Arca Continental SAB de CV
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Arca Continental SAB de CV
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Good day, everyone, and welcome to the Arca Continental conference call. [Operator Instructions] Please note that this call is being recorded. [Operator Instructions] For opening remarks and introductions, I would like to turn it over to Melanie Carpenter of i-advize Corporate Communications. Please go ahead.
Thanks, Jennifer. Good morning, everyone, and thank you for joining the senior management team of Arca Continental to review the results for the fourth quarter and full year of 2017.
The earnings release went out this morning, and it's available on the website at arcacontal.com. This call is also being transmitted via webcast and you can access the replay.
It's my pleasure to introduce our speakers joining us from Monterrey, our Chief Executive Officer, Mr. Francisco Garza Egloff; also the Deputy CEO, Mr. Arturo Gutierrez; Chief Financial Officer, Mr. Emilio Marcos; as well as the Investor Relations team. They will be including some forward-looking comments today, so we ask that you please refer to the disclaimer in the earning release for the conditions surrounding these statements. And I will now turn the call over to Arca Continental's CEO to begin the presentation. So please go ahead, Pancho.
Well, thank you, Melanie, and good morning, everyone. At this point last year, we knew that 2017 would be a landmark year for Arca Continental. Without a doubt, it turned out to be a transformational year, thanks to the transaction with The Coca-Cola Company to acquire the territories in the U.S. Southwest region, which significantly increased our scale and value creation potential. Nonetheless, last year was not only about scale and geographic expansion. We also made significant progress in innovation of our portfolio with the acquisition of AdeS, a leading soy-based beverage brand jointly with The Coca-Cola Company and our bottler peers in Latin America. [ AdeS regard ] will play an important role to rapidly leverage our strong market capabilities in Mexico and Argentina to capture significant market share in this important category.
We are also driving innovation in the sparkling category, particularly in the non-calorie segment with Coca-Cola no sugar in Latin America and Coke Zero Sugar in the U.S. We are reinvigorating this segment with a non-calorie renovated formula that tastes even more like the original Coca-Cola. We have achieved excellent results in the market through this new launch. Continuing with the innovation efforts, we also relaunched Diet Coke in our U.S. territories recently as part of the campaign to re-energize and modernize Diet Coke with an updated look, sleek new packaging and the debut of 4 bold new flavors.
In another significant milestone in line with our strategy to create new avenues for growth, we completed the transfer of brand rights of Topo Chico mineral water in the U.S. to The Coca-Cola Company. This transaction further accelerates the expansion of the iconic brand in our market in Texas and Oklahoma while The Coca-Cola Company carry this out throughout the U.S., extending its reach and preserving its 122-year heritage.
In the Snacks division, we recently completed the acquisition of Deep River, again, to broaden the diversification with innovated products and differentiated segments in the premium better-for-you snack industry. And we continue gaining scale and developing a platform for growth in this business.
As I already mentioned, last year, we indicated our efforts to aggressively expand geographically, but in a logical way, and at the same time, develop new avenues for growth and innovation in our portfolio. But in addition, to reinforce even more our innovation and future, we have actively worked to establish a new Web-enabled point-of-sale digital platform providing connectivity with large mom-and-pop customers in Mexico. We are collaborating closely with these customers to improve their performance and outlook, helping them improve store traffic, increase inventory turnover and capture additional income from e-payments while allowing us with online sales information of our categories as well as other consumer products within their stores. These capabilities, combined with our state-of-the-art data and analytic tools, enable us to create more value today and in the future. This model will be expanded in Mexico rapidly and can be easily replicated across our territories in Latin America. In summary, throughout 2017, we have been solidifying the foundation to stand out in the markets in which we compete. Our culture and philosophy, always oriented to the market and competitiveness, combined with the talent and dedication of our people, will provide us with a strong framework for 2018 and beyond.
Moving now to our consolidated results. Let me start by saying that we are pleased with the results reported today. Thanks to our discipline and innovation in market execution as well as passion of every member of the Arca Continental team to better serve every day our customers and consumers, we were able to, once again, double our revenues in 5 years by third consecutive time in a profitable and sustainable manner. We remarked that this goal has been achieved without the effects of the 2 operations acquired last year in the U.S. When we add their results, I mean, U.S. new operations, it brings our total revenues for 2017 to a record level of over MXN 137 billion, an increase of 46% when compared to the previous year. Total consolidated volume grew 20% for the full year to 2.1 billion unit cases. We led industry growth and consolidated our market leadership, thanks to the integration of the new territories in the U.S., targeted market investments, as well as innovation in our core portfolio. Despite the global macroeconomic challenges and impacts of major natural disasters in Texas and Peru, our team's commitment and professionalism helped us achieve, once again, another exceptional year of positive financial and operating results. In terms of profitability, our consolidated EBITDA rose 29% for the year, reaching MXN 26 billion, representing a margin of 19%. In addition to the strategies and actions in the market and portfolio previously mentioned, our initiatives to increase operational efficiency and maintain a stricter control over cost and expenses have always been part of our DNA, placing us in a strong position to face the prevailing business landscape and capture more opportunities. With that, I will hand the call over to Arturo who will provide you with a more detailed outlook of our operating performance. Please, Arturo, if you are so kind.
Thank you, Pancho, and good morning, everyone. Let me expand on the results across our geographies. I will begin with Mexico, where we continue to demonstrate the resilience of our beverage business. We delivered yet another quarter of total volume growth of 1.2%, cycling a strong 5.4% from the fourth quarter in 2016, and 7.3% in the same quarter in 2015. This confirms the sequential improvement of volume performance throughout the last 2.5 years. For the full year, total volume growth was up 2.6%, maintaining the positive momentum. Once again, we further strengthened our leadership position as we gained both volume and value share in the quarter, driven by growth in bottled water with 9.8%, and 6.3% in still beverages. Jug water volume posted 1.8% growth, confirming our position as the leading brand in our territories.
Total net revenues in Mexico rose 5.5% in the quarter and 9.6% for the full year to reach MXN 58.5 billion. The average price per case in Mexico, not including jug water, rose 4.4%, reaching MXN 54.8 as we continued perfecting execution at the point-of-sale and refining our commercial model, ACT.
EBITDA declined 4.3% in the quarter and increased 2.1% for the full year to MXN 13.1 billion, representing a margin of 22.4%, a contraction of 170 basis points due to increases in fuel costs and key inputs, particularly sugar. Moreover, we are capitalizing on the enhanced capabilities of our ACT commercial model currently being rolled out. We are incorporating new service models as part of the route-to-market methodology, looking to maximize customer service while optimizing cost to serve. Among the highlights of the quarter, we launched the AdeS beverages portfolio in Mexico, providing our consumers with a wider range of choices in this category. In addition, Santa Clara Dairy grew double-digit, particularly in flavored milk, leveraging our strengths in the traditional and at-home channels. Furthermore, Coca-Cola without sugar continued delivering outstanding results, with double-digit volume growth in the quarter.
Moving now to our beverage business in South America. Total volume in the fourth quarter was down 1.4%, driven by a volume decline in Peru, which was partially offset by growth in Argentina and Ecuador. Total volume for South America dropped 1.7% for the full year to 663 billion unit cases as we continued making sequential progress across the region despite the volatile macroeconomic environment.
Total revenues increased 0.5% in the quarter and 8.4% for the full year, reaching MXN 39.6 billion. EBITDA declined 2.2% in the quarter and rose 10.4% for the full year to MXN 7.7 billion, representing a margin of 19.4%, an expansion of 36 basis points. We are confident that the revenue growth initiatives we have launched in these markets, supported by the strong rollout of Coca-Cola without sugar and AdeS as well as product innovation and reformulation, will enable us to sustain value share growth while expanding overall profitability.
In Argentina, volume in the fourth quarter grew 2.7%, confirming the sequential recovery from previous quarters. The rollout of our commercial model, ACT, and the disciplined implementation of our price-pack channel strategy drove these positive results. We're also committed to continue promoting affordability of the products by expanding the mix of returnable presentations. We were able to revert the negative trend in still beverages, driven by growth in ready-to-drink juice, flavored water and bottled water categories. Importantly, we're now fully realizing the benefits of the vertical integration thanks to our cane sugar mill. We consumed more than 12,000 tons of our own sugar this quarter, resulting in an overall 4% reduction in cost of this key input.
Moving over to Ecuador. Our beverage business posted a solid 3.6% volume growth during the fourth quarter, confirming the steady recovery despite the prevailing economic slowdown. Once again, Coca-Cola brand posted solid volume growth in the quarter, up 6.8% thanks to affordability of the new Coca-Cola without sugar. Tonicorp, our value-added dairy business in Ecuador, jointly owned with The Coca-Cola Company, posted low single-digit sales decline in the quarter and was flat for the full year. We're driving growth profitability and market share gains by focusing on our core categories: yogurt, flavored milk and ice cream. We continued strengthening execution at the point of sale, supported by key capabilities of our global commercial model, ACT, namely RGM and go-to-market models. Tonicorp continued consolidating its market leadership, driven by product innovation. This quarter, we launched new products in the yogurt, oatmeal and ice cream categories with great results: spoonable yogurt with cereal, traditional drinkable oatmeal and new flavors of ice cream.
Our beverage business in Peru posted a 5.5% volume decline in the fourth quarter and 1% drop for the full year. Total revenues increased 3.7% in the fourth quarter and 12.5% for the full year, driven by growth in the sparkling category. We continued promoting immediate consumption in the low or 0 calorie category with an affordable pricing strategy. Also in the quarter, we launched Fuze Tea Peru, expanding our portfolio of still beverages and making our entrance in the tea category in this country. We continued sequentially improving overall profitability despite economic weakness and weather-related events that affected consumption. We are confident that the economy should pick up steam in 2018 as rising wages and employment gains are expected to spur household spending while the recovering commodity prices and the ramp-up in infrastructure spending will underpin fixed investments.
Moving on to our beverage operation in the United States. Coca-Cola Southwest continued to deliver solid revenue growth for its third consecutive quarter. Since the beginning of the transition, we have focused on standing out the new organization, integrating new IT systems, investing in infrastructure, and most importantly, promoting a customer-centric strategy. Fourth quarter organic revenue increased 4.3% to 653 million, with a total volume of 111 million unit cases, up 1.3% from the previous year. These figures include the results for the Oklahoma territory. This positive performance allowed us to grow volume and value share in NARTD, driven by growth in the sparkling category. Stills category also posted value share gain supported by strong growth in energy, sports tea and juice categories. We successfully launched our fundamental scorecard across the entire organization and completed training and certification of more than 2,000 frontline associates to align metrics to our 3 major channels. Since the launch, we have reduced out-of-stock levels and significantly improved our market execution scores. In 2017, we continue to grow our customer value proposition by increasing active users of our B2B platform, myCoke.com, by 27%. We processed and dispatched over 100,000 orders through myCoke.com, a 16.3% growth versus previous year. Finally, last month, we began distributing Topo Chico mineral water on the red truck in Texas. Our retail strategies focused on large and convenience stores to reach new consumers while protecting the existing base. During the fourth quarter, we began integrating our Oklahoma market unit, formerly Great Plains Coca-Cola Bottling Company. We will deploy a new operating model, looking to utilize our production capacity more effectively as well as a broader reorganization of functions. As these operational changes are rolled out, our team also remains focused on the successful IT migration to the SAP platform.
I will now report on the progress of our synergy plans. I'm delighted to report that we met all of our 2017 goals. In the last 2 quarters, we captured the first benefits of the in-line blow molding initiative, achieved several operational efficiencies and leveraged procurement negotiations in key inputs. Importantly, now with the integration of the new Coke Oklahoma territory, we are using our synergy -- we are updating our synergy target from the original goal of USD 60 million to USD 80 million dollars to $90 million within a 3-year period. We continue building more plans for short and midrange synergies. We are also identifying continuous improvement projects across the company around raw materials, packaging, sales, supply chain, and transportation and administrative processes. We will continue to act upon revenue expanding alternatives in our revenue growth management and go-to-market processes by replicating successful commercial practices from Market Continental.
To conclude with a review of our operations, let's move now to the Food and Snacks division, consisting of Bokados in Mexico, Wise and Deep River in the U.S. and Inalecsa in Ecuador. Bokados continued building its growth momentum, posting sequential mid-single-digit sales increases in the quarter and the full year, driven by exceptional growth in supermarket and convenient store segments and expanded product coverage. Bokados drove sales growth by capitalizing on key tie-in opportunities with Coca-Cola to offer attractive cross-promotions in the traditional and modern trade channels. Our new plant in Queretaro is 100% operational, with 4 production line supporting growth in key snack categories such as extruded snacks, corn chips, tortilla chip and marzipan. Wise snacks posted single-digit sales decline in the fourth quarter and the full year, facing a challenging year characterized by retail volatility and overall category pressure from aggressive promotional activity. Our cheese puffs, popcorn and variety pack categories continued to grow, while the potato chip category remains flat. Wise continued expanding distribution of Sà Señor snacks in the Chicago area and in New Mexico, capturing additional market share in the Hispanic community sector.
As Pancho mentioned, last November, we completed the acquisition of Deep River snacks, a leading company in the premium better-for-you snacks based in Connecticut. Deep River's snacks rounds out our portfolio to capture both the conventional and growing better-for-you segment. We're rapidly integrating this operation, leveraging our existing production facilities in Pennsylvania and Texas. Inalecsa posted mid-single-digit sales increases in the quarter and the full year. We continued innovating our product portfolio with the launch of new cookie products. Moreover, we are moving forward with cross-fertilization of the snack portfolio across all of our operations. We successfully launched [indiscernible] extruded chips in Ecuador, which is one of our most successful brands in Mexico.
I will now turn it over to Emilio to give you further details in our financial performance. Please, Emilio?
Thank you, Arturo, and good morning, everyone. We appreciate your interest in our year-end company results. Excluding the integration of Coca-Cola Southwest beverages in the U.S., we reported good results for 2017 despite the challenges we faced in the country where we operate. While in Mexico, we maintained a solid top line due to an adequate pricing strategy, but in other ways, execution, the profitability was impacted by higher raw material prices along the year. In South America, it was the other way around, as the top line suffered due to a slow consumption trend while the profitability was expanded mainly by the company's capability to optimize cost and a G&A structure.
Now talking about the consolidated revenues. They increased 53% in the fourth quarter. The U.S. region contributed with MXN 13.3 billion while Mexico region increased 5.5%, mainly due to a price mix increase of 4.4% in the beverage business. In 2017, revenues grew 46.4%, with Mexico and South America posting 9.6% and 8.4% growth, respectively. Comparable currency-neutral and without the U.S. operation, we had a good performance where net revenue increased 6.7% in the quarter and 9.1% in the year. In the fourth quarter, we reported a gross margin of 45.2% versus 46.6% in the same period of 2016, which is down 140 basis points, mainly due to the integration of the Coca-Cola Southwest Beverages, which caused 110 basis points of the impact, and the remaining 30 basis points were mostly from the 30% sugar price increase in Mexico.
In the fourth quarter, the consolidated EBITDA rose to MXN 6.8 billion, increasing 31.6% for a margin of 17.8%. The dilution year-over-year is explained by the continuous margin effect, combined with higher selling expenses, driven by fuel prices increase. In 2017, EBITDA went up 21.4% to MXN 26 billion for a margin of 19%. On a currency neutral comparable basis and excluding Coca-Cola Southwest, the EBITDA was slightly below than the same quarter of last year and 4.2% above for the full year.
In terms of the comprehensive cost of financing, our dollar cash position and the Mexican peso devaluation in the fourth quarter resulted in an exchange rate gain, reaching an income of MXN 237 million from an expense of MXN 603 million in the same period of last year. For the full year, the expense increased only 2.9% to MXN 2.5 billion. In December, we announced the successful issuance of our first private placement debt offering by Coca-Cola Southwest beverages for $800 million. We have received $600 million on December 2017. I will get the additional $200 million next March. This proceeds -- the proceeds have been used to refinance debt in U.S. beverage operations in U.S. Half of the total debt matures in December 2029, accruing interest at a fixed rate of 3.49%, while the rest in December 2032 accruing interest at a fixed rate of 3.64%. This issuance reached the lowest spreads in the public and private capital market for any Mexican corporate in the U.S. in the 12- and 15-year tranches.
In the quarter, due to the fiscal reform in the U.S., we booked a onetime noncash benefit resulting an effective tax rate of minus 10.5% and a positive amount of MXN 551 million as an income tax provision. For the full year, income taxes decreased 24% to MXN 3.3 billion. Effective tax rate for 2017 was 16.3%. Because of this adjustment, net income increased 121% in the quarter and 45% in the year. Comparable net income increased 14.2% in the quarter and 22.2% for the full year. As of December, our balance sheet reflected a cash position of MXN 23.8 billion, a total debt of MXN 55 billion for a net debt-to-EBITDA coverage ratio of 1.2x. In 2017, our operating cash flow reached MXN 22 billion, showing the company's ability to generate a good level of cash influx. The total CapEx investment for the year were MXN 11.2 billion, mainly production capabilities for Mexico and U.S. as well as distribution investments in Mexico and Peru.
This year, we will continue to focus on what we know best, innovating in the market to meet the needs of our customers and consumers while at the same time, delivering profitability to our shareholders despite the expected economic volatility from the political events in the different countries where we operate. 2018 will also be key to completing the integration of the production and commercial process initiatives at Coca-Cola Southwest Beverages. To keep up, we are planning to achieve an amount of synergies close to $90 million in the next 3 years. And with that, I'll turn it back to Pancho.
Thank you, Emilio. Now let me give you our guidance for 2018. We expect a consolidated annual volume growth of around 2%, and with selective price adjustments to at least reflect inflation in the countries where we operate. Anyways, we will ensure that our products are affordable and competitive through our flexible price packaging computation. We plan to invest 6% to 7% of total sales in CapEx. We will pursue prudent and targeted market investments to boost execution, information technology and digital innovation, coupled with a strategic [ price ] to upgrade our production facility and [ releases ] capabilities, mainly in the U.S.
Looking ahead, we expect a favorable commodity environment. Sugar prices in Mexico should stabilize and start a downward trend throughout the year, given a global and domestic oversupply. Our strategic investments in sugar mills in Mexico and Argentina will provide us with more flexibility, and very importantly, more competitiveness. Furthermore, we locked our fructose supply for 2018 for Mexico and our sugar needs for Peru at very competitive prices. In addition, the foreign exchange rate of our U.S.-dollar-denominated raw materials in Mexico is already hedged at reasonable levels for most of this year and lower than previous -- at a lower level than previous year. Also, this year, we are implementing a hedging program to mitigate aluminum market fluctuation, which is a key input in our U.S. operations. Prices for PET resin and other plastic packaging materials are expected to remain constant in dollar terms due to steady oil prices. We have already secured our supply and locked in price formulas for the year at very competitive rates. Moreover, in 2018, we will provide full support to Coca-Cola's World Without Waste global initiative by leveraging our recycling investments and alliances. In Ecuador and Peru, respectively, as well as PetStar in Mexico, the world's largest recycling plant of food-grade PET. We aim to raise the ambitious goal of collecting and recycling one PET bottle for each one we sell by 2030.
In closing, I would like to reiterate that our solid market and financial position, our expanded geographical presence in the Americas, of course, our strong portfolio and even more importantly, our stern commitment to serve our customers and consumers with excellence, with great pride that we have. Those are the pillars for our profitable growth in 2018 and the years to come.
Thank you for continuous support and confidence, and I would like to open the call for questions. Operator, we are ready to proceed with the questions, please.
[Operator Instructions] Our first question comes from Lauren Torres with UBS.
My question is somewhat more strategic in nature. And Pancho, we've seen you readily hit and/or exceed this 5-year target of doubling revenues. And I believe it's in place again for 2022 to do it again. So can you just talk a little bit about the dynamics of reaching that target? I think you have a few very strong years behind you, particularly in Mexico and then now the integration of the U.S. How do we think about this going forward? I think Mexico may get a bit tougher, at least that's the inclination right now. Peru is a bit challenging, as is Ecuador. So could you give us some sense of the [ uptight ] here whether it's from a country standpoint or a product standpoint? Is there more inorganic growth to expect? How do we get to this target? And like I said, more of a strategic-related question.
It's really my great pleasure to talk with you. Well, it's a very strategical question, as you mentioned. When we said in the year 2012 that we were doubling and targeting doubling the sales in a profitable manner, sustainable, we were at the level of MXN 50 billion. And then what we mentioned in this report is that in last year -- I mean, after 5 years of that goal, we've reached that level. In fact, we surpassed that level in the level of MXN 103 billion, even without the operations in the U.S. or the recent transactions in the U.S. Because obviously, they were not originally considered. We were targeting other areas as well as organic growth through that past 5 years. So when we announced again to double the size for the year 2022, we are talking, I mean, it's again compared with 2017, we are having as a basis, let's say, something around MXN 103 billion. So for sure, we are going to be above that doubling. Because if you multiply it by 2, then that will give you MXN 206 billion. So it's certainly, we feel comfortable that we will, obviously, will move even at a better level than that because just with the U.S. transaction, our budget today is really half of that way or more. So if you check the numbers, I mean, of the -- including the operations of U.S. is 137 billion, it's just 3/4 of the year in the U.S. So we put everything there and the growth that we are going to have this year and so on, et cetera, et cetera, and we divulge it, it's a very interesting number. Obviously, not operating the MXN 206 billion or MXN 210 billion, but it's really an important step to moving to that direction. So if we have, let's say, already more than half of that way with the U.S. transaction, it means that we feel very comfortable that we will be even above the MXN 206 billion, which is the double of 2017, just considering the 103, which is the number billion pesos, which is the number without the U.S. transaction. That is very important. Second one, definitely, we have created, let's say, the basis to continue growing with innovation, as we mentioned in several areas at the beginning of my speech, with new categories. Obviously, we will continue reinforcing Coca-Cola. This is our basis, our nature. But certainly, new categories like the soybeans, soymilk and those things, which are coming, and hopefully, that will give us a good platform. But additionally, to new categories or new avenues for growth in the U.S., which we had established already strategic plan to reinvigorate the growth there. There will be other areas like the way of executing better through our digital platform, so with the connectivity with the customers. So in that regard, I mean, we hope that we can establish a really much better structure to even improve even more, even, let's say, in a very, let's say, accurate way of minimizing any stock out or optimizing the portfolio and so on and so forth. So all the initiatives and innovation in growth portfolio as well as in digital platforms, definitely, it's another strong path for our organic growth as well as the new opportunities we have in the U.S., which shows we are just starting there and working hard with the team there with many opportunities to increase the business. And -- but in addition to that, we have more areas for growth, which are really the possibility of inorganic or acquisitions or M&As. We continue working on that. And I would want to mention that this year, we are already focused on consolidating what we have done and focused more on really synergies in the U.S. as well as reinvigorated volume in certain markets. And we hope that we can achieve very well these actions in this year. So we can move through the end of the year and beginning of next one into new possibilities of continue working hard on the M&A activity, of course in the area of our core business, which is the beverage area with Coca-Cola as well as with the new leg we are now, let's say, forming, establishing in the food and snack divisions. But I will do everything to create value and taking care of the way we are acquiring synergies and the multiples that should be achievable and workable to do that.
So those are the 3 basic areas, let's say. Summarizing, first, is we add to the MXN 103 billion of the 2017 without the U.S. territory. We add the U.S. territories and we give us more than half of this way. Second one, the new portfolios as well as strengthening our, really, all execution capabilities, including digital platforms, which will really reinforce and renew all the capabilities with a much more accurate information and model that will help us a lot to continue improving not only in Mexico but in other territories. And third one, having a good [indiscernible] and good position with Coca-Cola, certainly, with a close relationship with them and a great talent inside and capabilities, the third action will be through the year-end and the years to come. Continue moving into the inorganic growth through M&A activity in the areas which make sense to create value within our beverage, let's say, core business. But also now starting to develop the food and snack business division, which we recently created. Those are the 3 targets that we have. So certainly we foresee that we will have not only doubling the number of 2017 without the U.S. territories, but even more than that, because with these strategies and actions, we will have the possibility to surpass and have a better future there.
Our next question comes from Carlos Laboy with HSBC.
Pancho, you and Arturo have spoken clearly about the 2 top priorities of creating an intense service culture and of broadening the price-pack offering, the segmentation side. But I was hoping that this morning you could also elaborate on supply chain upgrades. And we see, for example, low or no availability of this new Diet Coke in some U.S. markets. And I was wondering what's been your experience with this first major new relaunch? And what does it inform you about what you need to do going forward in your territories and supply chain issues for doing really well with these types of launches, since innovation's an important part of the growth, as you've mentioned?
Well, Carlos, thank you very much, first of all, to asking this question. It's right, we're at the end. I mean, it's supply chain and all the infrastructure is very important. And it's -- well, before answering that, and again, thank you for all your support and your advices. Going to the answer, in this certainly, before talking specifically on new Diet Coke issues and so on, in our synergy plan that we have established, very clear, together with all the team that we have there, the hard synergies are -- refer to basically supply chain system, and it's really important to work in that direction. And there are several areas in which we are working them. First, we have to work on reducing the weight of the PET bottles. As we have mentioned before, it's a challenge, because it's a system and so on. But I hope that we can have the support from our friends in the U.S. Coca-Cola bottling system and Coca-Cola to move forward soon in that regard. There will be probably 2 steps. I mean, it's not only one step, because one area it's just the adequation of the packaging MOs. And another area will be related to, let's say, a system that assures the price, the turnover of the inventory and the market point of sale. But we hope that we can raise it. I'm talking about an important savings shift, we move into LatAm and [ push only]. I am not [ lacking ] anything else, and beyond what we have already in Mexico. In the north of Mexico, where the temperature is -- you know how we have the summer here now, so there will be no problem to move into that direction in the U.S. So the second one is -- and that doesn't require too much investment, by the way. The second one is the area of, the old area for in-line blowing. I mean, I hate really the freight of empty bottles all around the system. And obviously, we had to justify the economics. But certainly, there are a lot of movement of empty bottles from a centralized area to some distant areas. And we are now investing -- we started investing last year in the, let's say, in in-line moving line. I mean, ergo the machines which really we have blowing and bottling in the same machine, basically, which is a new technology in San Antonio and New Orleans. But we are now moving into other areas in, let's say, Fort Worth and maybe soon in the Houston area and so on. And we think that there will be also further improvements. Same with the sleek can, and -- which we import from [indiscernible] and we bring from far away bottlers. So the freight of, let's say, of products and the especially empty bottles should be diminished. We're having to invest and to arrange that, but it's an important area and will, by the way, give us more flexibility, because we will have the blowing machines there, in-line in an [indiscernible] machine, which is the one that blows and at the same time bottles. Or separate to the line but in blown anyways, at the plant, will give us more control so we can manage the, let's say the way of developing more packaging at a better rate and a better cost, and certainly faster than the centralized process. So there will be other benefits which are not only based on the freights and saving freight. There will be benefits of being more, let's say, agile in this process. So if we move further, I mean not only PET bottles but cans and those, we have a tremendous opportunity. The same with cardboard, the same with other things or filling, things which certainly will bring more savings. And if we move further, we can talk about, certainly, the area of logistics and where we have to have the distribution centers and plants, in which we will have already a plan of synergizing some of the infrastructure there to assure that we have a better cost in -- to serve. And to move into specific question on the Diet Coke issue and how that is performing and what we have been doing, I will ask Arturo to add further information in that regard. Please, Arturo?
Sure. Carlos, from the Diet Coke perspective, first, the market. Just a few weeks after the launch, we're performing really well. We've increased our volume more than 5% versus previous year. And that represents a significant swing in this particular brand that you know is not performing very well in the past. So we are satisfied there. We are also above our plan in placement of displays, getting more customer space. So the flavors are doing great. Cherry, particularly, is performing really well in our markets. From a supply chain point of view, we know when we came into the U.S. that this is a much more integrated system and that it requires a lot of collaboration among all the parties. We certainly need to improve there in that integration. And this is really a new system, although it's been in place for some time. But for now we don't have CCR on the table, as you and I have discussed. So this is a different conversation. And we believe it is a system that is well designed, but it is complex. And we need to work to improve our supply chain operation there and lead that conversation. The advantage that we have in Texas and in many other instances is that Texas is fairly autonomous, from a supply chain point of view. So that's why many of the initiatives that Pancho has mentioned could be carried out on our own, independently of things that we need to collaborate with the system.
That's very important, I mean, it's Texas, well of course, Oklahoma and [ L.A. earlier ] that we had there, but Texas is the ninth or tenth largest economy in the world, so it's past searching off to, to start moving in that direction. And I mentioned also other areas of opportunity. It's amazing, but just exchanging practices in the supply chain, for how we manage the water or CO2 or the gas that we use, the carbon dioxide that we use, it's amazing that we find opportunities in both sides. So we found that the area of opportunities, it's important and we will follow up not only because of the cost and savings, but also to have, up to certain extent, more flexibility, understanding that there is a system there. But thanks to the size and thanks to our proximity to Mexico, probably we are going to make some extension of products and lines, which will make the life easier in that regard, to move forward and more agile into the market there, Carlos. Because to a certain extent, it's a, let's say, connected to the, what we have to do in savings and improvement in the infrastructure and operations. I mean, we cannot just stock out the market if we don't assure that the line of systems, to assure that this can be done in the right manner. You are right in that.
Our next question comes from Alex Robarts with Citigroup.
I wanted to stay in the U.S. as well and have, I guess, a 3-part question, sorry. The first thing is, the increase in the guidance outlook, it's interesting. Just taking your -- the midpoint of your old range, going up to the $90 million, that's a 25% increase. And I guess it'd be interesting to hear what's giving you this incremental confidence. It sounds like, as you just stated, a lot of the synergy captures around the supply chain. But could this higher estimate be reflective of things that you're seeing on the revenue side or on the OpEx? So that's the first part. Secondly, it's helpful that you give us the volume increase for the United States. And I guess, just doing the math, it looks like your average selling price is up 300 basis points, which is a hefty number. Is that -- is it fair to say that what's driving this revenue per case is on the packaging side? Or could it be also reflective of channel mix or actually just portfolio? And finally, the third piece, just to round it out, any thoughts around the go-to-market implications from the Dr. Pepper, Snapple and Keurig business? I know you guys do the distribution for DPS in several Texas markets, so any thoughts around that would be helpful.
Alex, well, just let me answer the first one, and I will pass then, the other 2 to Arturo. Just to mention that the last time that we had just -- so let's say, at the beginning we were staying in that range from $60 million to $80 million. Now we feel more comfortable to the $80 million, definitely. And certainly, we have Oklahoma. So we are now in the [ night ], okay? So the number is, let's say, that we have mentioned, was a range, originally. Then we mentioned just last quarter, that we feel comfortable with the upper side of that range, which is $80 million. And we add the Oklahoma synergies, and then we have the total of USD 90 million of synergies within the frame of 3 years. So we will have a clear -- we have a clear program on that. We have the name and the last name of who is responsible of that, leading this process, and what do we need to do to achieve that goals. And then, so the improvement is that, more than an improvement is we certify that the upper limit, it's clearly achievable. And we add the Oklahoma numbers to that. And if we have Oklahoma, we'll talk more about hard synergies, because it's a very close territory. And it means that we have, let's say, much more synergies in the areas of cost. And certainly, we will continue with the synergies in the area of sales and [indiscernible]. But let's say, being so close to our territories in the Texas area makes really much more clear that the synergies in Oklahoma will be more related to the cost [ in our ] synergies. So that's just a general figure on that, and I will pass now to Arturo, so he can mention what are the types on the [indiscernible].
Sure. Alex, with respect to synergies, just to mention that we try to be very rigorous in our follow-up on our synergy plans. So we classify the synergies with respect to how mature the projects are. And as we continue to analyze the projects, we can -- we narrow the range of possibilities and that certainly, been more optimistic as we go on. And we have both, the savings synergies, which include a number of projects, improvement to production lines, yields in our plants, carbon dioxide and energy consumption, optimizing and secondary packaging, using more of the shrink wrap instead of the plastic trays, reduction of freight -- in freight cost, Pancho already mentioned that, in-line blowing and then one additional plant. Synergies from procurement in key categories. And we continue to identify those projects. And on the revenue side, we also have a number of projects replicating basically and adapting our commercial practices from Arca Continental to the U.S. The recent deployment of the commercial ACT model in Coca-Cola Southwest and better execution on the point of sale, and specific projects and vending operations and service models for the on-premise channel and expansion of Topo Chico, development of stills categories, et cetera. So we're getting better also on estimating the benefits that we'll get from those synergies.
So moving on to the second part of your question is that, we -- during the fourth quarter, we had an increase in the volume of 1.4% versus previous year and 4.4% in revenue. What we had is a price that continued to increase to a total rate of 3%. That would get -- got us in the whole year to 2.9%. And that increase is basically part to rate increase in prices and price improvement and mix. I would say it's about half and half. So it's like 1.5% and 1.5%. And we have a more strategic approach to price package management that allowed us to increase prices. And at the same time, continue gaining share, because it's also important to mention that we continue to gain share in the market. So where does that growth comes from? We promoted the 12-ounce can package in large store customers. That grew 4.3% in volume. In the on-premise channel, we also redefined some routing processes and installing segmentation practices and -- to increase some customer visits. In small stores we grew as well, driven by Monster Cans and 20-ounce, which is a very important package there. So we're growing in different channels and through different strategies. And we plan to continue to do that throughout 2018. Very importantly, what we've done in the U.S. is -- one important milestone is the launching of the fundamentals culture that you are familiar with, and we have in Mexico and the rest of Latin America. We train our frontline associates. And we have reduced our stocks in our customers. So we continue to do that in 2018. And we started to track our basic metrics in 3 segments: large stores, small stores and on the on-premise market. So we expect a lot from that initiative over the year. And finally, on your last part. We don't believe at this point that the acquisition of Dr. Pepper will affect our licensing agreement. We actually had a meeting with them. We have -- we had a long-standing relationship. We just signed an agreement, a long-term agreement, 25-year agreement, with them. And -- but more than the agreement, I think what's important here that it is a - is that it is a win-win relationship. We know that these brands combined are winning in the market, and it's in a marketplace where we operate in Texas. So I think it makes total sense to be partners in that market.
Yes. So we are combining the #1 and #2 brands there. We're clear. So it makes a lot of sense. So however, I mean, we feel very well connected with them and both relationships will ensure that this business will continue for the future. Thank you, Arturo, and I hope that you had enough information. I also will add that really this situation of prices in the U.S., it is very important for us, for everyone, I will say, not only for us. So we are working now in investing in a new tool for what we call the profit seeker and other, let's say, RGN tools to really make the deep analysis on this as well as the new packages to ring. All the negotiation in the U.S, they are well in advance this year. So what we are working now to have, through the end of this year and over the next year, 2019, a much better, let's say, lever, in terms of prices. I think price is key. Over a very well-managed price-pack architecture, the price at the end is key. And know -- we know very well, 1% of price, multiply it by 2.795 billion, it's really 25 billion, which certainly can change even more the basis of our synergy plan. Thank you very much for your question. It's very important.
Our next question comes from Antonio Gonzalez with Credit Suisse.
I had a quick one and I wanted to shift gears to South America. I'm seeing the margins are becoming individually, in each of the countries: Peru, Argentina and Ecuador. And I noticed that your individual margin in Peru actually improved, whereas in Ecuador and Argentina, it declined. And I found out that it'll be counterintuitive, obviously because volumes in Argentina and Ecuador are improving already. And not only volumes are weak in Peru, but also you're going through this process of increasing direct distribution. And so I wanted to hear, I guess, your qualitative comments on how do you see profitability in these markets progressing. And is there any specific item that impacted profitability in Argentina and Ecuador during the quarter that could prevail in the coming year or so?
Antonio, nice talking to you, and it's an excellent question. I mean, regarding some countries like Peru, let's say, the volume is affected mainly by products which are not so profitable. That's -- I'm talking now generally, water, things like that, especially during the last quarter of the year and the first quarter this year. So as -- along that, we did very well managing the products which are more, let's say, better positioned in terms of profits. That will be the great mix. And beyond that, we have a very good price for sugar now, because we established, as I mentioned in my piece, that we locked already the price for sugar at that very low level compared with the previous year. So all of this together will give us a very good framework for the Peruvian operation in terms of the margin. I think the Argentina has the results to [ temper our little situation ]. Because we, let's say, increased the salaries according to all the process negotiations there and the centralized manner and up to certain extent in the Argentina country. And that really is a temporary situation. Meanwhile, we reflect those into the prices, volume is behaving relatively well, so we don't see any major, major situation. I think on Ecuador, please Arturo, if you can mention more about the Ecuador and certainly, what are we going to do to recover the right levels in that direction.
Sure. Antonio, Ecuador has been a very challenging environment. Although we've improved the volume in the recent quarter, we still have slow growth and soft consumer demand. The first part of the year we also faced the comparison versus the conditions before the tax. So the beverage industry as a whole continues falling in Ecuador, and sparkling is the category that is most affected. So we have a -- the appearance obviously of lower-priced brands and strong promotional activity in the market. And we have to respond tactically. Especially in the flavor segment, where we were more affected than in any other one, we had to implement some tactical actions. And that obviously affects margins, but at the same time, balances our overall business in terms of our growth, our presence and share in the market and our profitability. We continue to maintain a solid market share. We even grew in most of the categories except for probably tea in Ecuador. But the market continues to be, I would say, the most challenging from that point of view, in South America. So we -- especially in the stills category as well, which are the ones who contribute to margins, those segments have been declining significantly. The tea and juice segment in Ecuador, we've been gaining share, but they have declined and some of these categories have migrated to other lower-priced per case categories. So we have to leverage more our returnable packaging, and that's what we plan to do mostly in 2018. This year, returnable in Ecuador has not grown that much. And probably this is the biggest opportunity that we have in that market.
I mean, in the other countries, as I mentioned, in Argentina, prices there, I mean, are very workable, let's say, this time, especially because the economy seems to be better. And we have a very good position, competitively speaking. So we will recover that rapidly. Ecuador is a more challenging area. But anyway, we hope that through the second quarter, we will be in a much better position, right, Arturo?
Yes, and we have already increased prices for products in Ecuador. Our Coca-Cola 192 ml returnable has increased; our Coca-Cola, Fanta and Sprite 3-liters already have increased this year. And the same for some changes in packaging that will give us a higher price per case. So we've implemented that so this first quarter and the first half of the year will look much better in that respect.
So summarizing, it's a great question. I mean, certainly we're working on that. And again, Peru, better, let's say, picture. And volume wise, not necessarily, but it's really the mix of more profitability, which is now becoming better. And certainly, with locked sugar prices and then more synergies to come of the still, a consolidation of that country will give us a good frame to move ahead. So we have a better perspective. And in Argentina, it was a temporary situation that we had to adjust prices that are very susceptible to move. And beyond that, in Argentina, remember that we have the sugar mill, which we just started operation by, I don't know, September last year. So we will start now using more of that sugar mill to be more competitive. And we'll bring a better also frame for pretty soon, and volume wise, it's good. And Ecuador, as mentioned by Arturo, it's really the issue of old economy, which anyways, we are well-positioned. And now we are moving prices very strategically this time and probably by second quarter, we'll see the results. And in Mexico, we are moving also prices. I mean, that's at the end of the year, and again, doing that in March, 1st of March. So I think that, and I think the market is doing that, not only ourselves. I mean, we see that there is pressure on the sugar. But more importantly, as we mentioned in my speech, sugar prices are really going down and the exchange rate that we are using at this time, in comparison with the exchange rate that we fixed, basically hedged last year, it's much better level now, so. The combination of those aspects of raw materials coming down in terms of prices and then the negotiations that we have and the exchange rate hedging and the price increases we had in our products, end of the year and March, will give us a good frame to have a better margins, coming soon. Always taking care of our competitiveness and market share, especially value share and transaction share. Thank you.
Our next question comes from Antonio Hernandez with Barclays.
My question's regarding the effective tax rate. What should we expect for 2018? And also, should we expect any effect from U.S. tax reform?
That's a very, let's say, we need a PhD to understand this, in taxes. I will ask Emilio to participate in the ... please, Emilio, you are great in this.
I don't have the PhD. We're working on understanding. But as I mentioned, we have to, let's say, to have an impact on our results, based on the fiscal reform. So that we needed to reflect the change on the tax rate in U.S. from 35% to 21%. So that's why we need to adjust the deferred tax liability that we have at the beginning of the transaction in April, since the tax rate was 35%. So since the new -- the reform was enacted last year, December 2017, we needed to update that tax rate. So that's why we needed to reduce deferred tax liability and also, that change, deduct also the income tax line as you can see in our income statement. So that had an impact of around MXN 2 billion. So that's why comparable net income for the quarter, you would have seen an increase of 14.2%...
Comparable.
Comparable, yes. And for the year, 22.2% to 11 -- a little bit more than MXN 11 billion in net income.
So bottom line is improving, anyway. So it was a combination of all this deferral.
But it's important also to say it again, that this MXN 2 billion is a noncash and onetime. So that's not coming from the operations. So that's why it's important to know the real number from the operation. That's number one. Number two, since this is a onetime, again, we will expect to have -- to normalize the effective tax rate starting this year, I mean, in January. So we will have any additional effects in 2018. So the tax rate will normalize around 30%. That's one part of the question. And the other one, it's also important, because as you know, again, the fiscal reform changes the rate from 35% to 21%. But I think that we need to consider the whole reform, because there are some changes in the taxable base and also some things that had been canceled, deductions that are canceled. So at the end, the final rate will not be exactly 21%. We expect to be around 24%. But at the end, we will have a cash benefit of around $25 million, which, of course, we plan to reinvest those savings in our infrastructure in U.S. and in the market, of course, to continue growing and to improve our profitability. So I think that it was a very good timing.
We had good luck.
We have a good, positive impact on this tax reform.
The acquisition, what does it say, good only in terms of wholly-owned operation. And certainly, the [indiscernible] and so on, but additionally, the value has been increased [indiscernible].
Our next question comes from Miguel Hidalgo with Credit Core Capital.
It's just a few quick questions. The first one is, I understand that some of the synergies in the U.S. operation have already been achieved, and I was wondering if you have any number about this? And my second question is about the 2018 guidance. You mentioned 2% consolidated volume growth. I was wondering if this 2% growth includes in its base the U.S. volumes? And if you -- I'm not sure if you gave any guidance about the margins.
Well, thank you very much, Miguel, and regarding the -- your question of synergies in the U.S. up to now, as we mentioned, we installed some equipment, and especially for in-line blowing in San Antonio and Abilene. We start moving some actions in terms of packaging, some of the [ hard issues ] and start moving some hours, so a little bit more volume here and there. So we hope that, that will be much better in the coming months, but especially coming years, but up to now we have on the level of $10 million to $12 million of, let's say, of synergies at the running rate. Then we have a long way to really move. And we have established 3 years for that. So we have this year, next year and probably part of the 2020, because we have made this acquisition in April, May last year. So the 3 years will be finally reached in the middle of 2020. So we hope that we can move faster. But there are things that takes time, because, as was mentioned by Arturo, it's a collaborative process that we have there. And we have to work hard with the system to assure that we can move into specific areas. But we are quite comfortable of reaching this $90 million in our synergies at this time. Please, Arturo, if you can continue adding more information, please?
Yes. Well, basically, as Pancho said, we have reached that, already that target for which was our target for 2017. And the project that would support our basically, the in-line blowing in 2 of our facilities, Pancho's already mentioned that. That reduces our freight cost for bottles. So that's been significant. Probably half of the benefit comes from that. And there are a number of procurement improvements in the operation, also, the project of secondary packaging that we started to implement in some of our facilities. And that also is an example of what we're going to do with the rest of our operation in terms of secondary packaging. And some additional synergies on the revenue side, I would say they're minor as compared to the others. So we've achieved that target, and also kind of sets the pace for 2018, because some of these projects will continue. We have some carryover from some of these projects and also just replicating this practices in the rest of our plants. So that's for the 2017 synergies. So I'll turn it back to Pancho for the guidance.
Yes. Well, in -- we normally don't give, specific, let's say, guidance into margins. But we expect in general that we will maintain the margin through. You know that we will have, let's say, 12 months of U.S. operations, which certainly in the U.S. operations has lower margin. So we are expecting, let's say, in general -- I mean, we normally don't give that guidance through, I mean, on the company to have even with more mix of U.S., let's say, operations. Even with that effect we will try to maintain the margin of the company, right?
At this time, I would like to turn the conference over to Pancho for closing remarks.
Thank you. So to all of you, thank you for participating in our call and for your continued interest in Arca Continental. And as always, our Investor Relations team or ourselves, we are available for any additional questions you may have. It will be our pleasure to talk with you. Well, to all of you, have a great day and a blessed and happy weekend. Thank you.
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.