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 now like to turn the call over to Melanie Carpenter of i-advize Corporate Communications. Ma'am, please go ahead.
Thanks, Katie. Hello, everyone, and thanks for joining the senior management team of Arca Continental to review results for the third quarter of 2018. The earnings release went out earlier this morning, and it's available on the website at arcacontal.com, in the Investor Relations section. There's also a webcast of this event for you to listen to on replay.
It's my pleasure to introduce our speakers. Joining us from Monterrey is the CEO, Mr. Francisco Garza Egloff; the Deputy CEO, Mr. Arturo Gutiérrez; the Chief Financial Officer, Mr. Emilio Marcos; as well as the Investor Relations team.
They will probably be making some forward-looking statements today, so we ask that you just refer to the disclaimer and the conditions surrounding these statements in the earnings release.
And with that, I'll turn the call over to Francisco Garza Egloff for what would be the last time, to begin your presentation. So please go ahead, Pancho.
Thank you, Melanie, and good morning, everyone. As you know, managing a company to ensure long-term growth requires a thoughtful and orderly succession plan. So for several years now, I have had continuous conversations with our Board on talent development and management succession to have ample time to be prepared for the moments of change. As you are aware, on August 21, we announced that Arca Continental's Board of Directors unanimously approved the leadership transition in our company, which is part of an institutional succession plan, designed to ensure the long-term continuity and positive evolution of the company. One of our Board's key priorities is developing the next generation of leaders. So now, it is time to write the next chapter in our profitable growth story with the appointment of Arturo Gutiérrez as our next CEO, a prime example of our talent pipeline in action.
I know that his vast industry knowledge, expertise in our markets, coupled with a deep understanding of our core values and competencies, made him ideal to take over the role of CEO. Arturo had the strategic vision and inspirational leadership to drive the next phase of profitable growth for Arca Continental. Well, I still think that my jokes are better than his. I mean, really. But other than that, I truly believe he's going to be a great leader for this company. Congratulations, again, Arturo.
Thank you, Pancho.
Well, now moving to our consolidated results for the third quarter. I am pleased to report that despite a challenging volatile business environment, our company delivered yet another quarter of sequentially improving performance results. Total consolidated volume grew 2.1% in the quarter to reach 573 million unit cases, driven by growth in Mexico, Ecuador and the U.S. Southwest, which helped offset some volume declines in Peru and Argentina. Total consolidated net revenues rose 8.6% in the quarter to reach MXN 40.6 billion. Our market position is very strong, as we continue to extend our value share gains across all nonalcoholic ready-to-drink beverages in all the countries that we serve. We delivered solid results even in a sluggish consumer environment with a disciplined approach to volume, price and mix management. Part of our end-to-end total execution commercial model that you know very well. What we call ACT, A-C-T. During the quarter, consolidated EBITDA grew 5.8%, reaching MXN 7.2 billion, representing a margin of 18.1%. This improvement was achieved despite macroeconomic challenges in some of our countries and higher raw material prices, particularly PET resin and aluminum. While the third quarter proved to be challenging, our timely actions allowed us to offset pressures in certain markets. Also maintain our profitability and enhance our market leadership. Our superior execution capabilities and a strong brand equity of our product portfolio provides a solid foundation to capitalize the gradual improvement in the economy of the countries where we operate. The favorable outlook for our flagship Mexican market was confirmed by strong volume growth in the quarter, continuing the positive performance achieved over the last 3 years or more. This reflects our solid fundamentals, consistent investment in the market and continued optimization of our price-pack architecture. Furthermore, recent announcement by new government to last products to lower tax in northern border locations as well as other actions aiming to boost the economy of this important region, which is a key part of our franchise territories will bring more benefits to our territories.
In our U.S. operations, the benefit of the volume growth achieved in the quarter was somehow diminished by the continued increase in the cost of PET and aluminum. Nevertheless, looking ahead, we expect a more stable environment on that front. The near-term outlook remains right in this concept. Thanks to stronger economic activity in our territories, especially Texas. Also because of tax cuts affect in the last federal spending increase expected through the end of this year but also on all 2019. Moreover, we continue to make steady progress with our synergy program towards our goal of achieving $90 million by 2020. Arturo will provide you with sources that tells on this topic later.
In South America, we have kept sequential improvements across the region. In Ecuador, despite a slowdown in the economy, we posted volume and value growth in the quarter, confirming the recovery trend of the last 12 months, which we foresee will continue in this way. And in Peru, solid growth in GDP, moderate inflation and infrastructure investment should translate in more job creations and better consumer spending. As we have seen in our positive volume results during the recent months and the current month.
We would continue selectively increasing prices to pass through the effect of the consumption tax recently implemented in this country. Finally, in Argentina, the recent agreement reached by the government with the IMF, provides further financial support that should help prevent further turbulence in the short-term and medium-term. We have doubled down on execution, accelerating deployment of our ACT commercial model and strengthening operational processes while driving affordability by expanding returnable presentations. Importantly, in Argentina, as well as in Mexico, by the way, but in Argentina, we are fully capturing the benefits of the vertical integration. Thanks to our cane sugar mills. We consumed in that country more than 12,000 tons of our own sugar this quarter, result in a nominal reduction in cost of this key input in Argentina. But, overall, we are confident we have the ability to successfully navigate through this uncertain times as we had done this in the past, keeping our investment plans consistent with our long-term vision and our orientation to strong customer service, which will enable us to achieve a solid financial performance as a result.
Now I will turn the call over to Arturo who will take you through the highlights of our operating performance. Please, Arturo, if you're so kind.
Sure. Good day, everyone, and thank you, Pancho. Let me start by saying that it will be an honor to succeed you as Chief Executive of this company. It's certainly a pivotal time of change for our company and our industry. And without a doubt, the actions we have taken over the past few years under your leadership has set a strong foundation for Arca Continental, and I look forward to steering it through our next phase of profitable growth.
Thank you.
Let's now review the performance across our operations, beginning with Mexico. Our Mexico beverage business delivered outstanding results. Total volume in the third quarter grew 3.4%. This marks the 13th consecutive quarter of volume growth. The sparkling category rose 1.8% while personal water and still beverages grew double digits up 11% and 12.4%, respectively. Jug water volume posted 3.8% growth, confirming our position as a leading brand in our territories. Total net revenues in Mexico rose 8.2% in the quarter to reach MXN 17.1 billion. Average price per case, not including jug water, rose 6.2%, reaching MXN 58.05. We gained both volume and value share across nearly all the categories in which we compete, outpacing once again the beverage industry in Mexico. These results are aligned with our revenue growth strategy, and we expect that our prices will continue to grow in line with inflation or slightly above. The Mexican economy maintained its forward momentum as it continued to benefit from growth in the United States. Exports grew at double digits with private consumption, fixed investment and remittances all growing at a faster rate than prior quarters. Noteworthy, remittances from Mexican nationals working abroad registered an all-time high in the last 12 months up to August. At the profit level, our EBITDA increased 8% to MXN 4.1 billion, representing a margin of 23.9%, remaining basically flat despite increases in PET, fuel and concentrate costs. There are plenty of reasons to be optimistic about Mexico's outlook. The new free trade agreement in North America will improve business confidence in Mexico as the country maintains premium access to exports to the U.S. Our franchise territories in Mexico, as you know, are precisely located in the areas that will directly benefit from these exports.
I will now discuss South America where our total volume was down 3.1% for the quarter as a result of declining volume in Argentina and Peru, which was partially offset by growth in Ecuador. Total revenues were down 5.6% in the third quarter, reaching MXN 8.3 billion. However, in a currency neutral basis, total revenues in South America grew 4.3% in the quarter. We continue reinforcing our revenue growth strategies, actively promoting affordability with returnable formats and smaller size packages. EBITDA declined 3.9% to MXN 1.5 billion for the quarter, representing a margin of 17.5% with an expansion of 30 basis points.
In Argentina, volume in the third quarter declined 1.7%. Overall consumption has been negatively affected by tough fiscal measures, restricted credit conditions and the effect of higher inflation. Despite the slowdown in the economy, revenues in local currency rose double digits. Our efficient price-package architecture allowed us to selectively increase prices to compensate for high inflation rates. We gained value share in nonalcoholic ready-to-drink beverages, driven by growth in still beverage categories, particularly ready-to-drink juice, flavored water and bottled water. The recent integration of AdeS to our portfolio generated significant market share gains in this category. We're focused on increasing product coverage as we complete the relaunch of the brand and the introduction of new flavors. We continue driving affordability by promoting immediate consumption occasions and increasing our mix of returnable packages. The Coca-Cola system in Argentina launched a national campaign with a message: "Together, we're going to find a way." With the aim of remaining close to our consumers by sharing a positive and encouraging message in the face of this difficult environment. We're confident that the actions taken by the government in order to stabilize the foreign exchange market and to strengthen macroeconomic fundamentals will put the economy back and the growth back. Shifting gears to Ecuador. Our beverage business delivered sequential volume growth, up 0.9%. This confirms the recurring trend of the last 12 months despite the slowdown in the Ecuadorian economy, which grew at its weakest pace in 18 months, as the government's fiscal tightening plans gained strength. Volume growth was mainly driven by bottled water and still beverages at 7.4% and 4.7%, respectively. This quarter, we launched DASANI sensations, a new flavored water, that will expand our sparkling beverage portfolio and accelerate innovation in the noncalorie segment. Furthermore, we started distributing Monster Energy drinks in Ecuador. We expect to replicate the success that we've had with the brand in other territories as we fully leverage our execution capabilities to capture additional share in this fast-growing energy drink segment.
Tonicorp or value-added dairy business delivered low single-digit sales growth in the third quarter. We captured additional value share across core categories such as yogurt, flavored milk and ice cream, consolidating our market leadership. The demand for healthy foods is growing in the Ecuadorian market, and our team in Guayaquil is constantly working on product innovation to meet the needs of all consumers. As an example of this continuous innovation, we launched mango, chia, grape yogurt and expanded our flavored milk portfolio with new chocolate and coconut flavors. Additionally, we recently launched strawberry and peach-flavored frozen yogurt in the ice cream category.
Moving on to our beverage business in Peru. We are starting to see a steady recovery. Total volume in the third quarter was down 5.2%, a smaller decline than in the previous 2 quarters and our average daily volume for September showed positive growth. We continue driving innovation by reformulating our products to offer more low or 0-calorie options and by expanding our portfolio with more affordable presentations and new packaging. We maintain our strong focus on profitability and continue driving efficiencies across the supply chain. The new Huachipa distribution center is playing an important role to streamline logistics while optimizing distribution costs and improving service for customers.
Importantly, last month, our subsidiary AC Bebidas, signed a stock purchase agreement with The Coca-Cola Company to acquire stake in Corporación Lindley. As a result, AC Bebidas now holds 99.78% of the common shares of this company. This transaction reflects our confidence in Peru's healthy macroeconomic fundamentals and positive long-term outlook. We're convinced there is many opportunities to continue expanding the business and create additional value. The economies continue to expand at a solid pace. Moderate inflation, rising wages and steady employment gains should boost consumer confidence. Moreover, rising infrastructure spending as well as robust investment in the mining sector will help drive growth.
Turning to our beverage operation in the United States. Coca-Cola Southwest Beverages delivered its sixth consecutive quarter of revenue growth. As announced last quarter, during the month of July, our team executed an off-cycle price increase across our main channels. Revenue was up 4.4% in the quarter and 4.5% year-to-date. Price for the third quarter grew 5.8% year-on-year. Importantly, we achieved 2 consecutive months of strong volume performance following this price increase, a reflection of the stronger economy in the region and our growing execution capabilities. Our revenues continue to grow during the quarter despite heavy rainfall and flooding through our territories plus a tough comparison due to last year's recovery after Hurricane Harvey. Sparkling grew 0.4% and stills 1%, on the back of solid growth in energy, tea and ready-to-drink coffee categories, as well as a strong performance from the addition of Topo Chico to our sparkling portfolio. Topo Chico volume increased 24.2% compared to second quarter. We continue facing challenges to our overall profitability. Our bottom line was impacted by the increase in cost of goods sold, specifically PET, fuel and aluminum. The Midwest premium component of aluminum prices was up 162% against the same period in 2017. On a positive note, we're delighted to share that Coca-Cola Southwest Beverages won 2 major national Coca-Cola North America awards in the quarter. The manufacturing team in McAllen won the President's Quality Award of Excellence for the Year where 71 facilities from all bottlers in the U.S. participate to earn that distinction. We were also awarded the 2018 MARKET STREET CHALLENGE Cup, the highest honor in execution excellence across bottlers in North America. This competition awards the highest standards of market execution across major retail channels. Notably during the quarter, we broke ground on our Northpoint plant, a new $250 million production and distribution facility on 146 acres in Houston. Numerous federal, state and local leaders, community organizations and customers joined us to commemorate the occasion. Construction is planned to begin in the first quarter of 2019 and full start up a year later. We continue to execute our synergy program in our U.S. operations where we have over 20 projects underway. Key initiatives include bottle lightweighting, transitioning to plastic pallets in 3 plants and eliminating plastic shelves. We have also improved the yield of CO2 as well as our manufacturing productivity. In addition, we are taking steps to minimize transportation costs. We began production of slim cans in our San Antonio plant to save $1.3 million in annual freight cost. And we have also begun using monolayer labels, enabling us to reduce packaging costs. The project to optimize our vending machine operation is on track. We have deployed our best practices in service, maintenance, volume distribution, pricing and commission management, capturing synergies of $2.3 million this year-to-date. Also, we are expanding the availability of Topo Chico mineral water in convenience and retail grocery stores as well as local food service and on-premise channels. We're leveraging our direct store delivery capabilities to capture additional $4 million in revenues. In summary, we had completed several initiatives and many projects are well underway. We expect to close 2018 with over $32 million of cumulative synergies. To wrap up our operations review, let's move now to our food and snacks business, starting with Wise snacks in the U.S. Wise delivered high single-digit revenue growth in the quarter, driven by the growing demand of salty snacks, the addition of Deep River, Carolina Country Snacks to our portfolio of brands and the acquisition of strategic third-party distributors. Our new brands are gaining scale, growing at double-digit rates. During the quarter, we expanded coverage for Deep River products in thousands of outlets of several national chains, maintaining its solid growth trend. Priorities in the U.S. snacks business are focused on further expanding distribution capabilities in new territories and categories. Investing in product innovation, enhancing the brand equity of our portfolio and doubling down on operational excellence looking for efficiencies to mitigate the impact of volatility in key inputs. Bokados in Mexico posted sequential mid-single-digit sales growth for its 13th consecutive quarter, driven by growth in the modern trade channel. We have continue perfecting execution at the point of sale, expanding product coverage, accelerating brand innovation and market prices. This quarter, we opened a new distribution center in Nogales, Sonora to serve customers in the Northwest, another step in our plan to become a national brand in Mexico. And lastly, Inalecsa in Ecuador, once again delivered solid results driven by revenue growth initiatives. New product launches and optimization of our distribution capabilities in the Quito market. We continued solidifying our market leadership in the plantain chips category while capturing additional share gains in the pastry segment with the launch of exciting new products. And with that, I will turn the call back to Emilio to go over our financial results. Please, Emilio.
Thank you, Arturo. Good morning, everyone. Thanks for taking the time to review our third quarter performance. Arca Continental results reflected positive top line growth, thanks to the pricing strategies announced last quarter and the positive volume performance in Mexico and the United States. We continue facing margin pressures from higher cost of packaging materials, mainly PET in all of our operations, as well as aluminum in the United States. As you know, aluminum cans are an important part of our volume mix in this operation.
Now moving to our third quarter consolidated results. Total revenues grew 8.6% in the quarter, driven mainly by the positive price mix in our various business in Mexico. Sales in our U.S. operations rose 19% as a result of the full 3 months integration of the Oklahoma territory versus 1 month in 2017. These positive results were partially offset by sales decline in South America. Year-to-date, revenues in Mexico and U.S. were up 6.4% and 61.9%, respectively, while South America decreased 5.3%. On a comparable currency neutral basis and excluding the U.S. beverage business, consolidated net revenues increased 6.8% in the quarter and 5.6% year-to-date. Operating income was down 41.2% in the third quarter with a margin of 12.7% due to a higher nonrecurring item registered last year related to the sale of the Topo Chico brand in the U.S. for $220 million. As of September, operating income was down 17.6%, with an operating margin of 12.2%. This quarter, we included in the P&L of our earnings release an EBITDA margin calculations considering only direct sales in our territories. We consider that this defines more accurately our company's profitability as it takes out the agency sales or sales to third-party bottlers that we have been telling you about. Consolidated EBITDA in the quarter reached MXN 7.2 billion for an increase of 5.8% representing a margin of 18.1%, not including sales outside our territory, a dilution of 50 basis points. Margin dilution, as I just mentioned, is mainly due to higher prices of PET in all of our operations along with higher aluminum prices in the U.S. This negative effect was partially offset with lower SG&A expenses over a sales ratio. Year-to-date, EBITDA rose to MXN 20.7 billion, reflecting a margin of 17.8%. Comparable currency neutral and excluding U.S. various operations, EBITDA increased around 8% in the quarter and 3.3% year-to-date.
Effective tax rate for the quarter was 28% and 28.6% for the first 9 months of the year. The lower effective tax rate for last year is explained mainly by the Topo Chico transaction. As of September 30, 2018, we had a debt of MXN 55 billion and a cash position of MXN 15.3 billion, MXN 8 billion less compared to last quarter as we closed the transaction to acquire common shares of Corporacion Lindley from The Coca-Cola Company in Peru. This transaction increase our leverage ratio from 1.2 to 1.4x net debt-to-EBITDA. The operating cash flow of MXN 14.7 billion in the first 9 months of the year was due mainly for dividends, CapEx and M&A. We will keep working hard for a better fourth quarter and a solid start of 2019 as we should receive the benefits of our pricing initiatives, better volume trends in Mexico and Peru and a more stable commodity environment across all of our operations. We'll continue investing in market capabilities to consolidate our leadership and reinforce our commitment to satisfy our customers and consumer needs. I want to take this opportunity to thank Pancho for his leadership and support. It is always a privilege and honor to work along with him in the journey to build a bigger and profitable Arca Continental. Now I turn it back to you, Pancho.
Well, thank you, Emilio, for what you had said also. And thanks, Arturo. We have made great progress to accelerate the transformation of our company into a more competitive, leaner and agile organization. Our broad diversified product portfolio, our expanded geographic reach, the disciplined approach to extracting and reinvesting savings, and most importantly, the passion that characterize just our people to serve with excellency our customers, underscore our commitment to continue delivering long-term sustainable growth. For me, it has been a wonderful and unique privilege to serve as CEO of such a great company over the past 16 years. I wish to thank our Board, the Coca-Cola Company, our customers, partners, associates as well as our growing number of shareholders for the support through all of this time. I sincerely believe that the best is yet to come. As you all know, my last day as CEO will coincide with the end of the year. I will be passing the torch to Arturo and his talented management team. I am sure that they will build on what we have achieved so far. To keep strengthening the skills of an increasingly competitive and innovative organization, to even better serve our customers and consumers, always generating share value for our shareholders, associates and their communities for the years to come.
I look forward to what lies ahead for our great company, where I will have the honor to continue to serve as part of its Board of Directors. Then, operator, we are now ready for questions. Thank you.
[Operator Instructions] Our first question will come from Alex Robarts from Citigroup.
Pancho, congratulations on a terrific run and stewardship of the company over those years. I wanted to kind of focus my one question around the profitability level in the United States in the quarter. And I appreciated the comments earlier on this call as well as the breakfast that you held with us in New York recently. And I'm talking about the aluminum, the raw material cost that have been offsetting the synergies that you've been putting through. And so, I guess, if we think about the aluminum piece as far as the COGS in the U.S. and the price increase that you did in July. Would it be fair or how should we think about going forward in the next quarter or 2 the dynamic of -- the stickiness of the price increase and the sequential raw material cost pressures? In the answer, could you talk a little bit about what the NAFTA negotiations are inferring and implying for the aluminum cost if there is some relief that you see there, that would be great.
Well, thank you very much. And Alex, it's always a great -- really opportunity to be talking with you. And thanks for really having this opportunity also recently in New York City. And your words about me, I highly appreciate it. It's really a teamwork and it's really -- and you've been also really good support for leading this process. Thank you. Regarding your question, Alex, I would say that certainly, there are some headwinds recently happening on this raw material area, which I think that -- thanks to what we have done in terms of prices and so on. The effect has been diminished. But those are important, especially in the aluminum, in which certainly, we have a lot of, let's say, mix of aluminum cans. And additionally, there, not only that cost also transportation cost and other cost that have been very challenging in the recent past. But I will ask really Arturo to expand, a clear information about what is happening and what we should expect. Please, Arturo.
Sure, Alex. Well, as you know, we increased the prices and that helped us certainly mitigate the impact. The impact comes from mostly aluminum but also PET prices and fuel prices in the quarter. I would say that if you consider all those 3 factors were close to between $9 million and $10 million of impact of incremental costs just in the quarter, which is pretty significant. The situation with aluminum as we have explained is that it is not the basic cost of aluminum what we call the LME, that has been increasing at high rate. Actually, the increase in the quarter for the LME is just 2%. And we are already working on securing prices for 2019. And they look favorable in their comparison to the 2018 prices. The issue is on the Midwest premium, which is this logistics cost that includes, obviously, tariffs, that were imposed in aluminum to the United States. And that was not solved in the renegotiation of the free trade agreement in North America so far. But it is part of the conversation mostly with Canada. And if they agree on quotas, maybe that could be fixed. We're, obviously, analyzing our options, but if you look at the impact there, the Midwest premium is around $450 per ton. And it used to be below $200, it used to be in the $170, $180 range in the past. So it's pretty significant.
It's almost $300 delta about that.
It's close to $300. But most importantly, it's completely artificial. I mean, it does not relate to anything that is happening in the core aluminum market and its dynamics. So that, we should expect that to improve in the future. And then with respect to our price, price in the third quarter grew 5.8% with respect to the same period. And this is a part that what we call the rate increase, which is a true rate of prices, that was about 4.6%. And then we had the remaining 1.2% achieved through better mix of prices. That better mix sometimes impacts margins, by the way, but it's additional contribution in terms of dollar margin. It is still an improvement. So the good thing about prices is that they were well executed in terms of our interaction with customers. The elasticity that we anticipated was lower. Actually, the decrease in volume that we see in the quarter is not related to price increase. First, because we increased our volumes, we grew our volumes in the months of July and August, the 2 months following the price increase. The decline came in the months of September where we have very unfavorable weather plus the difficult comparison with the volume from Harvey recovery -- from Hurricane Harvey recovery last year. So this is the reason for the decline. It's not the prices. And the decline came also in categories that have not increased price. So the elasticity is low. The price was well executed with customers. And our share of value in the market continues to grow. So all in all, I think it was a very successful execution of price increase.
May I add something, Arturo?
Yes, please.
Just because -- just telling you about what is really happening on this margin. The margin in the U.S. and I just saw let's say, without the so-called agencies and those things which really does not have any real impact on that. So the margin decrease about 90 basis points. But just on comparable terms, just the Texas territories or in what we call Southwest, the original Southwest. The reduction is just 30 basis points. But because we put also Oklahoma there, which Oklahoma territories are having always lower margins, it seems to me that we are reducing, let's say, 90 basis points. But 60 are coming just because of the mix with the Oklahoma now, which that was not part of the business a year ago. So the reduction is really a net steady basis points. But the effect on the raw material was about 140 or 150 basis points. So it means that the net impact is in the level of, let's say, really if we should isolate that, we will be increasing in that proportion in margin. So we should understand that still there are many room to continue improving the processes and synergies. And it's already a clear program ahead of us. I am sure that Arturo will follow up that very closely with the U.S. team. So but -- which should separate the effect of Oklahoma and which should clarify that the raw material effect is about 150 basis points. So without that, you can imagine that the improvement in volume would be much better. And let me just give you a frame of what is happening in the raw materials. Really, the PET resin increased a lot. Really a lot in the last few months, and especially I'm talking about August, September, even October it's very, very high. And the reason is because there has been a huge increase also on the oil prices, which by the way, now changed already the trend and is coming down to a more reasonable level. So that will be an important impact of PET. But additionally, the raw materials of PET, especially paraxylene in the far east. There was not delay on some projects and some projects with some plants in the raw materials. And then that has been also temporarily affecting the margins, increasing the margins. So those commodities or those raw materials that really creates an impact on PET risk. Both things, and I would say, first, the oil prices which are coming down soon, already happening. And the reduction again to a more normal levels of such bubble in paraxylene margins created in the last few months will bring PET resin to a much more stable situation. And there will be an increase compared anyways with the last year. But not such an increase. So at this time if you compare the quarter -- or the last, let's say, months, compared with the months of the last year, it is about 25% or more price increase. So really, it's very high. So it will be an increase. But maybe in the level of 15%, something like that. So not 25%. So it will come back, and we foresee that in the next coming months. Probably we will start seeing that in November, December, and that will help a lot. So regarding the aluminum. I think that it was already explained by Arturo. But one thing we can say is that the USMCA or YMCA, I don't know how you can call it USEMA (sic) [ USMCA ] agreement is not more NAFTA, but it is -- definitely it will have to accelerate the process to really try to negotiate that, let's say, artificial impact on the NWP. So I think that with the signing of this agreements and elections and things that will come in the next coming months, it will have a better position to solve this issue, which is really a very important impact because 300 -- almost $300 per ton on that the effect is very, very high on the consumption of aluminum, which is really very -- it's a lot in the U.S. So we foresee that, that will be solved. Canada is a good supplier of U.S. and not only they are arguing that and I hope that this will find a good solution soon. Thanks to this agreement. Thank you for that opportunity to add comments. A lot of comments, actually.
Our next question comes from Lucas Ferreira with JPMorgan.
First of all, I'd like also to wish good luck to Arturo and Pancho in their new positions. And the first one is just try to summarize and to make sure I understood your discussion about the margins in the U.S. First of all, to talk about the Oklahoma mix, if you see that as you in the next couple of quarters pushing your average from margins down, and also in the cost side, if the price increases you're mentioning are enough in your view to already lead to some improvements in the margins in the next quarters. So in other words, can we say that this quarter, the third quarter was sort of at the low point of the year in terms of margins? Can we assume this because I'm seeing at least in the case of aluminum, I think it's probably yes, but in terms of oil and PET there might be some extra pressures when we see the average number on a quarterly basis. And finally, just on the synergies, you mentioned $32 million to be delivered this year. I had a smaller number in mind. So I was just wondering if the synergies are coming like faster than you were expecting and you're keeping the $90 million total 2-year synergy plan or if you see some upside to that $90 million number.
Thank you very much, really appreciate your comments. And really, also your question it's welcome. And I would like really, first, Arturo to intervene in this. And then after, it was to probably, Emilio, no? Please?
Yes. I can let Emilio explain in detail the margins on how the operation of Oklahoma impacts that. Relating just to the price, the impact in cost and the outlook for the remainder of the year. Certainly, it was very important to increase prices this off-cycle increase in July and we will continue to do that. The important thing here is that we've already started planning price increases for next year, and we maintained the goal of increasing prices above inflation. So that is one of the most important synergy programs that we have in the next few years. For the remainder of the year, we're still going to be seeing some margin pressures because this situation that Pancho explained about aluminum and PET might not be solved immediately. But certainly, we're going to see some pressures from the cost side. At the same time, we're working on our synergy program. And that is going to give us some additional benefits. The number that we mentioned -- that I mentioned about synergies, the $32 million is a cumulative number considering the project that we had implemented in 2017. We had approximately, I believe, $11 million in synergies last year that got us to the $320 million EBITDA level. On top of that, we have a number of projects where we have made great progress this year. And let me mention a few -- let me talk about, first about synergies that can be easily measured and tracked aside from revenue synergies that are sometimes harder to estimate. And most are savings but some revenue synergies are also easier to isolate like vending improvement, Topo Chico and the Mexican Coke expansion. We have a number of projects, I'm going to mention a few, lightweighting of bottles and that is going to give us savings of $500,000 year-to-date plus carryover. So all the synergy programs since they are not -- they don't come into effect at the beginning of the year. They all bring carryover effects. So if you consider the running rate, the yearly running rate benefit, it's higher than what we have achieved so far. I guess so far, we might have achieved about $13 million of those on top of the benefits from last year. And we're going to have some carryover effect, probably double of that in the months to come in 2019. Procurement savings, that's a significant one. Probably $3.5 million. Production line improvements, freight savings by installing a new can line. I mentioned that, it's about $1.2 million or $1.3 million savings in freight on a year-to-date basis. We're transitioning to plastic pallets in 3 of our plants. That's currently only about $200,000 because we just implemented that but it's going to turn into a close to $3 million a year synergy. The cost in converting aluminum that is separate from the aluminum cost itself. This is conversion costs with savings there of about $1.5 million. Then yields of CO2 at plants and improvements in our packaging and plants using monolayer labels. Those are the most important savings synergies that we have. Then we have the expansion of Topo Chico. I mentioned Topo Chico, how it's growing in the third quarter. That's going to bring us about $3 million in synergies in the year and with a carryover effect for next year as well. Vending operation, the same case. That's also probably on a yearly basis a $5 million synergy. And Mexican Coke, that's maybe smaller but still important and you can isolate the effect of that. Additionally, we have our go-to-market projects. Our execution, the point of sale what we call the fundamentals model. It's hard to estimate the benefit of those, and we're just rolling out those new commercial practices. So certainly, that's going to have a bigger impact in 2019, same as other OpEx projects that we're identifying. And then you have additionally revenue growth management. And this price increase if you calculate its effects above inflation, we actually just saw that in this third quarter. We don't have that benefit in the first half of the year. But certainly, we're going to see more of that in the remainder of the year. And obviously 2019 where we already have a plan to increase prices above inflation. So I hope that explanation is useful. I will just turn it over to Emilio, so that he can explain the effect of the margins from the Oklahoma...
I just want to mention, Arturo, that basically we conceptualized this in 3. Obviously, there are no concentrators specific product with the same information, but conceptually speaking, we have 3 baskets. One is the one that related to the very strategic place like the new plant that will be close to $30 million. And also in that same basket, the renegotiation of all the shared services from Tampa zone. So we think that both of them will be in the level, say, till $5 million or $36 million is already negotiated with Tampa. We have to follow all that, and certainly, the plant analysis is basically on cost and not an additional bit, let's say, in terms of save. It's just cost reduction. And we know where it's coming and what is happening and following what...
Let's talk about 2019.
So together, it's in the level of $35 million or in that, okay? The other basket is related to this multiple number of projects that was mentioned to Arturo. The change of pallets, the production of the slim can closer to the facility. Obviously, the CO2 reduction, the lighting of the weight of the bottles and producing the bottles in line lowering some cases, et cetera, et cetera. Many list of projects which is all of them, it could be $1 million, $2 million, $3 million each, but it's another basket of -- in the level of $30 million, and that level of $25 million, $30 million. And then the last basket is for those which are really the revenues. And in that case, we can talk about 3 companies. One is the Topo Chico, as was mentioned by Arturo. Its revenue stream and also Nostalgia also the vending machines, which we are really improving the margin and taking actions on that to make this profitable, which by the way, are thousands and thousands of vending machines there. It's an important area. That is part of the third basket for revenues. But the most critical of that is prices. Prices above inflation or at least inflation plus is likely and that is critical. But one important factor is that you also remember that beyond all the activity that we are going to do to improve the execution and product mix and so on. 1% of price increase, it represents about $20 million. So we have to be able through this time, and I'm sure that we've been opening this discussion very well with Coca-Cola and all the bottlers and being working together very closely to ensure that we are going to be able to move into that direction for the benefit not only our self but also our customers, and to make really a clear picture for the future. So if you put the 3 baskets together, definitely we have a specific information aspect-by-aspect, issue-by-issue and the names and so on. So we are following up and we are fully sure that we will achieve this anytime to clarify this process. Can you also tell a bit on the challenges? As I mentioned, I would like to ask Emilio to inform you about what is our perception of this.
Yes, regarding the mix that you asked us. As I mentioned, this quarter, we have 3 months of the Oklahoma operation in our results. And last year, we only had 1 month. As you know and as we have mentioned, Oklahoma has very low margin, below 10%. So that brings down our margins. So that's why we explained that the dilution of the 90 basis points that Pancho explained. 60% of those are because of the integration of 3 months of Oklahoma. Of course, we are on track with all the initiatives that we started implementing in the first territory that we acquired on April last year. Remember that Oklahoma was acquired in September. So we are also implementing all the initiatives in Oklahoma, so we expect really to improve the margins in Oklahoma. And then for the next quarter, we will be 100% comparable basis because we had full operation in Oklahoma for the next quarters.
Our next question comes from Juan Guzman with Scotiabank.
I have a very brief one here. We have seen an outstanding performance of your nonsugar portfolio in Peru with the launches of Coca-Cola Sin Azúcar and Inka Kola Sin Azúcar. So with like -- with that per se and if you can give us an idea how your low calorie or nonsugar portfolio as a percentage of the total sales mix is comparing now across all your geographies? And what can we expect for this levels in the future and also in terms of its impact on profitability?
Thank you very much, Juan. I highly appreciate your question. I think strategically speaking, it's a very important one. And we are -- it's part of our, let's say, key strategies that we have. And it all depends also in each market. And as you said, we should find that, Arturo. How is the mix today or how was the mix recently and how we are moving into what direction, which direction we are in the trends for the next coming years?
Yes. This is -- thank you, Juan. This is one of the most important strategies that we have as a company, as a system jointly with Coca-Cola. So we are -- this has become a very important indicator in each of our operations. And it has actually 3 segments: the no calorie, low calorie and regular drinks. So in each of the countries, we've evolved towards a larger mix of the noncalories. For example, in the case of Peru that you're mentioning we had 23% a year ago. We are up to 25.5% now. And that's in that the 0-calorie. In the mid-calorie, we were at 2% and now we are closer reaching 8%. So that gives you an idea of how this is a clear strategy to reduce the calorie footprint in our beverages. In other countries like in Argentina, we have actually a lower percentage but also we're moving in the same direction. We're about 18% in Argentina, and Ecuador is the highest. Ecuador, we've formulated a big part of our portfolio in the last couple of years. So in Ecuador, we are above 40% of 0 calories. In the case of Mexico, it's one of those markets where we have the biggest opportunity. In Mexico, our 0-calorie mix is around 14%, that is fairly stable and...
And with respect to our territory because in others, in the Oklahoma rate lower.
Might be lower.
So we are much more exposed to the proactive process in this place.
Right. And the mid-calorie is at around 5%. But with Coke without sugar in Mexico, that's been growing in the last few months. I think an increasing also availability in the market, this mix will no doubt continue to move into a higher mix of 0-calorie. And we're also reformulating many of our products not only in colas but in other of our categories in flavored drinks and even in juices and powdery. You start to see options with 0 calories for each of our drinks, which is very important for our strategy for the future. We're going to see more of that in years to come in every of our markets.
I think it's a very important part of our -- not only because of the issues of taxes and so on, but certainly it's a complicated matter because even we are not the ones that has the problem, because I mean, there are many factors for that kind of obesity issues. However, we are always, let's say, attacked and it's an issue. But beyond that, I think it's also a cost issue and it's a process that will help a lot. Arturo, I think if you go there, you can take advantage and just stay for a couple of minutes, mention that there's another important strategy, which is the affordability. We have had that in the past, but we are enforcing this with a new equipment that we are having to make it much more affordable for countries like, at this time, challenge is like Argentina. But in general, all Latin American countries returnables and with the new process that we have in place already moving very fast.
Yes, I think that's definitely one of the strengths of our system is that we have a flexible portfolio and we could move through different packages in our architecture. And when situation requires it, we have increased our mix of returnable presentations. The innovation has been in Peru now and we're going to do that in the rest of our markets is that we've had -- we launched a PET bottle that is returnable bottle that can be used for our different brands in the portfolio. Not only for Coca-Cola but also Fanta and Sprite and the different flavors. And we just relabel the bottle at our plants. That requires -- had required investment, which we already made. And this is going to be a very important to maintain affordability and profitability at the same time. So we've done that in Peru. It's mostly multi-serve bottles we've done in Peru. We're going to roll it out in the rest of our markets. And I think this is a -- as Pancho mentioned, a very, very important element in our strategy.
Thank you, Arturo. I think obviously there are several strategies. The critical one or the other one certainly is the still beverages, becoming much more full beverages -- flavored company and so on. But I think action size specifically in each strategy which much more beyond the synergies in the U.S. we have in the market. Thank you for that question.
Our next question comes from Álvaro García with BTG.
Pancho, congrats on your leadership and best of luck in your new role. My question is on, Arturo, your commentary on sort of already thinking about price increases for next year in the U.S., particularly sort of distinguishing between what you'd classify as a rate increase and a shift in mix. So when you think about price increases in the U.S. into like 2019, is this mainly a rate increase? Or are you thinking about really pushing your mix in a particular way to see that price increase?
Thank you, Alvaro, for your words about me. And I appreciate a lot. And I'd ask Arturo to answer your questions.
Yes. Thank you, Alvaro. Well, the changes in mix is something that comes natural -- naturally in the market as some of the categories that grow faster may have the higher price per case like in the case of Monster. Those kinds of categories. Now we're going to incorporate BodyArmor into a portfolio that's going to bring additional growth and it's always going to help in shifting that mix. But the way we approach this is we think about price in terms of rate. And this is one of the changes in the frame of mind that we introduce into our team in the U.S. We have to think first about rate in itself being in line or above inflation. And then mix could provide an additional benefit in terms of average price versus last year. But we cannot rely on mix to consider that we're going to be increasing prices above inflation. So that is the way we're approaching it. The prices for the system have to be negotiated as a system with The Coca-Cola Company and the rest of the bottlers for most of the market. And then in our local customers, we aligned to that price increase to maintain the coherency between the price in the large accounts and the rest of the customers. So we are in the process of defining that for 2019. But we are aiming and we're confident that we're going to have a similar situation as you've seen here in the second half of this year where price on a base rate is going to be in line or above inflation. What happened in 2018 is that inflation we estimated at the beginning of the year turned out to be lower than the real rate of inflation, as the U.S. economy evolved into a higher inflation environment. So for next year, we're taking that into consideration as well to make sure that our prices reflect that.
Well is that fine, Álvaro?
Yes. It's very clear. It's very clear on the rate increase.
At this time, I am showing no further questions in the queue. And I'd like to turn it back over to management for closing remarks.
Thanks to all of you, my friends, and for your support, advices and the honor of your friendship. And as always, we appreciate a lot your interest, your investment in our company and for joining us this morning. I wish you all the best and hope that our paths may cross again. Thank you, and God bless you. Thank you.
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.