Good day, everyone, and welcome to the Arca Continental conference call. All lines have been placed on mute to prevent any background noise. Please note that this call is being recorded. After the speakers' remarks, there will be a question and answer session, and instructions will be given at that time. For opening remarks and introductions, I would like to turn the conference over to Melanie Carpenter of iAdvize Corporate Communications. Ma'am, please go ahead.
Thank you, Katie. Good morning, everyone. Thanks for joining the senior management team of Arca Continental this morning to review the results for the Q1 of 2021. The earnings release went out this morning, and it's available on the company website as always, arcacontal.com, in the investor relations section. It's now my pleasure to introduce our speakers. Joining us from Monterrey, we have the CEO, Mr. Arturo Gutiérrez , the CFO, Mr. Emilio Marcos, the Chief Commercial and Digital Officer, Mr. Jose Pepe Borda, as well as the investor relations team. They're going to be making some forward-looking statements. Per usual, we just ask that you refer to the disclaimer and the conditions surrounding those statements. With that, I'm going to turn the call over to the CEO, Mr. Arturo Gutiérrez, to begin the presentation. Please go ahead, Arturo.
Thanks, Melanie. Good morning, everyone. I want to thank all of you for joining us today to go over our first quarter performance. Let me begin by saying that 2021 is off to a good start, with positive top-line growth, strong underlying margin expansion, and volume acceleration. The unwavering dedication and commitment of our associates was fundamental to overcome a still challenging business environment and weaker consumer sentiment due to the ongoing COVID-19 pandemic. Total consolidated volume grew 0.4% in the quarter, reaching 514 million unit cases. Once again, our beverage business in Mexico and the U.S. remained resilient and delivered a notable improvement in organic revenue growth in the Q1 . Total consolidated net revenues rose 4.1% to reach $40.5 billion. Consolidated EBITDA grew 15.7%, reaching $7.7 billion, representing a margin of 19%, for an expansion of 190 basis points.
This is the highest EBITDA margin we have recorded for a Q1 in 4 years. Q1 results reflect the steady progress that we are making. Our financial and operating discipline, along with our market focus, enabled us to take another step in the right direction in every market and deliver solid top and bottom line results. Let's review the performance and highlights across our operations. Our beverage business in Mexico continued to show positive momentum, delivering another solid quarter of volume growth, up 1.4%. Volume growth was driven by a robust performance in colas, sports drinks, and personal water categories, up 7.6%, 14.8%, and 2.5% respectively. The traditional trade channel continued to stand out with 7.6% volume growth in the quarter, while the decline in supermarkets and convenience stores moderated.
The mix of returnable presentations in Mexico grew 1.3% as we continued investing in our new universal bottle to address the new buying patterns and consumer preferences for affordable multi-serve presentations. Total net sales in Mexico rose 9.4% in the quarter to reach $16.6 billion, marking the 19th consecutive quarter of net revenue growth. Average price per case, not including jug water, rose 6.5%, reaching $68.37 billion. Moreover, we were able to grow value share in NARTD beverages due to the excellent market performance in still beverage categories such as water, sports drinks, soy beverages, and juices and nectars. On the profitability front, EBITDA increased 24% to $3.8 billion, representing a margin of 23.2%, for an expansion of 270 basis points. This is the eighth consecutive quarter of margin expansion as compared to the same quarter of the previous year.
Notably, this is the highest first quarter margin in Mexico since the merger of Arca and Grupo Continental. Turning now to our operations in South America. Total volume was flat in the quarter, resulting from declines in Peru and Ecuador, which were offset by growth in Argentina. The major concern now is the resurgence in COVID-19 cases, as some countries are entering second and third waves. The resilience of these economies is linked to the success of targeted restrictions and the underlying strength of business spending. Total revenues in the region were down 5.8% in the quarter, reaching $8.8 billion, while EBITDA declined 3.4% to $1.8 billion, representing a margin of 21%, for an expansion of 50 basis points. We continue driving affordability, doubling down on execution, and focusing on cost discipline to mitigate the impact on profitability.
We are optimistic that after a pandemic-driven recession, the economy in the region is expected to start a tame recovery in 2021 on the back of eased mobility restrictions. In Argentina, our operation delivered sequential volume growth in the Q1 , up 4.7%, cycling a strong 2.7% growth from the same quarter in 2020. Volume growth in the quarter was driven by both sparkling and still categories, up 2.2% and 51.7% respectively. Brand Coca-Cola showed its resilience, up 8%. Growth in stills was led by the juice category, followed by sports and energy drinks. From a channel perspective, supermarkets and wholesale delivered strong improvements. This quarter, we launched in Argentina Coca-Cola with Coffee in a 250-milliliter PET presentation. This is part of the strategy to continue innovating our sparkling portfolio and offer consumers more alternatives in the zero-calorie category.
Turning to our business in Peru, volume was down 1.2% in the quarter. We gained value share in NARTD beverages, driven by both sparkling and still categories, and supported by our affordability initiatives, particularly in multi-serve formats. Brand Coca-Cola grew 10.8% in the quarter. Fanta also delivered strong 7.3% growth, thanks to our affordability initiatives with 1.5- and 2-liter returnable packages. The traditional trade and wholesale were the best-performing channels, with 9.6% and 11.8% growth, respectively. We accelerated the rollout of our AC Digital platform, expanding our B2B capabilities to more than 59,000 customers in the traditional channel, interacting with us and placing orders through our mobile app on a regular basis. Also in the quarter, we launched a new 7-liter package of our Benedictino brand to continue driving affordability in the water category.
We are encouraged by the latest economic reports showing that GDP and employment are accelerating in Peru due to the reopening of various sectors such as mining, manufacturing, and commerce. These areas have helped activity levels recover from last year's lows. I will conclude my commentary on South America with our business in Ecuador. Volume in the quarter was down 1.6%. The country faces the third wave of the pandemic with a sharp rise in new cases. The gradual easing of restrictions has been put on hold, and tighter measures were reintroduced, mainly relating to movement and curfews, but with some more stringent lockdowns in the most affected regions. We executed targeted commercial initiatives focused on protecting portfolio affordability as we continued expanding returnable presentations. The mix of returnable packages increased 5.4 percentage points in the quarter.
We launched Sprite Peppermint and Coca-Cola with Coffee in limited editions and with great acceptance in the market. Tonicorp, our value-added dairy business, posted a double-digit sales decline in the Q1 . The overall dairy industry in Ecuador continued to be impacted by the effects of the pandemic. Despite the weakening consumer demand, Tonicorp grew value share driven by yogurt and flavored milk categories. Moving to our beverage operation in the U.S., Coca-Cola Southwest Beverages closed out the first quarter with an outstanding financial performance, delivering solid profitability improvements and its 11th consecutive quarter of EBITDA growth. Revenue grew 4.2%, reaching $692 million. Net price grew 5.9% with a true rate increase of 4% and 1.9% growth on mix, driven mainly by high profit per case transaction packages.
Value share in non-alcoholic ready-to-drink beverages grew, driven by Monster, BODYARMOR, and sparkling water, fueled by a Topo Chico and AHA combined strategy. Volume was down 1.6%, cycling strong 3.9% growth from the same quarter last year caused by consumer pantry loading. Moreover, the February snowstorm significantly impacted all of our operations in Texas and Oklahoma. As you remember, this winter storm was one for the ages. Our associates were impacted in one way or another, whether it was from the record-breaking low temperatures, power outages, broken pipes, lack of water, or freezing roads. Despite this, our teams throughout the region were pulling together, supporting each other, and helping our communities and customers. From a channel perspective, large stores delivered positive volume in the quarter. Small stores also started to grow for the first time since the pandemic as we cycled closures that happened in early March of last year.
The FSOP channel closed with a double-digit volume decline, cycling the last period of pre-pandemic volume. During the first days of April, we have seen encouraging volume recovery as FSOP customers reopen. We also saw an increase in volume during spring break as consumer confidence increased following the availability of vaccines and lifting of mask mandates in Texas. Importantly, the Dr Pepper portfolio had a strong start to the year with high single-digit growth. On the profitability front, EBITDA for the quarter grew 26.1% to $99.5 million, with a 14.4% margin, a solid expansion of 250 basis points. This is the highest EBITDA margin for a Q1 in any year since we acquired this operation in 2017. We continue focusing on accelerating rollout of our digital playbook. This quarter, we reached 51% of our eligible FSOP customers accessing mycoke.com. We hit the ground running with advanced analytics in 2021.
We began by implementing the Next Best SKU initiative across our convenience retail channel with excellent results. I will now finish our operations review with our food and snacks businesses. Wise snacks in the U.S. posted a double-digit sales decline in the quarter, still impacted by store closures due to the pandemic, particularly in large metropolitan areas such as New York City. Deep River is starting to rebound in food service with a strong month in March, delivering a double-digit increase and on pace with 2019. We're actively pursuing new avenues to regain growth momentum by capturing additional points of sale with key customers such as Target, Walmart, BJ's, and Walgreens. We are maintaining strong growth in the e-commerce channel, with sales more than double compared to last year. We're introducing product innovation, as well as a new price architecture to continue capturing share in the digital shelf.
This year, we are celebrating the 100th anniversary of Wise. This is an important milestone for us and proof of the longstanding connection between our brand and consumers. Bokados in Mexico posted double-digit sales growth driven by solid improvements in the traditional and wholesale channels and better management of discounts and promotions. We accelerated deployment of our AC Digital mobile platform across our snack operations in Mexico. We're replicating core revenue management capabilities to improve profitability of this business unit. Inalecsa posted a low single-digit sales decline in the quarter. Despite the slowdown in the Ecuadorian economy, Inalecsa consolidated its market leadership and captured additional value share in core salty snacks categories such as plantain, tortilla, and potato chips, as well as in the confectionery segment with the Tigreton and Inacake brands. I will now provide an update on the most relevant ESG activities in the Q1 .
Together with The Coca-Cola Company, we launched a new 13.2-ounce bottle in the U.S. made entirely from 100% recycled PET. We launched the new bottle for Coca-Cola, Coca-Cola Zero, Diet Coke, Sprite, and Fanta. Next July, a 20-ounce version for smartwater will follow suit. We also became one of the first bottlers to launch 20-ounce bottles made from 100% recycled PET across our territories in the U.S. In another important highlight, our operation in Argentina was recognized by the United Nations Entity for Gender Equality and the Empowerment of Women, also known as UN Women, for promoting gender equality through both internal initiatives and the work we do in the communities. Furthermore, Tonicorp was granted the Premio Violeta for best corporate practices by the government of Ecuador.
This is in recognition for active promotion of jobs for women, our efforts to prevent violence against women, and strengthening equal opportunity processes within the framework of the policies promoted by the Ministry of Economic and Social Inclusion. This reinforces our commitment to working on initiatives focused on supporting the role women play in the value chain while striving to achieve gender equality in every country where we operate. I will now turn the call to Emilio to go over our financial results. Please, Emilio.
Thank you, Arturo. Good morning, everyone, and thank you for joining us today to review our financial performance for the Q1 of 2021. First and foremost, let me give a big thank you to our entire team for their commitment and hard work, which has been the key to consistently delivering strong results. We're entering 2021 with a solid momentum, building on the strong foundation that led us through the pandemic, our ability to adapt to an ever-changing business environment, and our discipline to protect profitability and yield strong results. Moving to the financial results of the Q1 , consolidated revenues increased 4.1%, driven mainly by a positive volume performance in Mexico and a strong price mix in Mexico and the U.S. This top-line growth, combined with our pricing and an effective hedging strategy in raw material prices, helped us expand the contribution margin by 70 basis points.
We still expect pressure in some raw material prices beginning in the second quarter, particularly in PET and sweeteners. However, our hedging strategy will partially offset the rising trend in spot prices. We reported an operating margin of 13%, representing a robust expansion of 290 basis points versus the same period of 2020. Consolidated EBITDA reached $7.7 billion, an increase of 15.7%, a healthy expansion of 190 basis points to reach a 19% margin, being the highest EBITDA margin for a Q1 since 2017. This is largely driven by the expansion of contribution margin, combined with a reduction of SG&A coming from our discipline expense control. In line with the latter, the SG&A to sale ratio decreased by 150 basis points, mainly from a reduction in sales and marketing expenses, while administrative expenses remained stable. Our goal is to maintain OpEx aligned with revenue growth throughout the year.
As volume recovers across our regions, we expect that some SG&A expenses that were temporarily reduced during 2020 will gradually increase in the following quarters. We will look towards sharpening our revenue management initiative and increase our holistic cost management efforts to mitigate some of these incremental costs. Net income in the quarter decreased 3.5%, primarily related to the harder comps from last year, where we registered a foreign exchange gain of $1.4 billion from our strong cash position in US dollars, coming from a significant depreciation in the Mexican peso at the beginning of the pandemic. Moving on to the balance sheet. On April 15th, a cash dividend of $2.94 billion per share was approved at an annual shareholders' meeting, totaling $5.2 billion for a payout ratio of 50%, in line with our historical average. This dividend will be paid on April 27th.
Cash and cash equivalents in the Q1 stood at $35 billion with a total debt of $56 billion, resulting in a leverage ratio of 0.6 times. CapEx for the first quarter was $ 1.1 billion, a decrease of 30% versus the same period of last year. We expect to invest close to 6% of sales during the year to reach around $11 billion, prioritizing the allocation towards strengthening and innovating production lines, distribution, and execution capabilities, as well as promoting digitalization and sustainability projects across our operations. The strong results of the quarter continue to prove our ability to thrive and adapt during challenging times. We'll continue to capture and create value for our shareholders through a disciplined execution oriented towards volume recovery, deploy commercial and revenue management initiatives to maintain pricing in line with or above inflation, and improve cost efficiencies to protect our margins.
With that, I'll turn it back to Arturo.
Thanks, Emilio. With the Q1 behind us, we see a challenging health and economic landscape continuing throughout the remainder of 2021. Despite this, we're executing on all fronts to drive performance and share gains. We started the year with a clear objective to uphold the momentum of our business. This momentum is evidenced by our value share, which we grew or maintained across our territories. We expect volumes to remain positive, mainly the traditional trade, supermarkets, and all channels related to at-home consumption. The on-premise channels should start to recover as the COVID vaccine becomes more widely available. Single-serve and non-returnable packages should evolve favorably across our portfolio, with returnables leading our affordability strategy. As we have said before, it is imperative that we keep focused on the long-term vision of our business with an aim on preserving and strengthening our relationship with customers, consumers, and the community.
As we look ahead, we will continue to invest and execute to advance our priorities. Investments will span across our supply chain and go-to-market initiatives and include an acceleration of our digital transformation and sustainability agenda. It is important to mention that it has been two years since we made our first venture capital investment. We are actively engaged in both VC funds and startups, which has enabled us to stay at the cutting edge of technological developments and to start piloting solutions that are strategically relevant and can help make our business more efficient, sustainable, and future-proof. In closing, all of us who are part of Arca Continental are proud of the results we have achieved so far. We remain keenly focused on becoming more efficient and swifter in adapting to the new market conditions.
This requires an even greater commitment to leverage our scale and continue growing, striving for excellence in everything we do. Thank you for your continued support. I would like to now open the call for questions. Katie, we're ready for questions, please.
Thank you. At this time, we will open the floor for questions. If you would like to ask a question, please press the star key followed by the one key on your touch tone phone now. Again, that is star one. If at any time you would like to remove yourself from the questioning queue, please press star two. As a reminder, due to high interest and time, please limit yourself to one question. We will pause for just a moment to allow everyone the opportunity to signal for questions. Thank you. Our first question comes from Fernando Olvera with Bank of America.
Hi, Arturo, Emilio, and thanks for taking my questions. I have two. If I may, my first question is about Mexico. Can you elaborate more on how are you thinking about volume recovery the remaining of the year? Because it seems that you could return to pre-COVID-19 levels sooner than expected. My second question is, what was the main driver of the margin expansion during the quarter, and how should we think about margins ahead given that raw materials continue increasing? Thank you.
Thank you, Fernando, and good morning. Let me address your first question first about Mexico. Certainly, we've performed very well throughout the pandemic and the Q1 . As you saw, we had an EBITDA growth of almost 24%. The margin was 25%, one of the highest margins we've ever had, 290 basis points expansion. This was the combination of solid volume, even though we were cycling growth in the Q1 of 2020. As you know, in Mexico, the pandemic started affecting only the final days of the Q1 of 2020. It still was a tough comparison. We had a very good price architecture. We were very disciplined, still disciplined in our OpEx in this quarter, and very good execution.
It's important to mention that we actually were recognized by the Coca-Cola Company with the Legacy Cup Award for 2020, which is the recognition of the best execution in the marketplace in our operation in Mexico. The volume, as you know, was driven by the traditional channel, and that has been the case throughout the last few quarters. We had very good performance across categories. As you know, even our core categories continue to grow, colas and flavors grew this quarter. I think it's a combination of an economy that continues to have strong performance from the consumption standpoint, the traditional trade that also has been the engine for growth in Mexico and in South America. If you see particularly the month of March, you can realize what would be the path for recovery in Mexico.
In the month of March, you continue to see a strong traditional channel, but you start to see a recovery of the on-premise channel. I think that, obviously, as we have the baseline of 2020 for the on-premise, would start to look really good for the remainder of the year. Raw materials were not a big impact in the Q1 in Mexico, I would say, in general, in our operation, and maybe Emilio can expand on that. We are very optimistic of the performance in our Mexico market for the rest of the year. Volume, even though it's not going to be spectacular, we did have a significant decline in volume last year anyway. Even if we don't recover the volumes of the pre-pandemic scenario, the business is profitable. We have better execution in the market.
we're rolling out many of our digital initiatives that I think sometimes we don't talk about that in the middle of the crisis, but we are convinced that that has been making a difference, and it's going to continue to make a difference in the market as we are improving in our performance, in reducing stockouts through our suggested order algorithm, in our B2B platforms, AC Digital is being rolled out. There are a number of things that we believe are very important for this year and for the future in Mexico. this continues to be a very solid business unit. With respect to margins going forward, our goal for 2021 is to protect margins. As you know, our margins have been very high in the last quarters. We've been growing consistently margin quarter-over-quarter.
We're going to have some headwinds going forward with some of the commodity pricing. It's not the case in the Q1 , and we have some hedges that are going to be important to mitigate that impact as we move forward. I would mention probably a few factors. One is our pricing strategy in line or above inflation. We plan to keep that. The mix of our categories and channels are going to be relevant for the margin. It's hard to predict at this point how that is going to evolve. We do have some positive carryover of pricing from 2020 to 2021, so that's going to be good for our margins. We are being more effective in the management of discounts in all of our operations. That also is going to be very effective.
our efficiency plans are still delivering good results in our OpEx ratio to sales. those, I would say, would be the main factors. Maybe Emilio wants to expand on that.
Thank you. Thank you, Fernando, for your question. I just like to add, regarding the first quarter, we expanded margin 190 basis points. Seven of them are coming from pricing. As Arturo mentioned, we did not experience any increases, basically stable raw materials in the Q1 , so that's a positive. Volume, it's a little bit positive, but it's a positive effect going forward. There's 150 basis points coming from our efficiencies and expense control. Some of them are coming from synergies in U.S.
Some other efficiencies implemented in all the countries. It's important to mention that we improved margins in all the operations, in all the countries except Peru. That's also important to mention. We have a positive trend in the future, as Arturo mentioned. Basically, in summary, our pricing, the mix is really important. It has a positive impact on margins and then the efficiency plan that we implemented last year.
Great. Just very quickly, one last question. How are you thinking about the recent changes in outsourcing and what impact do you expect?
Well, yeah, we've been operating based on what has been approved. We do not expect a material impact as a result of that. The number of people under that model for us in Mexico and where we need a restructure is not that significant, will not be a significant impact. There's still some work to do, and we're working to integrate them to the structure that would be in compliance with the new regulations. We will continue to work in that regard and mitigate any impact we could have in the operation.
Great. Thank you so much.
Thank you, Fernando.
Thank you. Our next question comes from Benjamin Theurer with Barclays.
Hey, good morning, Arturo, Emilio. Thank you very much for taking my question, and obviously, congratulations on the result. That was really strong. Now in Mexico, you've made everything clear, so I want to switch focus and gears a little bit on the U.S. and what's your expectation outlook there, particularly now that you're basically one year into the launch of the facility. Just if you could share with us what your expectations are going forward in terms of where profitability is heading once food service comes back in, and how you think about the shift between multi-serve, single-serve going forward. We still saw that obviously impacting, but we're seeing already strong margins, but that even with a not so strong volume environment. Just to get a sense of where could margins be if volumes are actually in a normal level.
Yeah. Thank you, Ben. Well, certainly, we're very pleased with our performance in the U.S. This is our 12th consecutive quarter of EBITDA growth and the ninth consecutive quarter of margin expansion in that operation. We've just celebrated our 4th anniversary of integration of the U.S. business unit into Arca Continental. I think we continue to demonstrate the resilience and strength of the strategy that we followed throughout the years, and we're reaping some of the benefits of projects that we started a few years back. That, as we saw that also in margin expansion, as we saw, despite the volume contraction in the quarter, and we were cycling high volume for Q1 of 2020. Also, we have to have in mind that we had this February snowstorm that impacted all of our operations almost for a complete week in the month of February.
Even with that, I think we performed really well. The economy in the U.S., especially in the state of Texas, is improving day by day. The consumer confidence has increased, and as you know, the capacity of businesses and on-premise venues has been increased as well, and the statewide mask mandate has also ended. It's a much better environment. We've been able to sustain prices at a very good level, even with the change of the mix. Remember that in the U.S., the shift in the mix of channels works in a different way sometimes as what you see in Latin America. If you look at the channels in the U.S., large stores have been driving growth for the last few months and quarters.
In the month of March, we had a decline in large stores, but this was basically with the comparison of first quarter pantry loading in 2020. We did have an increase in the on-premise channel for the first time in the month of March. It increased almost 11% in volume in March. That is a positive sign of recovery, although you also need to be aware that sometimes the on-premise market might result in consumption that has less profitability than the at-home market. We're trying to drive consumption towards the bottles and cans formats also in the on-premise market, something to have in mind. The other important impact in our U.S. operation is that we're still seeing some of the benefit and the carryover of our synergy plan for last year. Even though we completed the projects in 2020, we still have some positive carryover.
An example of that is our North Point facility that you mentioned. We're very proud about how that facility is operating, where we have, as you know, five production lines, the PET lines with in-line blowing. That provides significant efficiency, and the cost per case significantly improved. Water usage is at a very good level, 1.3, and we have a number of other things there also for environmental standards to be best in class. We've seen our semi-automatic picking system in North Point, which builds a pallet according to customer orders, now fully operational. That also brings efficiency and savings to our U.S. business unit. We think that we are in a very good position to capture growth as we move forward.
We are also in a good position in terms of commodity pricing for the year, based on the hedges that we have for aluminum, both LME and Midwest Premium for the rest of the year. very important also, that we continue to build capabilities and to roll out our capabilities in the marketplace, both digital capabilities, new models to service our customers in the U.S., and there's growth to capture there as things return back to normal in the market and we move to a more balanced consumption mix across the channels.
Okay. Have you actually tried to quantify the impact from the storm?
From the snowstorm in February?
Yes.
Well, it's hard to quantify. If you look at it isolated, the whole week, the operation was really paralyzed. You have some additional consumption after that. It's hard to isolate just the week. If you look at the week separately, you will think it's a much higher impact probably than at the end it would be. I think we were able to mitigate most of it in what we did in the market the following days. Still, we don't have a specific number for that.
Okay. That's okay. I'll leave it here. Thank you very much, and congrats again.
Thank you, Ben. </edited_transcript
Thank you. Our next question comes from Alan Alanis with Santander.
Thank you so much. Good morning, Emilio, and good morning, Arturo. Congratulations for the report. Very impressive. A couple of questions, one around capital deployment and dividends. The first question would be, you are under one time net debt to EBITDA, very comfortable. What's the likelihood that you will increase your dividend beyond the payout ratio that Emilio mentioned, the 50% of the net income? That would be the first question. The second question, I know that the agreement with The Coca-Cola Company is confidential, and you cannot get the details and so forth, but you do mention that some of the increase in the cost came from an increase in the concentrate, so we have to ask about that. What can you tell us specifically about two things, the timing of how frequently the agreement changes? Is that a quarterly, annually thing?
Second, is it based now on profits at the operating income level versus how it was just in the past when it was directly at the revenue side? Those would be the, I guess two questions, one with two aspects. Thank you so much.
Yeah. Thank you, Alan. Thank you for your question. Let me address the first point first about dividends. Well, as you know, last year we had additional dividend payments throughout the year based on precisely that analysis of what's our leverage and what are the uses of our capital and what are the expectations that we might have for that particular year. This year, actually last week, we had our annual meeting for the company. As you know, in Mexico, that's where dividends are approved. Aside from the dividend that was approved to be paid now, the shareholders authorized the board to approve additional dividends for the rest of the year. That gives you the idea that it's something that would be under consideration based on the circumstances for the rest of the year, for sure.
Thank you.
Yeah. We cannot assure anything, of course. </edited_transcript
Yeah, of course.
The second point-
Depend who the year was. Mm-hmm.
Yeah. What's important is we don't have to convene another shareholders meeting to do that. We can do that at a board meeting. </edited_transcript
Understood.
regarding our relationship with The Coca-Cola Company, well, we have an agreement with them, and it's certainly a more complex relationship that we've had before, but it's also, I would say, a much more balanced relationship. We think that negotiations are now more equitable and more stable. This is not something that changes on a quarterly basis, to your question. We do have some annual revisions of where we are standing. again, this is not only about incidence pricing and concentrate. It's other issues that are on the table. you've seen, even though concentrate prices have increased, in the case of Mexico, also their participation in some key areas and investments, marketing expenses, and even co-investments in CapEx and product development have also changed. this is part of the negotiation. That's why we don't want to convey the message that this is a one variable negotiation.
There are many other things that are
Okay
on the table. think about the universal bottle in Mexico that we've rolled out, and this was very important for our strategy, for the company strategy. they contributed to that investment significantly. I think that was around $10 million. Emilio, correct me if not. </edited_transcript
Okay.
That they would participate. Again, this is an example of how those negotiations take place and how we manage this relationship to preserve our margins. I think our margins are also a good indication that this is a good model and it's turned out to be beneficial for both.
Yeah. That's very clear, very useful. A much more balanced relationship. Again, congratulations for the results. Thank you so much for taking the question.
Thank you, Alan. Good just talking.
Thanks. Likewise. </edited_transcript
Thank you. Our next question comes from Lucas Ferreira with JP Morgan.
Hi, gentlemen. Hi, Arturo. Hi, Emilio. Thanks for the space to ask questions. My first question is I wanted to go back to that margin discussion. Certainly, you guys are on a very sweet spot now in the Q1 , given the price increases, not much impact on the raw material side yet. Even listening to KO's comments in their conference call, it feels like this cost discussion is going to be much more of like a 2022 discussion than a 2021, right, for you guys. My question is a general question, looking at the market dynamics, your channels, looking at your pricing models.
How comfortable you guys feel about maintaining your profitability going through this kind of massive wave of increasing costs, like not to mention PET, sugar, aluminum, and others, eventually kind of later this year or 2022, when eventually you're going to feel the full impact of all this massive inflation we are seeing today. Many CPG companies, other food and beverage companies already increasing prices. If you guys feel comfortable about maintaining the profitability going forward with the levers you have in hand. Then I can ask the second question later. Thanks.
Yeah. Thank you, Lucas. Let me talk about profitability starting with pricing, I guess, which is a very important factor. As you know, our goal is to capture prices in line or above inflation. We've been leveraging our RGM capabilities, and we've implemented effective price pack architectures in every market. So far, I think we've been successful, and this is based on, again, on renewed capabilities in our operations. If you look first at Mexico, we're going to have a positive carryover from last year in terms of pricing, and in the U.S. as well. We expect that to be in line with our target. There are some effects there in Mexico. Obviously, returnability has an effect on price sometimes, but it's a good effect. Even though overall price might not be as high as one-way packages, profitability is still very high.
The evolution of the on-premise market is a very important factor also in Latin American markets. Connected with that is our mix of single-serve presentations. It's hard to predict where that is going to go in the next few months, and that's where we're not providing guidance at this point. Prices in South America have been impacted by mix more significantly. It's important to mention that. I think we're in a good place in every country with respect to price and also with respect to the management of discount. This is one of the two largest digital initiatives that we have in the advanced analytics space, which is how to better manage our prices and promotions.
Maybe Pepe can add some additional comments to that because it's very important for our profitability going forward. The other elements are raw materials and pricing of commodities that we know where that is. We all know where that is going. Our volume will certainly help because the volume continues to grow in Mexico and the U.S. It's going to have a significant recovery. We expect that in Ecuador and Peru. In Argentina, it's growing. It's one of those units where probably it had a less challenging baseline to begin with before the pandemic. Price is certainly going to help. The other is our efficiency in the management of our OpEx. I think all the learnings that we captured during the pandemic are going to be very useful going forward.
I think the combination of that, even though with the scenario of commodities for the future, is still a positive scenario for us in general. I don't know, Pepe, maybe you want to add about what we're doing in terms of promotions and management of trade promotions.
Yes, Arturo. Thank you, and thank you, Lucas, for your question. Yes. Regarding pricing, I think we are in a very good position. Specifically in March, when we analyzed price versus previous year, that was positively impacted by category mix, where we're cycling high volumes from water panic purchases. March may be a little high. Going forward, we see four main impacts with different impacts by market. The carryover from the increases made last year, the immediate consumption recovery across countries, although with different speeds, but all going in the same direction. New package launches, especially in the U.S., like the 13-ounce bottle that is very profitable and we are going to roll out. As Arturo mentioned, the trade promotion optimization, as we roll out the capabilities in all operations.
This capability was deployed in August 2020 in the Mexico business, where we've been able to reduce unproductive promo spending by almost 20 points.
In Latin America, we are already replicating this capability, and we will deploy it gradually in Coca-Cola Southwest Beverages, starting with local accounts, focused on the retail channel. We feel confident that we have the tools to manage the pricing.
Thank you, Lucas.
Perfect. Thanks, Felipe, Arturo. My second question is somewhat correlated to this. You guys mentioned a couple of times in the introduction about investments in digital, about, let's say, the hard seltzers and the launch of some new products in the portfolio. My question is regarding the SG&A, how much investments are you going to have to do this year relative to last year, which was more of a turbulent year, I would say. My question is basically if you're going to have to speed up a lot your investments and we should see that specifically SG&A line growing, let's say, more than inflation or growing relative to your sales.
Yeah. With respect to investment, 2020 was not a typical year. That's for sure. We had a much less rate of investment throughout the year. 2021 will go gradually back to normal. It was not in the Q1 where we're still cautious and I'm still comparing with pre-pandemic scenario. As we move forward, we expect CapEx to be probably around 6% of revenue in the year, which is, I would say, pretty much a normal ratio for our operation. Maybe, Emilio Marcos, you can expand on our investments and CapEx.
Yes. Thank you for your question, Lucas. Yes, we expect this year, as Arturo mentioned, last year was around 4%, so this year we expect around 6%. That's going to be allocated towards, as I mentioned already in my speech, some production lines improvements, some coolers, of course, as always, go to market capabilities and to enhance our competitive presence and execution in the point of sale. As you mentioned, also some investment will go through automation and digitization processes across our value chains and modernize some IT systems. That's part of our CapEx. Also some investments towards sustainability benefits for our communities and some investments in energy efficiencies and our distribution channels. Talking about countries, I think around 50% will go to Mexico, and I would say around 25% to U.S. and the rest to Latin America countries. Basically, you're right.
Some of those CapEx will go to our digital initiatives that we have.
With respect to SG&A, that is going to increase versus our baseline 2020, but that would be also in line with our growth in revenues throughout the year, so we maintain healthy ratios for our OpEx.
Thank you very much.
Thank you, Lucas.
Thank you. Our next question comes from Felipe Ucros with Scotiabank.
Hi, Arturo, Emilio. Congratulations also on the results. I'll second myself up to everything that everyone else said. Very strong results. Let me start with a question on digital analytics. You guys talked about the suggested order and how it had another good volume contribution in Mexico. I was just wondering if you have an accumulated number for how much this has contributed since it was rolled out. If I remember correctly, I think the first time we had you to talk over with us about this about four years ago, you had a pilot and the pilots were already contributing, but it seems you continue adding to that contribution. I don't know if you have an accumulated number that you can give us on that. If you have thought about what's the peak contribution from this. I have a follow-up question after that. Thank you.
Yeah. Thank you, Felipe. Let me explain to you how this operates in our commercial processes so that you have a better idea of what we're doing. What we at the end are trying to do is to reduce out of stocks or increase availability of our ideal portfolio and at the point of sale. You have to make some assumptions on how that is going to translate into additional sales as you capture those white spaces, probably in the traditional outlet. We've measured out of stocks and we have demonstrated that the model reduces effectively out of stocks in the marketplace. You have to try to analyze and figure out how much that is going to convert into additional volume.
We started actually making some pilots and comparing with control groups, and we had growth of 1%, 1.5% around that of volume versus the control group. As you continue to roll that out. You don't have a control group any longer. You just have assumptions based on your initial calculations of how that is impacting. We had the pandemic, so the situation certainly changed. It was harder to estimate, in isolation, what is the true impact of the suggested order. The number we had originally was, I guess the average was 1.3% of increased sales versus the control group. You start rolling that out gradually across the operation. I'll let Pepe expand on that, please.
Yes. Thank you, Arturo, and thank you, Felipe, for your question. Yes, as Arturo was saying, this is an ongoing process. We started, the first models we built were just focused on reducing out of stocks on the key packages of the portfolio, mainly suggesting quantities of those packages. We got very positive results, and that's probably what we discussed in the previous meeting. after that, we rolled that out, and then we included the sales potential by category for customer. that helped us to develop portfolio suggestions for customer. as Arturo was saying, we then rolled that out, and then we didn't have a control group to measure with. the third step is to develop the next best SKU model. we have a model that has the three models and then balances per customer, the weight of each of those models.
As Arturo was saying, the numbers that we have found, looking at target groups versus control groups, have been around 1.3, 1.5 volume increase in Mexico, around between 2 and 2.5 in South America. We are currently rolling the Next Best SKU in the convenience retail in the U.S. What we've seen up to now is that we have expanded 5% in SKUs with a repurchase of nearly 70%. Looks like we are offering the right SKUs for the right customers. I hope that answered your question, Felipe.
Oh, that's fantastic color, and congratulations on what you guys are doing on that front. It's really leading the sector on that side. Maybe if I can do a follow-up, Arturo, on the Midwest Premium. I was looking at the series in Bloomberg, and it's at the highest that it's been in quite some time. I had thought that we would see somewhat of a normalization with the change in government and all that, but it seems that it hasn't happened. I don't know if you can talk a little bit about what's pushing that dynamic.
Well, we've seen levels, as you say, of Midwest Premium throughout 2020, probably over 300. We were under 300 at some point, and I guess in the Q2 when many things changed in terms of commodity pricing. That is, again, stabilized at the end of 2020 above 300, which is still a lower number that we had at some point when some of the aluminum duties were imposed, remember maybe, what? Maybe three years ago. The scenario going forward is that it's gonna be still at that level. We have the advantage, as Emilio explained, that we have hedged some of our requirements, or most of our requirements, I would say, for aluminum in the U.S., maybe around 90% of our requirements for both LME and Midwest Premium pricing. It's gonna be that very positive for us.
Certainly, as we move forward, the number, the spot price for the U.S. is gonna come up for the remainder of the year. That's the expectation. It might go again in the 400-plus level. That is what is expected. That's not gonna impact our own results because we have hedged that in the level of pretty much of what you saw in 2020.
Okay. That's great news. Maybe the last one, really quickly on the possibility of buybacks. Arca has been sort of rerating continuously over the last few years. At which point I know buybacks are not at the top of the list of your capital deployment, but at what point do you start discussing whether it would be a good statement at a certain valuation to start buying Arca shares? If there's ever been a criticism from the market about bottlers, it has been the multiples at which they have done M&A. It seems that at these points where you guys can buy the best bottlers at the cheapest prices in a decade, we're sort of not seeing it. What's the importance of making that statement to the market?
Yes. Thank you, Felipe, for your question. Well, as we have explained our capital allocation, first always, CapEx to our operations. Last year we did, as Arturo already mentioned, the number 2 capital allocation for us has been dividends. Last year, we paid two additional dividends. Arturo already explained that on the shareholder meeting, we have now at the board level in order to pay any additional dividends. That's another option for capital allocation. Number 3.
Been working really hard on the past month and years, it's M&A. We're always looking for inorganic growth, and we always have on the pipeline, some analysis in order to close a deal, so that we always have that expectation and that priority. Talking about buybacks, there's other considerations. It's not that easy. There's some other issues and complexity for buyback. That's why, for us, we still have the other options as main priorities before any buybacks. Now, the share price has been going a little bit higher, so that's good for everyone. Again, we still have the other priorities before any buyback.
Understood
an option.
Okay. Understood. Thanks for the call.
Thank you.
Thank you. Our next question comes from Carlos Laboy of HSBC.
Yes, good afternoon, everyone. My first question relates to refillable bottles. If you could expand for us, please, Arturo, on where you are as a percentage of mix in your main markets on refillables. More important than that, what I'm really after is your vision on how much higher these might go over the long term, especially now that the ESG value of these refillables is really increasing. While we're on the subject of refillables, if you could also comment on how these are helping you as a premiumization tool for driving pricing, to open up your price pack ladder on the upper end of the scale.
Do you see an effort from The Coca-Cola Company to market the environmental merits of these refillables further helping you in putting, I don't know, an environmental halo, a halo of nobility over the entire portfolio that maybe helps you with the pricing further?
Yeah. Thank you, Carlos. Good to talk to you. I think refillables continue to be a very important strategy, and now with that added factor that you mentioned. Traditionally, as you know, in Latin America, they have been very important to provide affordability in a portfolio like ours. That's what the role they've been playing, and that's why they've been so important across our market. Let me give you some numbers about the mixes that they represent across our markets. In Mexico, refillables are, this year, about a third of our volume, 33%. In Ecuador, it's about 29%. In Argentina, it's higher than that. It's more than 40%. This obviously, as a result of the situation that we've seen in that country for a number of years, it's become a much more important strategy. In Ecuador, it's also getting close to 30%.
In the case of Ecuador in particular, we've been very focused on that strategy, which was not as strong in the past. It's so important as we also structure our price architecture versus our competitors in all of those markets. It provides different options for consumers, and it's been very, very effective, especially in times like these and in downturns of the economy. We think that we have the conditions to continue to pursue that strategy in Latin America. We have the expertise. This is not only about introducing bottles. You have to have the commitment, and there's a significant investment there, but it's also you have to have the expertise of how to run a returnable package model. It's a culture that needs to be created in the market and with our customers.
The factor of sustainability is becoming more important as we move forward, especially in developed countries. In Mexico, as you know, we've introduced the universal bottle that also provides a new opportunity to promote refillables in our markets and even with a more efficient management of our bottle stock inventory, which we've been doing in the last year. That provides also some possibility of thinking in our U.S. market in the future as well, thinking about that other dimension, which is the sustainability aspect of the packages as we have seen in Europe and other markets. We have been considering a pilot test also for the U.S. We continue to analyze that possibility. In the meantime, it's going to be, I would say, a fundamental part of our strategy in Latin America and now strengthened with the universal bottle rollout in all of our markets.
just to add to the opening, you mentioned all the important points, Arturo, and
I think in the midterm, we see a lot to gain with the deployment of the universal bottle in all of our markets. As Arturo mentioned before, we're investing a lot behind this, and this permits us to have refillable bottles for products that we weren't able to have because we had to invest in specific glass mold for that. We're seeing better volumes in flavors, in still beverages, and that is going to be an important revenue engine within the next years. Where are we going to get? What's the ceiling? I think it is too early to say, but we plan to have increasing revenue mix from refillable bottles in the next years.
Thank you. Just one quick comment. You made a passing comment on diversity at the end of your comments today. It can come across as corporate speak so often, but I want to congratulate you and Jean-Claude, because when I go to the U.S. and I look at your markets there's so many brilliant women in your senior management ranks, in sales and marketing, and this is really rare for us as analysts to see in this industry. So many of your retail counterparts are women, and the way they engage with your clients is impressive. Congratulations. I hope you can do this even better. It's obvious when we go through the marketplace that this is a real issue for you, not a corporate speak issue.
Yeah, it is. We also acknowledge that there's a lot to do. We still have a long way to go. Thank you, Carlos.
Thanks.
Thank you. Our next question comes from Ulises Argote with Morgan Stanley.
Hi. Good morning, everyone. Thanks for the question. You touched base on M&A, so I was wondering if you could provide us an updated view on M&A across the regions, where you see the most compelling opportunities post-pandemic. Related to this question, what would be the maximum levels of leverage you will be willing to achieve in the case you see a M&A opportunity? That would be my question. Thank you. </edited_transcript
Thank you, Victor. Thank you for your question. Our approach to M&A has not really changed. Before the pandemic and throughout the last few months, what we've been thinking about is opportunities within the beverage and snack space and in the geographies where we operate. Basically, it's the Americas, and it's in our current businesses, and mostly focused on beverage opportunities in partnership with The Coca-Cola Company as our core business. We think we're very good positioned for that, because as was mentioned before, we have the financial capacity. We have been also perfecting some of the commercial supply chain capabilities, which are so important. After four years in the U.S., we feel much more confident that we could be successful integrating businesses throughout the region in the Americas. Also, we have a strong partnership with The Coca-Cola Company.
We talk about that frequently, and I think that provides additional opportunities for the future as well. We've also been working on our own talent pipeline to be prepared for that. It's hard to predict where something could arise and at the right, also, valuation. We will continue to look for transactions, as I said, in the Americas, with special focus in the markets where we operate. For that, going back to our financial capacity, we're going to have a conservative approach to leverage. We're usually aiming for a two to 2.5 leverage ratio as something that we would feel comfortable with, I would say, going forward.
Thank you very much. Just a follow-up on your top-line evolution, can you give us any color of what you are already seeing in terms of volumes in April for both Mexico and the U.S., and how your volumes are trending relative to what you were expecting before April started, taking into account the tricky comparison base now?
Yeah. We're going to be looking internally to both last year, as is normal, but also to our original pre-pandemic baseline as we look at volumes for the rest of the year and look at 2019. Just look at the recent trends, and if we see what's happened in this Q1 and what happened in the month of March, or at least in the final days of the month of March, it gives you an idea of how volume is going to evolve for the rest of the year. It's different in our different markets. As we know, U.S. has a faster recovery, and same for Mexico. We're not going to see a growth in volume as high as maybe in South America in the H2 of the year because the comparison is different.
South America, on the other hand, is still struggling with mobility restrictions and some of the effects of the pandemics in Peru and Ecuador. That's going to take a little longer, we believe. We had a much more severe contraction in volume in the Q2 of 2020. We're going to see that recovery gradually in the next quarters of the year, probably stabilizing by the end of the year. 2022 would be our most likely return back to our original baseline during that year in 2022.
Thank you very much.
Thank you.
That was very helpful.
Thank you. At this time, I would like to turn the call back over to management for closing remarks.
Thank you. As always, we appreciate your interest in Arca Continental. Please reach out to our investors relations team for any questions you may have. Have a great day.
Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.