We believe some of those opportunities may arise in this postpandemic scenario. As always, we're going to be very prudent about what we're going to be pursuing. And we're going to continue to look for transactions in our geographies in the Americas, and mostly focused on the beverage space.
So we believe we've combined a number of factors that put us in a very good position here. As I mentioned, we've developed capabilities to succeed in different markets, even the most competitive markets as the U.S. We maintain a strong balance sheet, as you know. And we've also developed a pipeline of talent to capture that -- those opportunities when they arise. And we also maintain a good relationship and an open communication with The Coca-Cola Company about things that we're trying to do and what we are pursuing. And very importantly, we have the commitment in our strategy to pursue those opportunities as a first priority. So that's what I would say in that regard, Vidal.
Our next question comes from Emiliano Hernández with GBM.
Arturo and Emilio, congrats on the results. Most of my questions have already been answered. So just a quick one here. Given the good results in the first half, should we expect an extraordinary dividend similar to the one you gave last year? Or is there another priority regarding your capital allocation?
Well, yes, as you know, our priorities remain pretty consistent with what we've done before. And Emilio spoke about CapEx, and that's certainly priority. We have reassessed our investment requirements and restated some of those investments that CapEx will increase.
And in terms of dividends, as you know, we declared a dividend, the annual regular dividend and the shareholders meeting has delegated to the Board the possibility of additional dividends. And that will depend truly on opportunities for the use of capital in different ways that would create value. Basically, M&A opportunities that we can envision for the future, even opportunities to repurchase some of our stock that's also part of the conversation.
At this time, I'm showing no further questions. I'd now like to turn the call back over to Arturo for closing remarks.
Thank you, Katie. On behalf of Emilio, Pepe and the IR team and myself, I like to thank you for your interest in Arca Continental and also for your continued trust. So have a great weekend.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.