Earnings Call: Q2 2019

Jul 19, 2019

Earnings release

Good day everyone and welcome to the ARCCA 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 now like to turn the conference over to Melanie Carpenter of I advise Corporate Communications. Ma'am, please go ahead. Thanks, Katie. Good morning, everyone. Thanks for joining the senior management team of ARCA Continental to review the results for the 2019. The earnings release went out this morning and it's available on the website at arcacontal.com in the Investor Relations section. We also have our webcast going live right now and it will be available for replay. It's now my pleasure to introduce our speakers. Joining us from Monterrey is the CEO, Mr. Arturo Gutierrez Mr. Emilio Marcos, the Chief Financial Officer and Mr. Jose Pepe Borda, the Chief Commercial and Digital Officer as well as the Investor Relations team. There are going to be some forward looking statements, so we ask that you just please refer to the disclaimer and the conditions surrounding these statements in the earnings release. And with that, I'm going to turn the call over to the CEO, Mr. Arturo Gutierrez, to begin the presentation. So please go ahead, Arturo. Thanks, Melanie, and good morning, everyone. I want to thank all of you for joining us today to review our second quarter results and some important recent developments. Let me start by saying that we are pleased with our performance. At the halfway mark of 2019, we are seeing good momentum in our business. We delivered another consecutive quarter of revenue and profit growth despite ongoing macroeconomic uncertainty and relatively weak consumer sentiment facing some of our operations. Total consolidated volume remained flat to reach five eighty million unit cases. Net consolidated revenues reached 42,000,000,000, up 4.1% from the same quarter last year. Our top line performance was broad based with most regional operations delivering positive organic revenue growth, demonstrating our robust execution capabilities and the strength of our brand portfolio. Total consolidated EBITDA in the second quarter rose 7.3%, reaching 8,100,000,000.0, expanding to a margin of 19.3. Our ability to implement local pricing initiatives, coupled with our tight control of expenses and a proactive hedging strategy, allowed us to expand margins across our operations. I will further expand on the results across our geographies and operations, beginning with Mexico. Total volume in the second quarter grew 0.8% on top of a solid 4.3% growth from the same quarter of last year. Growth was driven by still beverages, personal water and jug water, 4.3%, 7.15%, respectively. Total net sales in Mexico rose 7.9% in the quarter to reach 18,000,000,000, making the marking the sixteenth consecutive quarter of net revenue growth. Average price per case in Mexico, not including jug water, rose 8%, reaching 61.09, sustained by our segmented revenue management and affordability initiatives. EBITDA in the quarter increased 8.7% to MXN 4,500,000,000.0, representing a margin of 24.9%. During the second quarter, we launched Coca Cola Coffee in Mexico as part of our efforts to drive innovation in the sparkling category, particularly in the low and no calorie segment. Among the highlights of the quarter, Arca Continental participated jointly with the Mexican Coca Cola system in the opening of the new Jules del Valle Santa Clara dairy plant in Lagos De Moreno Jalisco. With an initial investment of ARS 2,000,000,000, the new plant incorporates state of the art equipment and has the potential to become the largest in the Coca Cola system worldwide. Moving over to South America, our beverage business posted flat volumes as a result of volume growth in Ecuador and Peru, which was offset by decline in Argentina. Total revenues in the quarter were down 2.9%, reaching ARS 8,700,000,000.0. On the profitability front, EBITDA grew 7% to ARS 1,600,000,000.0, representing a margin of 18.5%, an expansion of 170 basis points. In Ecuador, volume grew 1% in the second quarter, driven by growth in colas, personal water and still beverages, up 4.5%, 10.615%, respectively. We delivered these positive results despite pressures on domestic demand. We launched a new regular Coke formula with less sugar content this quarter as we drive innovation in our portfolio to offer more low and no calorie options. We also continued investing in market focused initiatives, bolstering our returnable base in the at home channel and increasing cooler coverage. In the second quarter, we installed 11,000 additional cool drink units. Toni Corp, our value added dairy business in Ecuador, posted single digit sales decline in the second quarter. We have been able to sustain market share across all core categories, yogurt, flavored milk and ice cream, driven by point of sale execution and product innovation. Also in the quarter, Toni Corp. Announced its Best Livestock Practices award to recognize the best of more than 3,000 ranchers in quality, productivity, sustainability and innovation. This initiative is part of Toni Corp's effort to further strengthen our value chain and to promote the implementation of sustainable practice. Moving on to our beverage business in Peru. Total volume in the second quarter grew 3.3%, confirming the recovery trend. Growth was driven by sparkling beverages, up 5.4% and by the launch of our new flavor water, Frugos Fresh and our sodium low sodium based water, Benedictino. We continue gaining value share in alcoholic ready to drink beverages, driven by growth in the low or zero calorie category with an affordable pricing strategy. Our team has been very successful in mitigating the impact of the excise tax implemented in May. Our flexible price pack architecture, revenue management discipline and returnable packaging initiatives were fundamental in this turnaround. Notably, EBITDA reached the highest historical margin for second quarter at 20.3%. Also in the quarter, in a milestone for the entire region and industry, Coca Cola Peru and Arca Continental Lindley launched the San Luis water bottle made from 100% recycled PET, seeking to reduce the environmental impact of the use of plastic. Looking ahead, the Peruvian economy should continue to expand as the state pays. Well anchored inflation, healthy credit growth, job creation should support household spending and improve consumer confidence. Moving to Argentina. Volume in the second quarter declined 10.6%, cycling a strong 8% growth from the same quarter in 2018. We're starting to see a recovery. Volume in the second quarter confirmed an overall sequential improvement. Our average daily volume report for June showed a positive trend. In the first half of this year, we gained value share in NARTD beverages despite runaway inflation, sky high interest rates and plunging retail sales. We continue capitalizing on local initiatives such as improved distribution in certain rural areas, which has helped us upgrade execution at the point of sale while increasing product availability and gaining market share. Shifting gears to our beverage business in The United States. Coca Cola Southwest Beverages delivered its ninth consecutive quarter of net revenue growth, up 4.8% to $737,000,000 as we continued capturing additional value share. Price mix was the main driver of sales, up 7.2% and well above consumer inflation. 4.4% of this was true rate increase and the rest was achieved by a change in mix, mainly due to higher price per case of products such as Body Armor, Monster and Topo Chico. Our mix had both a positive effect in price per case and a negative effect in gross margin per case since the new categories that drive growth in still beverages have lower margin on a percentage basis, but a healthy dollar per case contribution. These results were achieved despite a 2.3% decline in volume, which was a result, among other factors, of a change in the distribution of the Dasani case pack water to Sam's Club. Profitability was not affected, however, as we received compensation for each case sold. At the profit level, EBITDA in our U. S. Beverage business increased 4.6% in the quarter to reach nearly $103,000,000 representing a margin of 14%. We continue to grow value share net revenue and EBITDA above prior year due to a solid price strategy coupled with improved expense management and consistent delivery of synergies. We're committed to maintaining a balanced portfolio to fully capture the growth of the new categories and at the same time, growing profitably through pricing and immediate consumption packages. As mentioned last quarter, our team in The U. S. Won the Market Street Challenge in 2018 for outstanding execution in North America. As winners of this award, we earned the honor to compete for the Candler Cup, the highest recognition across the global Coca Cola system for excellence in execution. We are proud to share that our team in The U. S. Won the Candler Cup, which means that we were recognized by our peers as the best bottler in the Coca Cola system worldwide. Now reporting on the progress of our synergy plan, we are on track to meet our goal to achieve $30,000,000 in savings for this year, which is in line with our target to capture $90,000,000 by 2020. Our North Point plant in Houston is scheduled to open on time in 2020. We are laying the foundation to ensure that our new manufacturing, distribution and sales facilities become a key enabler of cost savings and efficiencies. Let me now close our operations review with our Food and Snack business in The U. S, Mexico and Ecuador. Wise delivered low single digit revenue growth in the quarter and increased market share driven by growth in the potato chip category as we continue capitalizing on the addition of Deep River and Carolina Country Snacks portfolio of brands. Some examples of new Deep River customers include distribution in Delta Airlines, Stop and Shop, salad works, go see and Air Force bases across the country. Vocados in Mexico posted sequential mid single digit sales growth for its sixteenth consecutive quarter, driven by growth in the modern trade channel. This quarter, we announced an important geographical expansion into Central And Western Mexico with the opening of three distribution centers. We're enforcing our commitment to profitably grow our food and snacks business, which is in line with our strategy to continue gaining scale while expanding our reach to more customers and consumers. Inalexa in Ecuador posted a low single digit sales decline in the second quarter. We continued innovating our product portfolio with the launch of new brand extensions of our tortilla chips portfolio while also capturing share gains in the pastry segment with the launch of new products. And with that, I will turn the call to Emilio. Please, in the view. Thank you, Arturo, and welcome again, everyone. We appreciate your participation in our earnings call. We continue to capitalize on the foundations we set at the beginning of the year. Our pricing strategy and operating expenses controls combined with an improvement in volume trends. These steps, accompanied by relatively stable commodity prices, paved the way to a very positive second quarter. EBITDA growth outpaced revenue growth, which resulted in the second consecutive quarter of margin expansion. Our consolidated revenues grew 4% in the second quarter and 3.2% for the first half of the year, primarily driven by our Mexico and U. S. Operations, growing 84%, respectively, which was partially offset by South America operations being down 3%, mainly from Argentinian's peso depreciation. Revenues in the first half of the year in Mexico and U. S. Were up 7.44%, respectively, thanks largely to the carryover effect from last year's price strategy, while revenues in South America decreased 4.8%. Cost of goods sold was up 4.8% in the quarter and 4.3% year to date. These increases came mostly from the sales mix change between distributed versus produced products in The U. S. And higher concentrate prices in Mexico. These factors contributed to a reduction of 40 basis points when compared to the 2018, a solid improvement from the 80 basis points gross margin contraction we reported in the first quarter. SG and A expenses increased only 1.9% in the quarter and 1.3% in the first half, representing an important contribution to our EBITDA margin expansion. This increase is a direct result of tighter expense controls and the execution of the planned efficiencies announced in the first quarter. Consolidated EBITDA in the second quarter increased 7.3% to MXN 8,100,000,000.0 with a 19.3% margin. Year to date, EBITDA rose to MXN 14,400,000,000.0 with an 18.2% margin. Excluding the benefit from the adoption of the IFRS 16 accounting standards in the quarter, EBITDA grew 5.7 and had a margin improvement of 30 basis points similar to the first quarter. The income tax accrual for the quarter was MXN 1,300,000,000.0, a decrease of 1.8%, while the effective tax rate was 26.9%. For the first half of the year, the accrual reached MXN 2,200,000,000.0, an increase of 6.5%. The comprehensive cost of financing during the quarter was up 8.2%, mainly due to exchange rate losses of ARS 40,000,000 versus last year's MXN 99,000,000 gain, partially offset by MXN 32,000,000 benefit from monetary position from the Argentina operation. The combination of lower income taxes and 4.8% operating income growth was partially offset by a higher comprehensive financing cost, resulting in net income increase of 5.2% for the quarter, reaching MXN 2,800,000,000.0 and representing a margin of 6.7%. For the 2019, net income increased 12.8% to MXN 4,500,000,000.0, reflecting a margin of 5.7%. As of June 3039, we had a cash balance of MXN 16,000,000,000 and debt of MXN 54,600,000,000.0. Our net debt to EBITDA coverage ratio is 1.36 times. Consistent with our strategic priorities, our strong balance sheet supports our business goals and maximizes our financial performance. Operating cash flow generation in the first six months of the year was 11,500,000,000.0, 35.4% higher than last year. This was mainly allocated towards CapEx of MXN 4,900,000,000.0 and MXN 4,100,000,000.0 for dividends. For the second half of the year, with the expectation of raw material rates remaining relatively stable, we will continue to capitalize on the results of our pricing strategy and disciplined operating expenses controls while ensuring that our fundamental market execution best serves our consumers. And with that, I'll turn it back to Artur. Thank you, Emilio. Looking at the remainder of the year, while there is still some level of financial volatility from macroeconomic risk and escalating trade conflicts, our industry remains vibrant and growing. We have lived through downturns before and understand how to manage the business in these circumstances. Speed and agility are critical to address this rapidly changing consumer landscape. Despite the challenges, we're executing on all fronts to sustain growth momentum. So while we expect consumer dynamics to remain difficult throughout 2019, we are encouraged by our performance across our markets. In summary, at Arca Continental, we remain relentless in our efforts to become more efficient and to adapt to changing market conditions. We're building on strong execution and a solid innovation pipeline. I'm confident we will achieve our full year guidance. Thank you for your continued support. Operator, we're ready to open the floor for questions. Thank you, sir. At this time, we'll open the floor for questions. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the questioning queue, please press 2. As a reminder due to high interest and time, please limit yourself to one question. Our first question will come from Isabella Samiko with Bank of America. Hi. Good morning, Arturo and Emilio. Thank you for the call and for the questions. I have two questions. First of all, in The US, we saw water volumes down double digits in the quarter, which in our view was a little bit of a surprise since you launched new smartwaters. Right? Can you elaborate a little bit more what caused such decline? Also in The U. S, you mentioned that costs were affected by the sales mix between the distributed versus the produced products by you. Can you give us a little bit more details on the margin differential? And this is something that we can assume will continue to be to happen in coming quarters or this mix could change throughout time? Thank you. Thank you, Isabella. Good morning. Well, with respect to your first question and the performance of water in The U. S, the reason for that is and and we are we are doing well with with the launches in in in smart water and the extensions of the brand. But the reason for the decline is that as a system, the the Coca Cola bottling system in The US moved delivery of, the Sani case back, to Sam's Club, one of our main, customers from a RET truck to a third party. So this is really an EBITDA neutral decision for us. We still receive a a compensation for cases delivered, but it's just a better, I would say, logistic solution for the system as a whole. And and and just that effect would represent, you know, about two thirds of total volume decline in our second quarter for the for the whole business. So so if you if you disregard that without that impact, volume in the quarter would be, still lower than prior year, but about 0.8%. So that would be the main explanation for the variation of water. I'm going to turn it over to Emilio to address your second question, if that is okay. Sure. Thank you, Arturo. Well, as I mentioned, steel cafeteria has a lower gross margin in percentage compared to CSDs, but it's important to highlight that they have a higher dollar contribution per case. Also, these categories have a better ROIC given that we don't need to make any additional investment in productive assets or trucks or production lines. And these categories give us more scale on distribution. So we just put it on the truck and it gives us additional EBITDA. So what we will be seeing, since these categories are growing, as an example, we have body armor. We didn't have it last year. We have it this year, so that's a new volume with, again, better dollar contribution per case, but lower EBITDA margins. So that will impact our EBITDA margin, but have a positive ROIC margin because, as I said, we don't need to invest. And these categories doesn't mix or has a cross interaction with TSD. So it's additional volume, additional EBITDA. So that's a complementary category that we have been, you know, growing. Not only body armor, also Topo Chicu is in that category, monster as as as some examples. So so when we look at our business, it's about at the end of the day, we have to look at at at margins with that perspective as well, not only the percentage, but the actual dollar contribution per per case in some of these categories, you know, are in in that space and also take into account investment, as Emilio mentioned. That's clear. Thank you. Thank you, Isabella. Thank you. Our next question comes from Antonio Gonzalez with Credit Suisse. Good morning, Arturo and Emilio. Thanks for taking my question. If I may, I just wanted to have a super quick follow-up on the previous question on The U. S. Is it possible to share with us excluding IFRS 16 how much wood margins specifically in The U. S. Would have come down? And do you think this is related to margins presumably declining in The U. S? Is it related to the high comparison basis and the effect that you just described on mix moving towards products like Body Armor? Or were there any additional headwinds, raw materials or else that impacted quarter on quarter, right? Because last quarter you were already delivering margin expansion even without IFRS 16. So that as a very quick follow-up and if I may, my question Arturo, I wanted to ask if you can give us a little bit of a longer term perspective on your PET recycling initiatives, right? I guess it's fair to say that you guys are among the leaders across The Americas really, but there is a long way to go, I guess, to get to the targets established by the Coca Cola Company for the next decade, right? So I wanted to ask you if you guys think you could step it up even more, no, increase perhaps the CapEx in your recycling facilities. You obviously have the very successful benchmark case of Petstar. Could you replicate that elsewhere? Just, I guess, your big picture thoughts on that theme, Arturo. Thank you. Yes, Antonio, good morning and good to talk to you. With respect to your first question, I will let Emilio elaborate. I just wanted to mention that we do have some headwinds in The U. S. We have several effects that come into play. One is, certainly, the margins as a percentage basis erode because of what we just explained, the growth on these very profitable categories, but that from a margin perspective, you know, do not help if you look at just percentages. And and then we have headwinds in the first half of the year, still with some, COGS increases, basically, PT and aluminum, where the comparison is still not favorable, but the trend is very favorable. And and, you know, I'm I think those somehow offset the the the positives of many of the synergy projects and some of the carryover effect of synergy projects of 2018. So but I'll let Emilio provide more detail on the numbers. Yes. Thank you, Tony, for your question. Well, talking about the business in U. S, only the beverage business, EBITDA margin was 14% in the second quarter, which is a very good margin. So we also had that margin second quarter last year. And it remained flat compared to last year. Even with IFRS, it's basically it's a little bit lower than that, but not that much. And year to date, we have a good margin expansion of 50 basis points for this Coca Cola Southwest business. This is a result, as we mentioned, different reasons. One is the pricing strategy, the synergy plan and also partially offset by some raw material prices since we do we still have some higher PET and aluminum prices in the first half of the year. We will have similar prices the second half of the year versus last year. But the first half, we still have higher prices than the first half of last year. And also, as I mentioned, evolving portfolio mix, the energies and steels, which, as I mentioned, has higher dollar contribution on per case basis, but lower margins. So these categories are contributing to increase our EBITDA, not our EBITDA margin, and it's also helping improving our ROIC, again, since we don't need to invest any additional assets. It's important to mention also that EBITDA in the first half of the year in Coca Cola Southwest increased 7.6%, even though volumes were lower or negative than compared to last year. So with less volume, we're increasing our EBITDA on 7.6%. And for the second half, we continue to target to expand our margin and capture the $30,000,000 synergies for the year. And we're on track on that. We basically have 50% of those synergies already. So we're very positive on the second half of the year. And even though we we have made a lot of progress in our new plan, we haven't yet seen, you know, the effects of of the efficiency of the new facility. So so so, Tonya, I'm gonna move over to your second question about our PT long term strategy. And first, I would say that PET recycling very is important topic. It is now for everyone. It's been important for us for a long time. And even before the Coca Cola Company issued its this this pledge of World Without Waste, we in Arca Continental have been working and having one of the most responsible management systems of PET packaging in our industry. And we are fully committed to this initiative to collect and recycle the equivalent of all the bottles and cans that we sell, and that that is the commitment. We we've made certainly more progress in Mexico starting with, you know, as you mentioned, Petstar is the largest food grade recycling facility in the world. It is producing 51,000 tons of recycled PET that we incorporate into the packages of the Mexican Coca Cola system jointly with other bottlers. The commitment in PetSmart is that we have to continue to grow. If if you look at how much of of PCR, of recycled resin we incorporate into our packaging, you know, it's a it's a at a, I would say, at a good level at this point, but it's not where we want it to be. In in Mexico, it's about 30%. And if you consider the whole of our operations, we're, you know, above 20, maybe 24 or so. So what what we need to do is to continue to invest. In the case of Mexico and and Petstar to expand capacity jointly with the Coca Cola Company and and the rest of the bottlers to get us to the target, which would be to incorporate 50% recycled resin in our bottles. And and, obviously, to collect a higher percentage of what we collect now, which is very high. And and, you know, if you compare that with other markets, we are really at a at a at a good level of of recovery, but we wanna get that to a 100%, and and that is part of the the pledge of World Without Waste. Similarly, we are working in South America, mostly with suppliers of PET to jointly develop projects where we can incorporate more recycled resin to our products. And and in The US, probably The US is the biggest challenge, but we're also working to address this opportunity. Maybe the being a neighboring territory to ours in Mexico presents us with the opportunity even to use some of the of the Mexican recycled resin in our packages. We're exploring that possibility also. But the the immediate project would be the expansion of of of PetStar. Certainly, that requires investment, but I think it is a it is an opportunity to become more efficient as well because we wanna have the best of all worlds, Tonya. We wanna have, you know, recycled resin, at at parity cost versus virgin. That that that would be the vision. And and at this point in time, if you if you look at the history of Petstar, we've been fairly successful at achieving that. And so it's about creating a circular economy, but also doing that in a a very efficient cost for for us. So that's why scale in Petzlar would be very important, not only to incorporate more resin, but also to do it more efficiently from a cost perspective. That is very clear. Thank you so much, Arthur. Thank you, Tony. Thank you. Our next question comes from Alex Rebartz from Citigroup. Hi everybody. Thanks for taking the question. The main issue I wanted to explore was the top line trend in Mexico. But just one clarification first. You gave us a confirmation of U. S. Synergies at $30,000,000 this year. And I'm just wondering, is that a little bit higher than what you had thought earlier in the year? I seem to remember numbers around the mid-20s as kind of the goal. So just wanted to know if that's in fact what the change or not. And kind of related to that, do you feel and you've given us the buckets for the synergies, but do you feel this might be that this number of $30,000,000 is front loaded in the year, back loaded or kind of even throughout the year? Any color on that would be great. But kind of the main question is, on the top line trend, when we think about that 8% sales that you put up for the Mexican business in the quarter, I mean, it's probably going to be one of the fastest growth rates that we see in the Mexican consumer space. And it's not really the volume story, it's the pricemix initiatives that you're doing. Could you tell us and kind of comment a little bit on how you see the back half of the year vis a vis price and mix? Should we think a little bit about any upside risk to the volumes, which frankly have been pretty lackluster in the first half? So any thoughts around the kind of short term top line view in Mexico would be great. Thanks a lot. Yes. Thank you, Alex. Good morning. Well, talking about Mexico first, yes, we did have a volume decline in the first half of the year. Our revenue grew in a healthy level. I think we had a very solid pricing strategy. We've identified some of the reasons for the decline. It's mostly regional. I would let Pepe elaborate a little more on that. But I will tell you that for the second half, we are confident that we will continue to grow the business. We have many relevant activities, especially things that we're doing in the market and introduction of new products and a number of activities, and it's already looking better just at the start of the year of the third quarter. Also, we continue to see an effective pricing strategy for the second half of the year. So we expect our forecast for the year would be aligned to our goal to be above inflation, certainly not going to be at the level of more than 8% as we've had year to date because it's about how the prices compare with increases of last year. So they're not, let's say, parallel lines, but certainly, we're to be above inflation for the year. I will let Pepe elaborate more on the consumer environment in Mexico. But just let me talk a little bit more about what you asked on U. S. Synergies. The number that we've estimated for this year, it's pretty much in line with our original plan. We've spoken about $90,000,000 and they're, I would say, evenly spread across the the, you know, the the three periods, the 2017, '18, then this year, and then the the the coming year where we're gonna have mostly the effect of the new facility and some of the shared services initiatives that we have implemented. In the first half of twenty nineteen, I would say that it's less than 50% of the overall impact. And I have to mention also that when we talk about the effect of synergies, we're very strict about how we track those. We're talking mostly about savings and some of the revenue synergies that we can clearly identify and isolate from the rest of the business. We're not including here the the effect of of the better execution in the marketplace, our new go to market models. The the most transformational things that we're doing in The US market are very hard to calculate, so we we don't wanna, you know, get confused about what the impact of those. But we are confident that that's gonna be very significant next year and and and in the in the in the next coming years. So if you think about the three the three transformational things that we're doing aside from the from the specific savings projects are, you know, the the fundamentals as a backbone of our execution strategy in The US, which is is really improving. You know, we're improving visit completions, order strike rates, the action items that we sent over to our sales force to, you know, get targeted direction to our frontline. Our new go to market models for the on premise market, what we call the customer intimacy project that we're already starting to roll out, and revenue management where we have already seen the effects of that. And probably that's easier to connect with our, you know, financial performance. But all in all, you know, they are spread across the the the the three periods that we're that we're tracking. So I think we're pretty much aligned with the plan there. And with that, I'll I'll turn it over to Pepe to make some additional comments on the consumer environment in Mexico, if that's okay with you, Alex. Thanks, Arturo. And thank you, Alex, for the question. As Arturo was saying, most of the volume decline year to date has come from a specific region in Mexico, the region that is in the North Pacific, 70% of the volume decline comes from there. And the main reason is actually weather. And we can see that when we compare to other bottlers in the same region. So also when we talk about prices, as Arturo said, prices will not continue in the 8% range because we are cycling a higher base from the next year, but we will finish in a healthy price increase over inflation. And however, the volumes have been we have seen sequential recoveries in the second quarter against the first quarter. And we have an easier comparative base in quarter three and quarter four. So we will see a change from revenue increase mainly coming from price to a more balanced increase coming from both volume and price. We have not seen yet the positive effects from the social programs and initiatives from the government, but we understand that these new governments have a hard time organizing the delivery on those social programs and we expect to see the positive effects of these programs in the rest of the year. Thanks very much. That was helpful. Thank you. Thank you, Alex. Thank you. Our next question comes from Alan Alanis with UBS. Hey, good morning. Thank you so much for taking my question. Congratulations on the quarter. A couple of quick questions. One of them is regarding the dairy market. I mean, you're still delivering a very, very strong volume growth of 21%. So the question has, how do you see that growth going forward? I mean, I noticed that you still have less than half of the intended coverage. So that would indicate that the solid growth in the daily category, including the new plant that you mentioned in Lagos De Moreno should continue. So could you just remind us what is the market share that you have and what is the outlook for the dairy category in Mexico? That will be the first question. And the second question has more to do with capital deployment. I mean you are on the 1.4x net debt to EBITDA. So it will be interesting to see how do you think about giving increasing the cash back to shareholders either via buybacks or dividends? Or how you would you be thinking about future M and A given the strong balance sheet that you have? Thank you so much. Thank you, Alan. Good to talk to you. Let me address the second part first and then turn it over to you and Pepe if you want to complement on my comments. And the second part, well, certainly, it connects to what you said about our M and A strategy. We always try to maintain a very solid balance sheet and a leveraged target that's basically below 2x net debt to EBITDA. So we manage that continuously. And at the same time that we try to identify opportunities for growth through acquisitions or or some sort of alliance that, you know, might require, you know, to use it for balance sheet. And with respect to that, you know, at at this point, we our priority has been to focus on consolidating our new businesses and and capitalize the opportunities for value creation and synergies in our operation. And we still have a long way to go there. But as you know, you know, part of our strategy is to continue to grow on the, you know, food and snack division, so we're we're actively looking for opportunities there. And and also, you know, our scale in beverages, you know, necessarily presents opportunities, and we expect that to happen in the future. So we have to be ready if there is a good opportunity to create value in line with our, you know, with our with our track record of always focusing on value accretive transactions. And and and, you know, you know, we've been very prudent in in that regard. So the the key for us at this point, if we talk about m and a, is to continue to strengthen our capabilities and core processes because we and we don't talk much about that in in these calls, but we we track a lot of the progress in our internal processes and our act model and the and the innovation of process, things that are gonna be very useful in creating value when we find opportunities for acquisition in our core business or or the adjacent food and snack businesses. So that means that we you know, we're gonna continue to be consistent with our with our historic policy. And with respect to dairy, dairy is is a great opportunity if you think about, again, the the muscle of the Mexican system and and that, you know, there is a an opportunity to reach more customers in a category that is that already exists. We've been successful in developing new categories with consumers, but this, for me, is clearly an opportunity to participate in category that is obviously already part of the consumer space now. Within dairy, the segment that we have been focusing most on was flavored milk, basically because it's very profitable. And as we, increase our coverage of the direct to home channel, we've been also finding opportunities to grow in flavored milk, not only in volume, because if you look at percentage of growth in volume, it is probably not the best metric because you come from a very low baseline, but mostly about market share. And we've made a lot of progress in some regions. I will let Pepe elaborate a little more about where we stand as a player in the dairy industry. Yes. Thank you, Arturo. As Arturo was saying, our focus in the dairy category is not in in white the milk or in what makes the most of the bulk and the volume the volume in that category. So we're focusing on flavored milk, on value added dairy in which which are more profitable categories. We have increased our market share in flavored milk almost two percentage points in the last year. And we have grown the Santa Clara volume. We're growing steadily between twenty five percent and thirty percent month after month. We now cover almost 45% of all the traditional trade in Mexico. And as Sarturo said, we're making important inroads in the direct to home channel. So our strategy there is to play in the most profitable categories and not go after a value share in the bigger volume but less profitable segments. Got it. And what's the market share again that you have right now? Is it 200 basis points of market share out of what base? Yeah. I I I don't have the number right now. I'll I'll send it to you. Okay? But it's it's between it is around 5% four to 5%. Correct. Got it. It's it's still around in the in the low to mid single digit market. Yes. Fair enough. So there's a lot of upside. That that's that's very useful. Quick really, really quick follow-up just because you mentioned the m and a on the food and bev on the food space and the snack space, Arturo. Remind me remind us, what does snacks and food share with the the beverage platform? I mean, there's there's no share there's no shared distribution. There's no shared sales. It's totally independent sales, totally independent distribution. Is that the case across all of your territories, correct? They're totally independent units in snacks and beverages. Well, it's not a, I would say, unified model, Alan. We do have independent operations in The U. S. Mostly because we are operating in different regions. Our brands in The U. S. Are are stronger in the Northeast and New York Metro and then New England and mostly the the the the East Coast. So so there's, not a lot of opportunity to, you know, synergize with our Texas operation. In the case of Latin America, in Ecuador, for example, we're, you know, much more integrated. We approach the the modern channel jointly and we do some other, you know, cross selling activities and promotions across categories. We even have some synergies in our distribution and operation as well. And I would say among all three companies in Ecuador, it's very unique system where we have, you know, dairy, we have snacks, we have pastries, we have obviously our beverages. And also, we have, you know, a distribution network in Ecuador that distributes third party products. So so it's a completely different model. And we are rolling out an evolution of the original go to market models in Ecuador trying to synergize more of the three businesses. And in Mexico, would think it's an intermediate model where we do have some joint activities, especially in the market and taking advantage of, you know, some of the market intelligence that we have with beverages. But we keep the businesses mostly separate in our in our operations. So I would say that there's not a, you know, single way to do it. You know, it depends on the market. It depends on how relevant we are. It depends on how important the brands are in a particular market. Got it. That's very useful. Thank you so much. Thank you, Alain. Thank you. Our next question comes from Lucas Ferreira with JPMorgan. Hi. Thanks for the question, Arturo and Emilio. My first I have two questions about The U. S. The first one is simply to understand just actually to follow-up from previous questions, but feels like you're not planning to do more price increases for the second half. Just wanted to confirm that. Or do you see like the economy would allow you to do some more adjustments to prices if that's in the plans or not? And my second question is related to this discussion, which is an interesting one about the EBITDA per million cases. Again, looking at margins, think I may agree with you that the market is too focused on the margins. So for us, they're modeling and looking at the company two years down the road and trying to understand your plan for The U. S. What should be the right metrics for us to look? Where let's say, how much return on invested capital contribution these, let's say, plans for the next two years should have? Or how much growth in terms of EBITDA per million unit cases we should look as opposed to be just looking at the margins. So just at least on a, let's say, qualitative standpoint, if you can help us understand how your business in The U. S. Would be looking like in two years. Thank you. Yeah. Thank you, Lukas, and good morning. Thank you for your questions. Let me talk first about price in in The US. And, yes, we've had a, I think, a very, very effective revenue management in in the last few months, and this is something that we we do work jointly with with the Coca Cola system in The US, and we've been able to deliver on our, you know, commitment to increase prices above inflation during the the second quarter, our price grew 7.2% versus prior this year, and that's all about consumer inflation. We have to say that a part of that only part of that is true rate increase, which means a nominal increase prices, and that was like 4.2. The rest of the result in a change in mix as we as I mentioned, we are not selling Santa case back to Sam's, and we are improving our performance in Topo Chico and Monster, and now we're selling, you know, Body Armor as a brand in our portfolio. So all of that contributes to a positive effect in in price per case. For the second half of the year, we're going to continue to do that, not only to find the right price increases to maintain our pricing above inflation, and the mix is going to continue to help, Also, to make sure that we are very rigorous in managing our own our own promotions, which also contribute to to net price. So by the end of the year, we expect to be significantly above above expected US inflation as as we promised. It's not gonna be the same differential that you've seen in the first half, but we're gonna have a price increase of of probably around 5% for the for the whole year. And I I think that is a very positive result. And and and it certainly connects to the second part of of your question, how, you know, we have to look at the business, you know, in more detail or from from a different lens because now we have these categories that are growing, that provide revenues, that maybe they can erode the margin, but they contribute to EBITDA. So I think for for for me, the the, you know, the easiest metric and the the one that we track for, let's say, for execution in the market, it's, you know, how many dollars per case they're bringing and what is the investment that is required to to produce those products. As as Emilio mentioned, the advantage is some of these products bring a good dollar per case contribution and not necessarily require investment in manufacturing assets. So if you look at our the whole universe of products, we have Body Armor, Monster, Juices that are above average and their contribution in a dollar per case basis. So at the end of the day, as Emilio mentioned, we have to take into account that we are growing our EBITDA in absolute terms. And that, I think, is very satisfactory for the first half of the year where EBITDA grew and with a healthy margin if you compare that to, where The U. S. System, operates. Got it. If I may, just also a quick follow-up. You guys talked about weather issues in Mexico. We also saw some issues in The US in the first quarter, but we also saw a pretty rainy month of May, if not mistaken, in The US and a lot of floodings in the Midwest, but also in Texas. So do you guys had any any effect from weather this quarter in The US? Yeah. I would say that volume decline in The US is caused mainly by, I would say, three main factors. One is the sunny case pack shift from our direct truck to third party delivery. The decline in particularly convenience retail caused by cycling very aggressive promotional activity. So we're also trying to get rid of those so aggressive promotions that do not contribute to the profitability of the business. And the third factor was unfavorable weather, especially lower temperatures. We normally don't want to talk about that because they obviously end up at the end of the year they even out. But it was a factor for the first half of the year. There's no doubt about that. Thank you very much. Thank you, Lucas. Thank you. Our next question comes from Miguel Torticlero with GBM. Hi, good morning. Thanks for the question. The first one is regarding Ecuador. Just would like to get a bit more color on the dynamics you're seeing there. What's behind the strong margin improvement seen on the region considering that volumes were not especially that strong during the quarter? And secondly, regarding Argentina, it seems that you should start to see easier comps in the 2019, specifically in top line. So could you just elaborate a bit more on the sequential recovery you mentioned on the initial remarks? Thank you. Yes, Miguel, and thank you. Well, first, talking about Ecuador, yes, the volume started to grow in the second quarter, although we were cycling a good growth in last year. But most importantly, I think we have been better at pricing in Ecuador. It was not necessarily the case last year. I think we've been able to find the right price back architecture, the right curve between returnable, nonreturnable, zero calorie or, you know, regular Coke. So we I think we've been able to align that much better, and that is reflected in the profitability of the business. So we we we're focusing a lot on profitability, on rigorous OPEX control, on a balanced architecture pricing. It's not only about about increasing prices. It's about, you know, how every single relevant package, is placed in the price pack curve to make sure that your, consumption is not shifted to less profitable, products. So I think we've been able to do that much more effectively this year, and that's why we've been able to grow average average price. Even though we have increased returnability in Ecuador, which also is a significant change in the structure of our portfolio for this year. We we've increased the mix of returnable products, which provides affordability, but at the same time, it's it's profitable. It may not help price at the end of the day, but what's important is that it's, it's very profitable. And that's why EBITDA, was, was significantly better, and margin also has been improving. So and I recognize the effort of the team in Ecuador because macroeconomic conditions are still very difficult in that country. So it's hard to grow the business, but I think we've been able to grow. The perspective is very positive. We we're gonna have a a a fantastic month of July, and we are gonna do it, you know, in a in a very profitable way. So so we're we're excited about the the the the future for for Ecuador. And also because we're doing things better in the market again. We are reaching more customers. We're serving better the the smaller customer segment, which, you know, it's it's very hard to do in Ecuador because the the market is so fragmented. And talking about Argentina, well, as you say, we are we are seeing a a a that the worst could be over now. The economic activity is still contracting, but at a at a lower pace, And and there's been a stabilization on on the currency and signs that, you know, the inflation also is gonna be better according to the the forecast. Our volume continues to decline, obviously, in the second quarter, but the month of June, we grew volume. We were the only franchise in Argentina that grew volume in Ecuador, and we did that increasing price pretty much in line with inflation. So we we had we have increased prices, you know, around 50% year over year, and and and we were able to achieve growth in in the in the in the month So we have a special plan focused on developing territories that are operated through third parties. I think we failed to be very good at execution in those customers, customers that are not in large urban areas. So just to give you a number, those customers were growing volume at 7% year to date even under this condition. So we found opportunities that we're capturing and the environment is going to be much better in the second half of the year. So again, the trend both in Ecuador and Argentina is improving and Ecuador and Peru continues to be a very good market. So we are confident about that. All right. Understood. Thank you very much. Thank you, Miguel. Thank you. Our next question comes from Juan Guzman with Scotiabank. Yes. Good morning, Arturo, Emilio and Pepe. Thanks for the space for questions and congratulations on the quarter results. I have a couple of questions here. The first one is a follow-up regarding growth in Argentina. You mentioned that you observed a low single digit growth in June. And could this be attributable to promotional activity related to the Gulf Of America or are you starting to observe changing the trends now? And we would appreciate if you could give us some more color on this region. And the same line what is the performance that you are expecting in this country for the end of the year? And now that a year has passed since the change of the excise tax in this country, how has your non sugar and low calorie portfolio has evolved during this period? I mean in terms of volume contribution of this category, what's the picture now and how was it before the tax implementation? Thanks. Yes. Thank you, Juan. Well, first, talking about Argentina, yes, we had a good month of June. And certainly, as you say, the Copa America may have an effect, although last year we had the World Cup. The Copa America, know, was not held in Argentina anyway, and and the 10 and the the Argentinian team did not do that well. So I think that it could have an effect, but it would not be that significant. But all in all, what we see is a is a slightly better consumer environment. It it's it's not a, you know, dramatic shift into a growth in in spending, but it's I think it's a much better trend, I would say, all in all. And and we were able to do that again, I wanna stress that, with a good pricing. So so I think that that the data that we've seen could suggest a turning point in the economic situation for for Argentina. And so we expect to have a a good second half, you know, aside from the efforts that I mentioned that, you know, we're gonna be doing our own, not only in channels, but with with single serve packages. We have introduced the smaller packages that, you know, it's very hard in Argentina to grow the mix of single serve. We've done that with with Sprite, Fanta, Crush, King, Water, Aquarius at $253.75. And so so we're we're doing a number of things that are going to contribute to, you know, to to restore growth in in that market. With respect to to Peru, yeah, we're we're doing much better. We we are starting to recycle the the taxes that was imposed last last year. I have to say we have better execution at the point of sale, and and we're leveraging that right now and more returnability in the market. And I will let Pepe comment further on the performance of our milk category categories and the situation in that market. Yes. Thanks, Arturo. Thank you, Juan, for the question. Regarding the increase of low and no calorie beverages, we have grown around 25% versus previous year, taking advantage of the lower excise tax and thus improving profitability. Our mix of lower no calorie products have grown 13%. It goes up to 36% of 37% of our total business. That has been sustained not only through reformulations, but also through better execution, for example, now that you're using a universal bottle for refillable packages, we can offer our non calorie products in refillable bottles and thus increasing affordability and coverage of those. That's great color, guys. Thank you very much. Thank you, Juan. Thank you. At this time, this ends I would now like to turn the call back over to Arturo Gutierrez for closing remarks. Thank you. And before concluding our call, I want to remind you that Emilio, Pepe and I look forward to seeing you at our upcoming company day in New York City on Friday, August 23. And please reach out to our Investor Relations team if you need assistance to register for the event or for any follow-up questions. Thank you for your interest in ARCA Continental, and have a great day. Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.