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Good day, everyone, and welcome to the Arca Continental Conference Call. [Operator Instructions] Please note that this call is being recorded. [Operator Instructions] For opening remarks and introductions, I would now like to turn the conference over to Melanie Carpenter of i-advize Corporate Communications. Ma'am, please go ahead.
Thanks, Katie. Good morning, everyone, and thanks for joining the senior management team of Arca Continental to review the results for the fourth quarter and full year of 2018. The earnings release went out this morning, and it's available on the website, arcacontal.com, in the Investor Relations section. There's also a webcast of this event for you to listen to live and via replay. It's my pleasure to introduce our speakers. Joining us from Monterrey is the CEO, Mr. Arturo Gutiérrez; the Chief Financial Officer, Mr. Emilio Marcos; we also have Mr. José Vorda, the Chief Commercial and Digital Officer; as well as the Investor Relations team. They'll be making some forward-looking statements today, 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'll turn the call over to Arturo Gutiérrez to begin the presentation. Please go ahead, Arturo.
Thanks, Melanie. Good morning, and thank you, everyone. We appreciate you joining us today. Before I begin with my prepared remarks, let me highlight an important announcement we made last month. Manuel Barragan Morales will retire as Chairman of the Board after a remarkably productive tenure of 14 years. This will become effective at our next Annual Shareholders' Meeting on April 4. Under Manuel's leadership, Arca Continental became a leading global bottler of Coca-Cola, profitably doubling revenues every 5 years and significantly multiplying its market value through a combination of strong organic growth and strategic geographic expansion. As a recognition to such achievements, our Board of Directors unanimously designated him as Honorary Lifetime Chairman. We sincerely want to thank Manuel for his leadership and highlight his legacy to our organization. As part of the same announcement, the Board of Directors elected Jorge Santos Reyna as its new Chairman. Jorge has been on AC's board since 2001, serving as Vice Chairman since 2007. We wish to reiterate our commitment to work jointly with Jorge to continue expanding Arca Continental's position as a leader and as one of the most attractive investment options in the food and beverage industry. Now let's summarize our performance for the fourth quarter and full year 2018. As you are aware, last year was marked by ongoing persistent macroeconomic challenges to our industry and our business. The combination of the slowdown in some of the countries where we operate, the prolonged uncertainty in Argentina, new excise taxes on sweetened beverages in Peru and new tariffs on key raw materials such as aluminum in the U.S., all created one of the most adverse economic environments for our company in recent years. Nonetheless, we are pleased to report that despite this turbulence, Arca Continental continued to make steady progress. Our organization came together to tackle the issues and implement solutions that resulted in a positive outcome as we continued to gain value share across almost all our operations for both the quarter and the year. Total consolidated volume declined 1.2% in the fourth quarter and grew 6.4% for the full year to reach more than 2.2 billion unit cases. Once again, we led industry growth and expanded value share in non-alcoholic, ready-to-drink beverages. Consolidated revenues increased 3.2% in the fourth quarter and 14% for the full year, reaching record sales close to MXN 159 billion. Consolidated EBITDA remained flat for the quarter and grew 5.7% for the full year. Now let's briefly review our performance across our operating groups, beginning with Mexico. Our beverage business in Mexico had a challenging fourth quarter. Total volume declined 1.1% due to rainy weather and below-average temperatures. Rainfall in many areas was at the highest level in years. Precipitation in 4 of our largest regions was more than double the level from 2017. Moreover, well below normal temperatures were also experienced in many of our large cities and metropolitan areas. Despite such negative weather conditions, our team worked diligently to mitigate the impact in the quarter and drive a 2.3% volume growth for the full year. Total revenues in Mexico rose 7.5% in the quarter and 6.7% for the full year to reach MXN 62.4 billion. Average price per case, not including jug water, rose 10% in the quarter to MXN 59.4. We refined our price-pack architecture and surpassed our goal to increase prices slightly above inflation in the year while at the same time gained value share across all the categories where we compete, outpacing once again the beverage industry in Mexico. EBITDA declined in the quarter and increased 3% for the full year to MXN 13.5 billion, representing a margin of 21.7%, a contraction of 77 basis points, mainly due to increases in PET prices and concentrates. 2018 was an outstanding year for our still beverage operation, which now is over 50% of our total volume mix. Importantly, we continue growing and gaining share across all categories: juices, sports, energy and dairy. Notably, Santa Clara dairy portfolio continued growing double digits. In 2018, we expanded coverage, innovated the packaging and launched new flavor milk presentations. Moving now to our beverage business in South America. Total volume in the fourth quarter was practically flat. Volume growth in Peru was partially offset by declines in Argentina and Ecuador. For the year, total volume declined 2.4% to 551 million unit cases. But we continue making sequential progress across the region under a volatile macroeconomic environment. Let me provide you with more color on each of our countries in this region. Our beverage business in Peru delivered solid volume growth in the fourth quarter, up 3.6%, confirming the recovery trend of the last couple of quarters, while volume was down 6.3% in the full year. Quarterly volume growth was driven by sparkling beverages and bottled water, up 4.4% and 6.5%, respectively. The economy in Peru gathered pace and strengthened considerably in the fourth quarter with notable job gains and robust credit growth on the back of solid consumer spending. Our team mitigated the strong impact of the new excise tax, leveraging the experience gained from past cases in Mexico and Ecuador. Once again, our price-pack architecture, revenue management disciplines and returnable packages played a key role in this quick turnaround. We will continue investing in market-focused initiatives, boosting returnable presentations and increasing cooler coverage. In fact, in 2018, we installed over 30,000 additional cold drink units. In addition to our commercial initiatives, we doubled down on our cost savings and efficiencies program. Great example is the new distribution center we opened in South Lima last November. This $50 million, state-of-the-art facility serves over 22,000 points of sale and significantly streamlines logistics and distribution costs while improving service levels to our customers. Notably, despite economic weakness and a decline in consumer demand, we expanded margins and increased our overall profitability. In 3 years of operating in Peru, we are satisfied with the results achieved to date and the opportunities available to continue expanding the business in a country with solid fundamentals and positive long-term prospects. In Ecuador, fourth quarter volume declined slightly by 0.8% and grew 3.7% for the year, driven by a 2% increase in sparkling and 10.2% in still beverages. We also gained value share in 2018 despite weakening consumer demand. This quarter, we launched a new version of Fanta as we continued innovating our portfolio by reformulating products to offer more low- and no-calorie options. Tonicorp, our dairy business, delivered low single-digit revenue increase in the quarter and was flat for the year. Despite the slowdown in the Ecuadorian economy, Tonicorp consolidated its market leadership and captured additional value share across all 4 core categories: yogurt, flavored milk, oatmeal and ice cream. Execution on the point of sale and product innovation have been the pillars of our successful commercial strategy. Moving now to Argentina. Consumers have been severely impacted by a slowing economy, rising inflation and reduced disposable income. Volume in the fourth quarter declined 7.9% and remained flat for the year. Despite prevailing economic challenges, we gained value share in alcoholic-related drink beverages as we re-enforced our 2-fold strategy to promote single-serve consumption and to increase affordable returnable presentations. We posted revenue growth in local currency terms. Once again, our price package architecture allowed us to pass through most of the effect of high inflation rates. We remained focused on cost discipline and optimization. In 2018, we captured significant savings as a result of the vertical integration [ indication ]. Turning now to our beverage operation in the United States. Coca-Cola Southwest Beverages delivered its seventh consecutive quarter of revenue growth, up 3% in the fourth quarter and 42% for the full year to reach $2.7 billion. We continue to grow value share in non-alcoholic, ready-to-drink beverages, driven mainly by sparkling, sports drinks and sparkling water, up 0.4%, 3.4% and 5.3%, respectively. Price mix grew 5.6% in the quarter, delivered mainly by rate increase of 4.6% achieved after the pricing actions taken last July on our sparkling portfolio. Price mix for the year grew 3.4%, reaching our goal to be at or above consumer inflation. Volume declined 2.6% in the fourth quarter and grew 0.1% for the year as we faced an unusual series of challenging hurdles, which impacted our volume performance. Our territories experienced records rains and flooding and also a tough comparison base as volume in the fourth quarter of 2017 included significant volume of case pack water for recovery efforts related to Hurricane Harvey. We continue strengthening our ACT commercial model as we completed the first full year operating in the U.S. We're refining point-of-sale execution with a strong focus on consolidating the fundamental strategy and improving customer intimacy by increasing face-to-face interactions. We have also improved key metrics such as visit completion and strike rate, yielding additional consumer orders. Another core element of our commercial model is cooler coverage. In 2018, we placed additional cold drink equipment to reach 40% coverage. And another significant milestone, the new BodyArmor brand was successfully launched at the end of October, with 24 SKUs now carried in our [indiscernible]. As we start our third year of operations, we are convinced that we have strong business plan for 2019. We're encouraged by the fast start in January, with results beating volume and revenue plan targets. The ACT model will continue to be the backbone of our execution strategy with tailored strategies based on consumer segmentation, price increases above consumer inflation and new model for the on-premise channel and continuously improving execution through the fundamentals. I will now provide you with an update on our synergy plan. I am glad to report that we are on track and making steady progress to achieve our target of $90 million in annual synergies by 2020. Our current projects are doing well and generating significant benefits. As of last December, we have captured $32 million on an annual running rate basis. Key savings initiatives in 2018 included bottle lightweighting, shifting to plastic pallets, eliminating shelves, using one-piece closures to reduce resin weight, leveraging procurement negotiations to reduce aluminum conversion costs, deploying slick can production capacity and reducing CO2 consumption by increasing yield, among others. There were also revenue synergies, which are coming primarily from the expansion of coverage in Topo Chico and Mexican Coke and an improved vending machine operation. Additionally, we're always starting to see significant benefits by replicating best practices in revenue growth management and route to market from our ACT commercial model. In 2019, our plan incorporates a number of projects for additional synergies and $11 million of carryover benefits from 2018. Let me now close our operation review with our snack business. Wise in the U.S. delivered high single-digit revenue growth in the quarter, driven by growth in the potato chip category where Deep River expanded product coverage, thanks to our expansion of distribution capabilities. The tortilla chip category grew double digits in the fourth quarter and for the full year. Other categories that are becoming more relevant to our business are popcorn and onion rings, both boosting growth in the quarter and the year. We also continue expanding our national footprint of core brands with large retailers. In 2019, we will keep investing in perk innovation and enhancing brand equity of our portfolio and further expanding distribution in new territories and categories as we leverage the addition of Deep River in Carolina Country Snacks portfolio of brands. Bokados in Mexico continued building its growth momentum, posting sequential mid-single-digit sales growth in the fourth quarter and the full year, driven by exceptional growth in the supermarket and wholesale channels. Bokados outpaced the southeast snacks industry in Mexico, driven by growth in extruded chips and popcorn. Lastly, Inalecsa in Ecuador posted a low single-digit sales decline in the quarter. On a full year basis, sales were up in the low single digits, driven by revenue management initiatives and a strategic focus on promotions. We continued innovating our product portfolio with the launch of a new line of corn chips. In the quarter, we started up a new production line to support this new category of chips. And with that, I will turn the call over to Emilio to comment on our financial results. Please, Emilio.
Thank you, Arturo, and good morning, everyone. We are pleased you are here with us to review our year-end company results. Arca Continental's positive results were achieved, thanks to the disciplined price-pack architecture, and initiatives implemented in the second half of the year where we registered price increases above inflation in the majority of our operations, partially offsetting this low volume trend and higher raw material prices. Meanwhile, our Peruvian business unit continued its fast recovery due to a better economic outlook combined with efficiency plans set forth at the beginning of the year. Both aspects contributed to better margins in the fourth quarter. It's important to mention that this is the first comparable quarter since [U.S.] acquisition in 2017. Also in the quarter, we're recognizing the effect of Argentina hyperinflationary accounting as we began to express the figures in real terms from July 2018. First, we adjusted the local currency numbers with inflationary effects to reflect the currency purchasing power. Then we translate it to Mexican pesos using the end-of-period exchange rates. All this expression process gave us a marginal negative impact in net income. Now I will go into the numbers. Arca Continental's consolidated revenues increased 3.2% in the fourth quarter, led by the U.S. and Mexico region growth with 6.8% and 7.5%, mainly due to price increases in the various operations in the second half of the year. This was partially offset by decreasing revenues from South America of 7.2% from the Argentina devaluation effect. For full year 2018, revenues grew 14%, with Mexico growing 6.7% and the U.S. up 43.1%, due to 3 more months of sales from the Coca-Cola Southwest Beverages done in 2017 and 8 months from the Oklahoma territory. Comparable currency neutral net revenues increased 6% in the quarter, and in the year, excluding U.S. beverage operation, were up 6.2%. In the fourth quarter, we reported a gross margin of 42.6% versus 45% in the same period of 2017, which is down 230 basis points due to higher raw material prices, mainly PET with an increase of more than 20% in South America and 14% in the U.S. Consolidated EBITDA for the quarter was flat versus last year at MXN 6.8 billion for a margin, without revenues outside the territory in the U.S., of 17.3%. The dilution is explained by the contribution margin effect, partially offset by the South America SG&A control. In 2018, EBITDA grows to MXN 27.5 billion, up 5.7% for a margin of 17.6% without revenues outside the territory in the U.S., a dilution from 19% last year, explained by the impact on raw material prices and the integration of Coca-Cola Southwest in April and Oklahoma in September 2017. On a currency-neutral comparison basis, EBITDA in the quarter increased 5%; and full year, excluding U.S. beverages operations, 4.2%. The comprehensive cost of financing in the quarter reached an expense of MXN 640 million versus an income of MXN 237 million basis in the same period of 2017. The variation is explained by a higher exchange rate gain due to the effect of the Mexican peso devaluation on our dollar cash position in 2017. For the full year, this line increased 62% to MXN 4.1 billion due to an exchange rate loss in 2018 as we posted a gain in 2017. This quarter, we're posting a monetary position gain from Argentina of MXN 245 million. Income tax provision increased in the fourth quarter to MXN 695 million for an effective tax rate of 19.2%, explained by the final deferred tax adjustment due to the U.S. tax reform. For the full year, income taxes increased 18.4% to MXN 3.9 billion. Effective tax rate for 2018 was 26.3%. In the quarter, net income decreased 45.3% to MXN 2.3 billion, representing a margin of 5.8%. The decrease is explained by the hard comps since 2017 net income has a benefit from deferred tax adjustment resulting from the change in the U.S. corporate tax rate. For full year 2018, net income decreased 33.5% to MXN 8.7 billion, reflecting a margin of 5.5%. In 2017, net income had 2 extraordinary effects: the sale of Topo Chico brand and the U.S. deferred tax adjustment. As of December, our balance sheet reflected a cash position of MXN 16 billion, a total debt of MXN 55.8 billion for a net debt-to-EBITDA coverage ratio of 1.45x. In 2018, our operating cash flow reached MXN 20.8 billion. The total CapEx investment for the year were MXN 11.4 billion, in line with the amount announced in April 2018. In 2019, we're expecting to have more stable raw material prices. We will continue with strict controls on SG&A and the execution of our synergy plan in the U.S. All this, combined with the deployment of innovations in our commercial platform across our operations, will allow us to deliver solid results to our shareholders. And with that, I will turn it back to Arturo.
Thank you, Emilio. We expect consolidated annual volume growth at around 2% in 2019. We will continue adjusting prices in line with inflation at each of our operations while always assuring that our products remain affordable. We plan to invest 7% to 8% of total sales in CapEx. As always, we will follow a disciplined and consistent approach to make the necessary investments to strengthen our market execution and further accelerate our digital transformation and innovation agenda. Additionally, we will invest in strategic initiatives such as the new production facility in Houston, Texas, scheduled to start operations in the first quarter of 2020. On the commodities front, we anticipated benign sweetener price scenario going forward. Our investments in sugar mills in Mexico and Argentina give us more flexibility and make us more competitive. In Argentina, our sugar mill investment resulted in an overall cost reduction of 22% compared to market prices. In Peru, we recently hedged all of our sugar needs for the entire year at an attractive price. Regarding PET, resin prices and plastic packaging materials are expected to remain stable in dollar terms for the remainder of the year. In aluminum, we will continue with our disciplined hedging program to mitigate volatility. We hedged the LME component, which represents the largest portion of the costs. We closed already over 80% of our needs for U.S. operations in 2019 at lower prices than 2018. In addition, this year, we started a new hedging program to mitigate volatility of fuel prices in the U.S. To date, we already hedged 80% of our diesel consumption for the year at a competitive price as well. All that said, we expect to experience some turmoil in the near term in some markets. Although the economic climate in Argentina and Ecuador may not yet have shifted to a favorable scenario, they are expected to remain neutral for our business in 2019. Nonetheless, other regions are doing well or are starting to recover. Our operations in key markets such as Mexico, Peru and the U.S. should be our growth engines for the near future. Looking ahead, 2019 is shaping up to be stronger than 2018 overall. We will remain focused on creating shareholder value through sustainable, profitable growth across all our businesses. As we have done consistently in our 93-year relationship with The Coca-Cola Company, we look forward to once again collaborate to drive forward momentum in 2019. As part of such effort, we will continue to respond swiftly and effectively to the new challenges we face in our markets, particularly in Latin America. It has always been part of doing business in the region, and we've learned to act and prosper in such environments. I would like to now open the call for questions. Operator, we're ready for questions, please.
[Operator Instructions] Our first question comes from Fernando Olvera with Bank of America Merrill Lynch.
By the way, my line disconnected, so I'm sorry if I ask something that you already mentioned. I have 2 questions. The first one is regarding Mexico. Can you tell us how is volume performing here today after the government reduced taxes and increased wages in the northern border? And in this case, the trend you are seeing right now will continue throughout the year? And also, on volume, regarding your guidance for 2019, can you give us a breakdown by country? And my other question is on -- it's about South America, EBITDA margin expansion was really outstanding. So can you talk about the EBITDA margin performance by country during the quarter, please?
Yes. Thank you, Fernando, for your questions. It's actually the first question today. So we will address the first part -- I will address the first part and then turn it over to Emilio. First of all, Mexico is a market that continues to grow. And you've seen the performance that we've had in the Mexican market for the last 4 years. And there's -- we continue to find opportunities to grow in the market. And there are very good signs now of the situation in the country that will certainly impact consumption, the increase in the minimum wage, as you mentioned, the VAT taxes that were reduced. And we -- actually, it's important to mention that we passed through the benefit of that tax and some price adjustments in the border, and -- but we had tough comparisons from 2018. So we are basically flat so far. We're expecting a positive performance in the rest of the year. There are other things in all of Mexico that also are going to be important for growth. The universal pensions that were announced and other benefits to the general population that will impact domestic consumption across Mexico. And that is reflected in the consumer confidence for the country. That increased in January compared to the same period in 2018. So there's much better optimism about the future of the economy. And so now we've had -- obviously, based on the performance of last year, when you have a bigger growth in the first quarter in some regions, probably those are not growing as much this year. So it's all, I think, fairly balanced, I would say. If you look at growth across channels, we continue to have growth in the traditional channel. We saw the month of December where we had a very robust growth in all of the Mexican market. The quarter shows a decline in volume, but it's mostly affected by poor weather conditions in the month of October and November. And the other thing that [is proven out] is we had price increases leveraging our Argentinian capabilities, and our prices in the last quarter and also in the first month of the year 2019 are going to be well above inflation. So that's very important. If we think about guidance 2019, surely, there are markets where we have a bigger opportunity. The ones that will be performing above the average that we have provided would be -- certainly Peru has, I would say, the biggest opportunity, recovering from the taxes of last year. And we're still comparing with the pretax volumes, and we continue to grow the market. We have a lot of opportunities as we execute better, especially in the market of Lima. So that would be above the average. The country that probably has the most challenging situation would be Argentina. So we would maintain our full year targeted volume to be flat. I would say that, that would be a good outcome in Argentina for the year considering the conditions. It's going to be a very difficult first half of the year in Argentina. I think conditions will improve midyear, and we'll have the opportunity to recover some of the volume in the second half of the year. At the same time, we'll look for opportunities in some regions in Argentina that we are not serving as we would like, especially third-party distributor volume. So there are always opportunities in the market, and certainly those conditions will affect us more in that country. And the other -- a big market, the U.S. is also expected to grow, which is -- as you know, it's always a challenge in a more mature market. Those will be my general comments in volume. So I will turn it over to Emilio for the final part of your questions, Fernando.
Thank you for your question, Fernando. Yes, as you mentioned, in South America, we have very good expansion on margins. We increased margins in Peru and Argentina. The only one that did not have an improvement on margins was Ecuador. The expansion in Peru has an extraordinary benefit this quarter that -- since we received some participation from The Coca-Cola Company to increase promotion with the customers. But even without this positive income, Peru expanded margins for -- in the quarter for 250 basis points. We have done a very good job on OpEx control in basically all of our operations. In Argentina, even though the situation and -- the volume and the economic situation in Argentina, we have done a good job also in G&A and OpEx. We have improved margins in Argentina in the quarter due to price strategy, our integration in sugar, as Arturo has mentioned that we have the sugar mill there, and also the hyperinflationary accounting give us a little bit of improvement on margins. But even without all these extraordinary effects, South America expanded margins in the quarter. So we're really happy with that result. As I said, the only country with lower margins in the quarter was Ecuador. In full year, basically, the margins were a little bit lower than last year. We have a very high increase in PET prices that were partially offset by better negotiation on other raw materials. But overall in the year in South America, we had a very good result in the year with a 40 basis points margin expansion during the year. And we expect for this year to keep those margins, of course, and try to improve them since we have very good -- better raw material outlook overall.
Your next question comes from Sergio Matsumoto with Citigroup.
I wanted to ask about your view around the aluminum cost and when it might normalize for you. You mentioned that there was a hedge at a lower price. Would that benefit be starting in the next quarter or in one of the subsequent quarters in 2019? That's the first question. And the second question is if you could provide an update on the U.S. synergies and how much we could expect in 2019.
Sure, Sergio. Thank you for your question. Let me talk about aluminum first. As you know, and we explained it in this call before, there are 2 components to the aluminum price. And on the one hand, we have the LME, which is, let's say, the basic metal price. And that price increased in 2018 significantly versus 2017, and now we have hedged at a lower price in 2019 versus 2018. So that is a factor that will, in a way, stabilize prices. The problem that we have is with the other component, which is the Midwest premium. And that was affected by the duties imposed to aluminum in the U.S. -- aluminum coming from other countries. It is important to say that most of our aluminum is not imported anyway. It is scrap aluminum. It's recycled. But that's how the system is operating right now. It's really an increase in price that has no logic behind it. But that is how the logistic price is calculated. That increased last year as a result of the duties and tariffs imposed. Those are not being reversed. So we believe that as part of the free trade agreement that might be approved by probably midyear, there would be a positive effect on those duties in aluminum. So at this point, we are seeing the benefit of the LME hedging, but we're still having a negative comparison of the Midwest premium in the first quarter of last year versus what we have right now. So just to give you an idea of -- the Midwest premium is still the smaller component of the price, but it went up like 100% last year. So that is the comparison that we're kind of suffering right now. And that, since it's completely artificial, we expect that to normalize at some point, but it has not happened and it is connected to the free trade negotiations and final agreements. So let me address now your second point, which is the synergy plan in the U.S. So as I said, we've achieved around $32 million of synergies in projects that we carried out throughout 2018. Some of that is reflected in our 2018 results and some of that is going to be carried over to 2019. About $11 million would be carried over, approx. The other $21 million were reflected in the financial statements. They were unfortunately overshadowed by a lot of the negative effects that we had during the year, specifically aluminum, PET and fuel costs. If you account for those, it's very similar to the impact -- the positive impact that we have from synergies. So we have -- we had around 25 projects in 2018. And if you'll let me mention some of those, the most important were improvements to line utilization. That reduces labor cost. We shifted from wood to plastic pallets. It's a very important project in terms of savings. We had a lot of procurement savings from negotiations. We optimized CO2, the yields of CO2. We had light-weighting of bottles, although it was a smaller impact. We started this year -- we're going to start this year with a test on the 20-ounce bottle, reducing our weight, which has a much bigger impact. And the 20 ounce, just to give you an idea, we're at 22 grams in the U.S. In our markets in Mexico, we are at 17.5. Obviously, it's not as easy to move down to that weight because it connects to shelf life and all of that, but just reducing 1 gram of weight in the U.S. would result in $1 million of savings roughly. So we're going to start brand by brand in our U.S. market. We moved into different type of labels and different types of closures. We started producing cans in the other plants like San Antonio to reduce freight. And we have something that's important to mention. We hadn't mentioned it before. It's a sensitive issue. But we reorganized our company in the U.S. We moved from about 5 regions to 3 operational regions, and that accounts for significant savings. None of that is reflected in 2018 because the project was announced in the final part of the year and it became effective on January. So it is a big reorganization within our company. And there were again some of the revenues -- the revenue synergies, sorry, the ones that you can really track easier like Topo Chico, like Mexican Coke, like vending operation. And then we have some of the revenue synergies that are not included in the numbers that I mentioned, which are the RGM synergies. They're harder to calculate. Same thing as a better execution in the market. Those things should bring additional value, which is very difficult to calculate. We're -- and to be very strict and rigorous about the calculations, we're not including those in the $32 million calculation. We strongly believe that, that is going to bring additional value in the short and the long term. So I don't know if that answers your question, Sergio?
Yes, it did, Arturo.
Thank you, Sergio.
Our next question comes from Antonio Gonzalez with Crédit Suisse.
I just have 2 quick questions. The first one, on Peru. I was wondering if you can remind us, what was the base of low-calorie products prior to the implementation of the tax last May? You mentioned on your press release that it's 28% at the moment. I was just curious to see where was it, I don't know, 2 or 3 years ago and where do you think this number can get to over the medium term? So that's number one. And then number two, in the U.S., clearly, volumes decelerated in the fourth quarter relative to the first 9 months. And this is happening even when there is a low-hanging fruit, I presume, in terms of the revenue synergies that you were just describing, Arturo. So does this tell you at all that there are more difficulties in implementing price increases ahead of inflation, let's say, in the next 2, 3 years than you were foreseeing? Or is there any -- either any sort of one-off in the fourth quarter explaining this volume weakness, that we shouldn't extrapolate as we look at the price increases that you are yet to implement in the next 2, 3 years?
Thank you, Antonio. I will address your second question first, and then I will let Pepe Borda talk about Peru and low cal. In the case of the U.S., we certainly had a challenging quarter, but -- our volume declined in the quarter. We still are comfortable with where we are and the growth in the U.S. market. As you say, there are still opportunities with the things that we're doing in some of the new categories, and there are opportunities in the traditional categories just in the way we execute in the market. We had a good December. Actually, we suffered, really, weather conditions, record rains, flooding throughout our territory. And also, we had a difficult comparison in the fourth quarter as we compare with some of the volume, especially water and bulk water -- or case-packed water for Hurricane Harvey's recovery actions in 2017. So I think those are not an indication of how we're going to perform this year. In terms of prices, you see the prices were increased in mid-July, and the impact of these changes in the fourth quarter really was minimum. During that period, sparkling experienced a decline, and stills also declined despite not having price increases in those categories. So it's really consistent with weather and the colder temperatures in October and November. Our value share went up in sparkling and stills. So that means that our pricing actions, I think, were very effective, and that is one of the synergies that we continue to implement in 2019. There are a number of things that make us especially optimistic of things that we're doing in the market. In the fourth quarter, we started rolling out our go-to-market capabilities. And that is mostly targeting the On-Premise channel. We have new go-to-market pilots. And this consists basically of reallocating resources, some account manager roles, increasing face-to-face interactions with the customers. This is without increasing cost. Actually, there might be some cost savings there in the reallocation of our resources. But it certainly also promotes a closer connection with our customers in the On-Premise channel, which we -- that is where we have the biggest opportunity. As we track our fundamentals -- one of the basic fundamentals indicators is the availability of your products -- of your basic products and the customers. And we have 3 channels: large stores, small store and the On-Premise. The On-Premise is where we have the biggest opportunity. The availability there, in many cases, it's 25%, 30% of those basic SKUs. So there's a lot still to do, so we expect 2019 to be a very, very good year. We had a good January also, as I mentioned in my initial remarks. So that also makes us very optimistic about our prospects in the U.S. Pepe?
Arturo, just before we move on to Peru, is there any chance you give us an informal, if not very numerical guidance on -- do you still expect 2019 to price ahead of inflation in the U.S. specifically?
Yes. We -- that is our expectation, certainly for 2019. As you know, prices in the U.S. are negotiated as a system for most of the customers. So we already have defined some of the prices for the year. And then the rest of the local customers, we align to that price increase to maintain a price coherency. So we do expect to have prices above inflation in 2019 as well, answering your question. So if that answers your second part of the question, I will turn it over to address Pepe Borda to address your question about the Peru market for low cal.
Thank you, Arturo. Antonio, if we -- when we talk about low- and no-calorie growth, let's remember that we're talking about 0-calorie and low-calorie products, they are those that have less than 20 calories per 100 ml. We finished December last year with a mix of 36% of low- and no-calorie products within our portfolio. That left us 12 percentage points increase versus last December; for our full year, of 31% mix increasing 5.3% in the whole year versus 2017. I don't have the exact numbers of 3 years ago, but I can -- I would say that it was around 20% low- and no-calorie mix at that time. Thank you. That answers your question, Antonio?
Yes.
Thank you very much.
Thank you, Antonio.
Our next question comes from Antonio Hernández with Barclays.
I have a question regarding the U.S. Besides what you mentioned regarding the weather headwinds, what other challenges do you expect there, especially because of, as you already mentioned, it is a more mature market? So in terms of competitiveness and other issues, what other challenges do you expect there?
Thank you, Antonio. If you're asking about the challenges in the market as we grow, well, certainly, the U.S. is the most competitive market where we operate. So I think the challenge is that you have to continue to incorporate new products and grow different categories as consumers are very demanding. And for that, we have -- the advantage is that we have a system in the U.S. that is very closely networked to work and identify opportunities in some of the growing categories. As you know, we incorporated BodyArmor very successfully. We also have been growing Monster, and we were actually planning to continue to grow Monster in our market. And that is a source of continuous growth as well. The other challenge, as always, is the pricing situation because it's something that we negotiate as a system. But I think as you refine your capabilities for pricing in RGM, it's based on analysis and identifying those opportunities. We have been able to capture the benefits of pricing with all the inflation because as you know, price is always -- is not always just increasing the rate, it's also about how you handle the promotions. And that's one of the opportunities that we still have in the U.S. market. So all in all, I think we still are in a position to capture many of the things that we've been doing so far. Last year, we completed the first year of operating under the new -- our ACT model, and that means having new metrics in the market, the culture of fundamentals. We believe that many of those initiatives have not really paid off completely. So we have to increase our indicators, the indicators that we adopted that relate to availability of product to -- just visit completion, let me give you some numbers. Visit completion, that means visiting the customers that we should, went from 77% to 87% at the end of the year. Strike rate, which means when you take orders, improved from 78% to 85%. We visited 400,000 more customers and wrote like 200,000 more orders. Those are the implications of rolling out that model, and that is what we've seen at the end of the year. Also, our cold drink equipment strategy, that has also increased last year; and the strike zone, from 33% to 40%. So there are many other things in executing in the market that we've been continuously improving. So if you look at the indicators of the last part of the year and you project those to the future, that certainly are going to give us additional growth in the U.S. market as well.
Our next question comes from Sam Ray with UBS.
I mean, my queries are also on the profitability. Firstly, for Mexico, I mean, the price increase was very strong at around 10% during the fourth quarter. But despite the strong pricing -- and you also saw the increase in returnable packaging, plus you also saw a mid-teen growth in vending. All that is very -- should be margin accretive, but it was a bit surprising to see the EBITDA drop in Mexico during the quarter. So could you please explain what is driving that and if you're seeing a change of this trend in this year so far? And the -- that's the first question. And the second question is more on the accounting side, I would say. I mean, we know there's a difference in the growth trend between operating income and EBITDA during the fourth quarter. I mean, basically, even if you adjust for the nonrecurring expense, EBIT was down high single digit, but EBITDA came flat. So if you could share some light as to why the D&A rose so much, that would also be very helpful.
Okay. Thank you, Ray. Let me talk briefly about your first point. I'll turn it over to Emilio to address your questions. But certainly, the impact in profitability in Mexico is something that results from -- some of the factors that we've mentioned, especially the biggest impact in Mexico have been PET costs for the year. I think that was the biggest impact. That continues to show. Prices for PET in 2019 look more favorable, as I mentioned. Also concentrate prices, those are the things that we've seen throughout the year. PET has, as I said, a positive trend. In the fourth quarter last year, we also had some, probably, one-timers that are still impacting EBITDA and not considered nonrecurring. But we believe some of the -- consulting fees and things that we've been incurring. But I will turn that over to Emilio to give you a more detailed explanation on that point and also on your accounting question.
Yes, thank you, Arturo. Thank you for your question, Sam. Well, as you mentioned, EBITDA margin in Mexico region, including complementary businesses, show a dilution of 166 basis points in the quarter. This quarter -- I mean, the last quarter of last year, we have the highest raw material prices in the year in Mexico, mainly PET and concentrate prices because of the incidence price increase to Coke. That impact cost in the quarter 180 basis points. So this negative impact was partially offset by increase in prices in the quarter. Additionally, as Arturo just mentioned, we have an administrative expense increase, as you can see in our P&L. Administrative expenses increased double-digit since, as you know, we are very active in our digital transformation and innovation agenda. So we have some extraordinary fees last quarter for those services that impacted also the margin in Mexico, and on a consolidated basis. But even with all these raw material price increases and incidents, the beverage business in Mexico maintained margins compared to last year overall. So margins during the year in the beverage business in Mexico were flat, even though all this price -- I mean, raw material price increases, and as you know incidence price also increased the second half of last year. For this year, we will continue our strategy to increase prices in line with inflation or a little bit higher than inflation, and we should be able to more than compensate the potential increases in raw material prices in pesos because, as Arturo mentioned, we have a better outlook on raw materials in dollars. But depending on the exchange rate, we will need to see what's going to be the prices in Mexico, depending on the exchange rate. But even with that, we don't expect a very high exchange rate, so we will be maintaining or even improving margins, hopefully, this year in Mexico. So I don't know, Sam, if that answered your question.
That's extremely helpful, extremely helpful. So basically, your raw material prices, you have it sourced so that are lower priced in dollars, but the peso impact will be, of course, dependent on the currency. That's the key conclusion, I guess.
Yes, correct. Last year, we have a very good FX hedge. We have an average price of -- FX price of MXN 18.5 per dollar. This year, we're going to be around MXN 1 above that. So that's why, for us, maybe the raw material in pesos will have that difference. But hopefully, we'll compensate the U.S. dollar price reduction with this new exchange rate, and hopefully, we'll be flat in pesos. And talking about the EBITDA, there's 2, basically, items there that affect the operating income versus the EBITDA: one is the nonrecurring expenses that you can see there; and the other one also is the depreciation to the hyperinflationary in Argentina. That grew also the depreciation. So that's why you see a difference in -- changes on the operating income versus EBITDA.
Our next question comes from Carlos Laboy with HSBC.
Arturo, when you think of future U.S. pricing, do you think that other bottlers and the Coca-Cola Company are on the same page with you in terms of a new long-term reality? In other words, can we expect the future pricing in the U.S. to be in line with bottler cost inflation or with just CPI?
Thank you, Carlos. Well, yes, as you know, pricing in the U.S. has been one of our focuses in -- as we come to that market, probably our top priority, as we've seen what's been going on in the U.S. market in recent years. So I think we have a shared vision with the rest of the bottlers. And there is a close interconnection with the top bottlers in the U.S., so we maintain close conversations on pricing and many other strategic issues. I would say that we're very well aligned on that idea. The challenges are that -- to have an effective RGM strategy, you need to have more than just an alignment on the will to do it. You need to have the capabilities. You need to have the right packages also to do it. You need to have the right segmentation many times. So that is where we need to work at. We are -- for example, we are testing single-serve packages that are very important to have in the U.S. market at smaller sizes as compared to our 20 ounce, which is our frequency pack in the U.S. And we need to work on segmentation with customers, which is very difficult to do, as you know. So there are a number of things that we need to do aside from just having the desire to move in that direction. But I would say that we are very well aligned with the bottlers to do it. Some bottlers are running some of the tests. We are doing things in a round, and we are very open to sharing the experiences among ourselves to find the best path to continue to growing prices above inflation. If you look at what we're going to do in 2019, it's another good example of how there is an alignment on creating, at the end, this positive cycle of profitability and continuous investment in the market. Because what we predicated is that this is what we want to do not just to improve our short-term profitability, but also our long-term prospects in the market because higher margins, as you have in some of our Latin American countries, resulted in more investment in the market in coolers and execution at the point of sale. And that, in turn, improves your business and creates this positive cycle, which is what we want to have in the U.S. as well. So I would say that yes, we are happy to have that alignment within the system, but now we have to work very hard. That is the challenge ahead of us.
Our next question comes from Leandro Fontanel (sic) [ Leandro Fontanesi ] with Bradesco.
It's Leandro Fontanesi here. Just 2 questions. The first one, in the U.S. and also in Mexico, it called our attention that most of the volume decrease was explained by the flavor segment. So if you could provide more color of what's happening in this segment. Is it -- do you see a higher price than we did before for flavor compared to cola, for example? And the second question, we saw that Coca-Cola Company is selling a stake in bottling in Latin America. We have been listening that they have been focusing some of their investments and changing capital locations. So if you see a potential stake sale in Arca as something that we could see or is a risk that we should have in mind.
Thank you, Leandro. What I will do is I will address your second question first, then I will turn it over to Pepe, our Chief Commercial Officer, to talk about flavor categories. Talking about KO and Andina, as you saw, the Coca-Cola Company mentioned that they are continuously evaluating investments in bottlers, and they have been consistent in that approach for many years. And the idea, obviously, is to ensure that they are deploying their capital in the most effective way possible. And this will result in, as they said, changes, occasional changes in their investment in bottlers. And that is the case for their investment in Lindley last year, in our own subsidiary, the sale of their stake last year. So what they said is that, that allows the Coca-Cola Company to redeploy capital to brands and to new businesses, and that will be for the benefit of the whole system, which I think makes sense. Having said that, they have also mentioned that they don't have any plans to announce any other transaction with bottlers. As you know, they maintain around an 8% stake in Arca Continental and about 20% in AC Beverages, but that is as far as we know. So with that, I will turn it over to Pepe for your first question, if that's okay with you.
Thanks, Arturo. Thanks, Leandro, and thank you for your question. Regarding flavors, we can explain the negative results in 2 different realities. In the U.S., flavors have been more impacted due to higher price elasticity. Specifically, Fanta 12-pack cans were the most affected, mainly due to reduction in less profitable promotion activities, especially in the large-store channels. We shifted most of these promotional activities in November and December to cola with very positive revenue results in the quarter, especially Coke Zero that is growing 10.6% versus previous year. When we talk about Latin America, there's -- the explanation is a little bit different. We have been testing low or no-sugar formulas for our flavor brands across Latin America in an agile way, learning directly from our consumers. This has cost us some short-term volume, but we have used these learnings to develop optimal formulations in terms of sugar content and flavor. As an example, in Mexico, most of the volume decline comes mainly from the, what we call, the AdeS segment, the lemons and oranges category. This category becomes an important contraction in April 2017, where we changed the formula to 0 sugar content. We were able to reverse the trend in the fourth quarter '18 as we got new formulas and launched new flavors, with a volume swing of 38% versus 12%. But we didn't have enough time to offset the volume decline in the first 9 months of 2018. A similar fashion happened in Ecuador, where we also lost some flavor volume in the beginning of the year, but we seem to have cracked the code with the new Fanta flavor launched in the last quarter that have shown great results, reversing the trend in 31 points. So we're confident that we will recover flavors's growth as we continue reformulating the rest of the portfolio. And similar thing has happened in both Peru and Argentina.
Our next question comes from Ulises Argote with JP Morgan.
Just a quick follow-up there on the U.S. pricing. Do you have any visibility in terms of the time frame for the 2019 price increases to be negotiated or rolled out? I understand that the July '18 price increases was kind of off-cycle, right? So I'm just trying to understand here what the normal pricing per cycle looks like in the region.
Yes. Prices in the U.S. are negotiated way in advance for -- I'm talking about the prices that are negotiated as a system, or I would say, decided as a system. And so that's already happened for 2019. And then just the calendar of the prices, that is fairly consistent in the U.S. We still need to do some work on our own to define the timing for our local customers, but the calendar will not have, really, an impact. We still expect, again, the prices to be above inflation. And one thing that I didn't mention, it's very important, is that in addition to rate, I mean, that is nominal prices that increase, we also have an added benefit in the average price from the change in mix. As categories like Monster and BodyArmor grow, then we have a mix effect that creates an impact on prices. If you.
Look at the fourth quarter, we have about a 1% mix effect. But that is something to take into account because, also, that might have the opposite effect on margins. So it would result in probably slightly lower margin but higher net prices all in all. We're going to see that effect in 2019 as well. I just wanted to point that out. But prices are going to be in line with our plan and what we've told you in this call and the previous calls we've had.
Our next question comes from Felipe Ucros with Scotiabank.
I just wanted to do a quick follow-up on your comments in Argentina. It seems that, obviously, you expect a very tough first half, but you're expecting a better second half of the year. And I'm wondering what your expectations are for the country. I don't know if you could touch a bit on the renegotiations with unions for salary increases and how tough you think they would be this year, given how high inflation was during 2018, especially in the second half, and how much you'll have to make up for employees on this and how it may or may not affect margins. And then obviously, in the second half, you might have a lot of noise due to elections and things are not looking great right now on that front. So I wanted to see maybe where you're coming from on your expectation for your second half, given that most of that electoral landscape is going to play out in the second half. And then secondly, on Santa Clara, if you could very briefly touch on what you think can be the sustainable growth because you had some pretty amazing growth over the last few years on Santa Clara, and it doesn't seem to be slowing down. It's still on double digits. So I was wondering what your expectations are for that brand for the coming years.
Okay. Thank you, Felipe. Well, let me talk about Argentina. And as I said, the situation is really challenging now. We're still comparing, again, to the first quarter of last year, where things were fairly stable in Argentina. And you remember, situation got complicated with severe droughts and impact on soy and corn production, a sharp drop in consumption. All things that happened last year actually did not start in the first quarter. So we're having a difficult comparison. We say -- if we look at the year, the complete year, we see actually a positive trend. It's like -- the problem is that we're starting at a very low point, which is where we ended last year. So the unions are always a challenge in Argentina. I don't think that is the biggest factor in terms of our concerns. It's obviously consumer demand because if you look at how that declined in the final part of last year, it was pretty significant, the shrinking of the economy; and especially, how the disposable income of families in real terms declined. That is the biggest impact, I would say. But we see a positive trend for midyear. And when you mentioned the elections, we think that the elections are a positive thing in terms of public spending, consumption in the second half of the year. So that, I think, it's going to be a more favorable effect. And as you've seen, we've been able to maintain very healthy margins in Argentina despite the conditions. And we've been also able to perform better than the rest of the system in Argentina. We're the only bottler that actually grew volume last year. So that tells you a lot about how we capture some of the opportunities that are still there. Let me give you an example of opportunities. If you go to a metropolitan area in Argentina, the largest cities where we serve, Salta or Tucumán, and you compare the per capitas, how much we sell to that population versus population that is the neighboring -- in the neighboring regions of the city, the relationship is like 40% of what we sell in the cities is the per capitas that we have in what are the surrounding areas. So that is -- for a reason, because when we look at our operating indicators there since many times we served the third parties, they're not at the level that they should. So there's a great opportunity, availability just with current portfolio. So if you extrapolate that, that's pretty significant. That's about 40 million of cases. It doesn't mean that we're going to capture those the first year, but certainly, there are things to do there in the market regardless of the economic situation. Same thing with returnable packages and new things that we're launching in returnable. Same thing with new brands to compete with big brands like Crush, which is a brand that we used to fight in that segment. So there are many things that we still can improve in the market and will offset the pressures that we have. At the same time, we also have launched a savings program, and I think we've proven that we're good at that and finding opportunities to continue optimizing our cost and our OpEx through the year. So we maintain our vision that this is going to be a year with an upward trend. It's only starting at a low point, as I said. So if you're okay with that, I will turn it over to Pepe for your Santa Clara question.
Thank you, Felipe. Thanks for your question. Regarding Santa Clara and the whole berry and seed-based beverages, the answer to your question is yes. There's huge opportunities, and we will be capturing them within the next years. Just to give you some examples. We increased Santa Clara volume by 32% in the last year. But -- and we increased our coverage in the traditional channel, that is our stronghold, in 5.5 points, but reaching only 49.6%. So the opportunity to keep growing in that channel is huge. We view white milk, 33%. We view flavored milk -- we introduced almost -- we have introduced up to date 12,000 coolers. That is what we need to do. But when you see our market share, for example, in flavored milk, it's only 12.7%, coming from -- growing 2.3 points. So there's a huge opportunity to grow. And there's another big opportunity also in seed-based beverages that complement that portfolio in AdeS, where we're only covering 20% of our customers as of now. So the space to grow is really big. Thank you very much.
Thank you. At this time, I would now like to turn the call back over to management for closing remarks.
Thank you, and thank you all for your continuing support and your confidence in our company. We look forward to speaking with you again soon, and have a great day. Thanks.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.