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Edited Transcript of AC*.MX earnings conference call or presentation 23-Apr-20 3:00pm GMT

Q1 2020 Arca Continental SAB de CV Earnings Call

Nuevo León Apr 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Arca Continental SAB de CV earnings conference call or presentation Thursday, April 23, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arturo Gutiérrez Hernández

Arca Continental, S.A.B. de C.V. - CEO

* Emilio Marcos Charur

Arca Continental, S.A.B. de C.V. - CFO

* José Borda Noriega

Arca Continental, S.A.B. de C.V. - Chief Commercial & Digital Officer

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Conference Call Participants

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* Álvaro García

Banco BTG Pactual S.A., Research Division - Research Analyst

* Antonio Hernández Vélez Leija

Barclays Bank PLC, Research Division - Research Analyst

* Emiliano Hernández Marván;GBM;Analyst

* Fernando Olvera Espinosa de los Monteros

BofA Merrill Lynch, Research Division - Associate

* Leandro Fontanesi

Banco Bradesco BBI S.A., Research Division - Research Analyst

* Luca Cipiccia

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Sean Roberts King

UBS Investment Bank, Research Division - Equity Research Analyst of Beverages

* Ulises Argote Bolio

JP Morgan Chase & Co, Research Division - Analyst

* Melanie Carpenter

i-advize Corporate Communications Inc. - Co-Founder & MD

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Presentation

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Operator [1]

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Good day, everyone. And welcome to the Arca Continental conference call. (Operator Instructions) Please note that this call is being recorded. (Operator Instructions)

For opening remarks and introductions, I would like to turn the conference over to Melanie Carpenter of i-advize Corporate Communications. Ma'am, please go ahead.

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Melanie Carpenter, i-advize Corporate Communications Inc. - Co-Founder & MD [2]

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Thank you, Katie. Good morning, everyone. We hope you're all well under the current circumstances. Thanks for joining the senior management team of Arca Continental this morning to review the results of the first quarter of 2020. Earnings release went out this morning, and it's available on the company website at arcacontal.com in the Investor Relations section.

It's now my pleasure to introduce our speakers. Joining us from Monterrey is the CEO, Mr. Arturo Gutiérrez; the CFO, Mr. Emilio Marcos; and the Chief Commercial and Digital Officer, Mr. José Pepe Borda; as well as the Investor Relations team. They're going to be making some forward-looking statements, and we just ask that, per usual, you refer to the disclaimer surrounding those statements. We imagine that several of you are working from home as are some of our operators. So we just ask for your patience, and hopefully, we can get through this call as well as can be.

And with that, I'm going to turn the call over to the CEO, Mr. Arturo Gutiérrez, to begin the presentation. So please go ahead, Arturo.

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [3]

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Thank you, Melanie, and good morning, everyone. I appreciate you joining us today. And I want to express the hopes of all of us at Arca Continental that you and your loved ones are well. Our company's deepest sympathies go out to all who have been impacted by coronavirus outbreaks throughout the world.

Before reviewing our operating results for the first quarter, I'd like to take a few moments to address the COVID-19 global pandemic and its impact on our business. As many of you have experienced, this unprecedented event is having a significant impact on people's lives, communities and the global economy. These are challenging times for everyone, which is why we are doing our best to support the needs of our associates, customers, consumers and communities.

Of course, safety is our highest priority. We have implemented extensive precautionary and hygiene measures to support the well-being of our people at all our locations, including strict social distancing, sanitation protocols and travel restrictions. Also, where possible, people are working from home in accordance with guidance from governments and local health authorities. We are grateful for the extraordinary efforts of all our teams to secure the continuity of our business and to maintain our product supply. We have reinforced all appropriate contingency plans in order to ensure that our production plants, distribution centers and our supply chain safely remain up and running.

As governments implement their strategies to control the spread of the virus, we may still experience some disruption, although the extent and duration is still unknown. We also recognize that we may have an important role to play in our communities. We are actively looking for ways to support those who continue to have their lives impacted by the virus and those who were tirelessly and selflessly supporting those affected. We're also stepping up our efforts to support governments and health services, either through financial assistance where appropriate or product donations and other types of help.

We have committed over 1.5 million liters of bottled water, more than 160,000 food products from our dairy and Snacks divisions, 100,000 face masks from -- made from PET and a significant contribution of alcohol from our sugar mills. It's so gratifying to hear from people throughout our operation sharing stories about how the community supports our efforts, their pride in Arca Continental and how we are coming together stronger than before despite the distance between us. We're also working closely with the Coca-Cola system to ensure that we are adopting the best ways to serve our customers and consumers.

It is still early to quantify the full impact that the COVID-19 pandemic will have on our 2020 results. Nevertheless, and given this challenging situation, we have immediately deployed a thorough plan encompassing several cost-saving measures and reassess CapEx investments in order to prioritize liquidity, profitability and protect our business for the long term.

Let's turn to our performance for the first quarter 2020. Overall, results in the first 2 months of this year were in line with our expectations. And during March, day-to-day operation across our markets was heavily dependent on the severity of restrictions on mobility.

Total consolidated volume grew 0.2% in the quarter, reaching 512 million unit cases, with total consolidated revenues growing 5.3% to MXN 38.9 billion. Consolidated EBITDA for the quarter grew 5.8%, reaching MXN 6.6 billion, representing a margin of 17.1%, an expansion of 10 basis points. Our ability to tailor our portfolio offering and price-pack architecture to the current consumer and macroeconomic environment, relative favorable raw material price environment, coupled with tight control of expenses and operating discipline, enable us to sustain margins.

Moving on to our regional operations. Our beverage business in Mexico maintained a positive momentum, delivering another solid quarter of volume growth, up 1.9%, driven by personal and jug water segments, up 12.8% and 7.2%, respectively. Total net sales in Mexico rose 6% in the quarter to reach MXN 15.1 billion, marking the 19th consecutive quarter of net revenue growth, despite the challenges in the latter part of the quarter. Average price per case in Mexico in the quarter, not including jug water, rose 5.2%, reaching MXN 64.20.

We continue strengthening our ACT model, leveraging digital technology with AC Digital, our new e-commerce mobile application. As you know, developing enhanced omnichannel capabilities is a key priority in our digital transformation. We are looking to expand the number of touch points and allow customers to place orders of our full beverage portfolio directly from their smartphones. This is in addition to the pre-seller visits in our contact center. We accelerated the deployment of this tool across all our operations in Mexico and South America, enrolling more than 3,200 customers per month and providing them with remote training and coaching sessions through digital platforms.

On the profitability front, EBITDA increased 9.2% to MXN 3.1 billion in the first quarter, representing a margin of 20.8% for an expansion of 50 basis points, driven mainly by raw material tailwinds and cost-optimization initiatives. In response to the COVID-19 crisis, we are redesigning and optimizing our service models in order to serve the market more efficiently, focusing on the execution of our fundamentals and protecting our core priority portfolio as we secure product stocking particularly at the traditional and modern trade channels. Notably, our direct-to-home channel in Mexico is experiencing a tremendous surge and represents a huge opportunity. We have developed stronger capabilities and further expanded consumer purchase points by deploying scalable, easy-to-use solutions while leveraging our remote contact platforms and web-based sales.

Let's close our Mexico operation with a positive note. This quarter, we were honored by the -- with the 2020 National Quality Award granted by the Mexican ministry of the economy. Our plant Las Fuentes, which is located in the State of Jalisco and is one of our largest production facilities in Mexico, was awarded for its best practices and commitment to continuous improvement and excellence.

In South America, our total volume was down 5.5% in the first quarter as a result of declining volume in Peru and Ecuador, which was partially offset by growth in Argentina. We doubled down on execution and on our price-pack channel strategy as we continue driving affordability by expanding the mix of returnable presentations. The mix of returnables in the region grew 2.2 percentage points. Total revenues were down 1.8% in the quarter, reaching MXN 9.3 billion, while EBITDA declined 8.7% to MXN 1.9 billion, representing a margin of 20.5% for a contraction of 150 basis points.

In Peru, volume was down 9.5% in the first quarter, cycling a solid 5.3% growth from last year. Despite the sharp slowdown in the economy and weakening consumer demand, we were able to maintain value share across NARTD beverages. Our still beverage categories grew 16.2% and posted value share gains, driven by the sports drinks, teas and juice segments.

On March 16, the Peruvian government declared a nationwide coronavirus lockdown with some of the region's most stringent containment measures. These restrictions cut movement of people as much as 90% in that country and 1/3 of our customers in the traditional channel remain totally or partially closed. It's important to mention that the national curfew begins at 6:00 p.m. So the time window available for the sale and distribution of our products has been reduced considerably. As these restrictions are lifted throughout this quarter, we expect our commercial operations to gradually stabilize. Nonetheless, a plan to tackle the health care and economic emergency was recently unveiled by the government and is expected to deliver resources of $26 billion, equivalent to 12% of GDP. This is by far the largest stimulus package of its type announced by any other Latin American government.

Moving over to Ecuador. Volume was down 3.1% in the first quarter. The slump in oil prices amid the outbreak of coronavirus is heavily weighting on the oil-dependent economy, especially exports. Unfortunately, as you may have heard in the news, Ecuador has one of the highest per capita number of COVID-19 cases in Latin America. Our Ecuador beverage business is a great example of our ability to quickly adapt to the new consumer dynamics resulting from the shift in consumption patterns. We are expanding our direct-to-home capabilities, increasing our customer base by replicating key learnings from our operation in Mexico.

Tonicorp, our value-added dairy business, is facing the same challenges as our beverage business. Joint initiatives are being implemented in our market and distribution capabilities to cope with the sanitary and financial crisis in Ecuador. We are confident that despite the contraction of the dairy industry, consumers will accelerate the shift towards product categories that generate wellness, health and nutrition. Tonicorp has strong quality credentials that reinforce consumer confidence in our products and that should enable us to regain growth in the short term.

In Argentina, volume in the first quarter grew 2.7%, cycling a significant decline from the same quarter in 2019. We continued capitalizing on the 2 major package innovations made last year to further increase product affordability while reducing our overall production cost, the 2-liter universal bottle refillable format for sparkling beverages and the 2-liter returnable presentation of Aquarius flavored water. As you remember, our operation in Argentina was the first one to deploy returnable packaging in still beverages in the Americas.

Coronavirus officially arrived in Argentina relatively late with the first confirmed case identified on March 3. The government acted very quickly in comparison with other countries, closing its borders and moving on to a national shutdown of all nonessential activity. These measures are being enforced by military and police. The response to the virus outbreak has been strict and swift. The number of cases in our territories is well below the average of Argentina. We've been through challenging times in Argentina before. I firmly believe we've never been better positioned than we are today and will come out even stronger.

Moving over to our beverage operation in the United States. Coca-Cola Southwest Beverages closed out the first 3 months of 2020 with a strong operating performance and its 12th consecutive quarter of revenue growth. We delivered solid financial results with 6.2% growth in revenues and 3.9% in volume. EBITDA for the quarter grew 16.6% to $78.9 million, representing a margin of 11.9%, a solid expansion of 110 basis points. During the quarter, our Northpoint facility in Houston, Texas, became fully operational. All 5 lines began producing, and we continue to work to achieve the rated efficiencies.

We posted solid volume performance in the quarter across both sparkling and still categories, coupled with a record 121 new SKUs introduced. Sparkling volume grew a solid 2.6%, driven by the launch of Coke Energy. Still beverages grew 2.7% for the quarter as we introduced important brands such as Powerade Ultra, Powerade Water and AHA. This is our new mainstream flavored sparkling water and is the first major new brand launch in a decade.

Volume performance was supported by a solid and disciplined execution of our ACT model. Additionally, in February, the new FSOP service models were implemented in our Oklahoma territory. And by this, we finished the deployment to our entire operation in the U.S.

Net price for the quarter grew 2.2% with a true rate increase of 2.5% and a negative impact of mix of 0.3% due to increase in sales of DASANI water during the final weeks of March. We also grew sparkling beverage value share, breaking the record high for the second quarter in a row.

Let me now talk about the impact of COVID-19 on our U.S. beverage business. As consumer behavior changes, our volume is shifting channels and our product mix is shifting as well. During the last weeks of March, our U.S. operations saw the benefit of pantry loading from our consumers. However, we expect an impact of the post pantry loading effect during the second quarter, coupled with a significant impact in consumer traffic due to increased social distancing and shelter-in-place restrictions throughout our franchise territories.

In the convenience channel, consumers are making less trips into the stores, and we're seeing slower growth in immediate consumption packages. Many of our customers, especially universities and colleges, the travel and hospitality industry and our food service on-premise customers are either closed or have moved to a pickup/delivery mode of operations. As a result, volume performance in the FSOP and vending channels was down significantly in the last 2 weeks of March.

In the large store channel, shorter hours of operation have been imposed and the number of consumers who can be in the store at one time is now limited. We're bracing for fundamental shift in our business in the coming months. The progress we've made from a strategic standpoint in our U.S. operation in terms of revenue growth management, refined execution and a strong business culture gives me confidence that we are uniquely positioned to capture the growth opportunity after the pandemic subsides.

I will now finish our operational review with our Food and Snacks businesses. Net sales in the quarter rose 4.5%, and EBITDA grew 6.4%, mainly driven by Bokados in Mexico and Wise in the U.S. Our salty snack portfolio was impacted in March when coronavirus outbreak closed T.J. Maxx stores and many customers in the food service channel. Our small bag segment was impacted the most. Conversely, grocery and club store sales have stabilized for now and should remain steady with small increases at key times.

We're experiencing a significant increase in e-commerce activity, and we are fully prepared for that. There are many consumers who have never ordered online, especially the groceries and are now doing so.

Our Inalecsa operation in Ecuador has also been severely impacted by the COVID-19 pandemic. From early on, Guayaquil and surroundings have become the most affected city in the country.

Let me now turn the call over to Emilio to go over our financial results. Please, Emilio.

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Emilio Marcos Charur, Arca Continental, S.A.B. de C.V. - CFO [4]

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Thank you, Arturo, and thanks, everyone, for being on the call today to review our financial performance. In the first quarter, we delivered positive numbers with a strong beginning and mixed results toward the end. In the first part, we continued with the last year positive momentum, both in pricing and volume performance. In the last few days of the quarter, we found ourselves amid the COVID-19 outbreak, with a negative impact on volumes and a sharp change in product and channel mix.

Consolidated revenues grew 5.3%, mainly due to a favorable price/mix trend of 5.1% in Mexico and 2.2% in the U.S. with an overall flat volume performance. This top line growth, combined with lower PET and aluminum prices, helped us expand the contribution margin by 80 basis points. We still expect to have tailwinds in some raw material prices throughout the year. We already have lower PET prices in all operations versus previous year as well as lower aluminum prices from the combination of a lower spot price and our hedges. Thanks to the strict execution in our hedging strategy, we have covered 80% of our U.S. dollar-denominated needs in Mexico at an exchange rate similar to 2019.

Nonrecurring expenses increased 55.4% this quarter, driven by MXN 79 million for expenses related to COVID-19 measures in all the operations and MXN 174 million related to the new Houston facility. EBITDA for the quarter grew 5.8%, reaching MXN 6.6 billion. This represents a 10 basis points expansion in EBITDA margin versus the same period of 2019 despite the strong water mix effect in March. This result is explained by the expansion from the contribution margin, which is mainly due to strong pricing and the raw material benefits previously explained. This was partially offset by an increase in our operating expenses, resulting from the combination of Mexico and U.S. expense increases, impacted by higher depreciation, along with exchange rate variations.

Our net income increased to MXN 2.7 billion from MXN 1.7 billion in 2019, representing 57.4% growth year-over-year at a 6.9% margin. This was driven by an improvement in our comprehensive cost of financing from an exchange rate gain of MXN 1.4 billion, generated by a high dollar cash position.

On April 2, a dividend of MXN 2.42 per share, totaling MXN 4.3 billion, was approved at our Annual Shareholders Meeting with a payout ratio of 46%, in line with our historic average. The dividend was paid out on April 16.

At Arca Continental, our financial performance has positioned us well to face the current economic environment. Our cash position reached MXN 29 billion with more than 60% in dollars. We have a strong balance sheet with a leverage ratio of 1x. And as you know, our credit rating was recently reaffirmed by the 3 agencies. Additionally, 96% of our debt is aligned to the local operation currency, limiting our exposure to only $100 million from AC Lindley bonds, which already has $49 million in cash to reduce the net exposure.

As Arturo mentioned, we deployed a crisis response team and implemented a series of initiatives within our finance area to focus on implementing a cash culture. Our priority is to preserve cash and deploy it prudently. As part of these initiatives, we are monitoring discretionary spending in 3 main areas: operating expenses, marketing and labor. Some of the items that we will be reviewing are overtime, temporary associates, trade promotions, route optimizations, among others.

CapEx will undergo the same level of analysis. As we continue to change our strategy to respond to our current market needs, we'll reevaluate the type of investments that are required to maintain the quality of our services and the safety of our associates. In brief, we are going to take strong actions in 4 pillars: operating expenses, marketing, labor and CapEx.

In times like this, liquidity becomes essential to keep the business running as we will have top line timing impacts, which we know are not going to be permanent or long term. Nevertheless, we have adequate liquidity to support our working capital and the required investment needs. Our disciplined cash management, a strong balance sheet and proper hedging policies, combined with our capabilities to implement efficiency plans to adjust CapEx and OpEx, enable us to be in a good position to overcome the challenging months ahead.

And with that, I'll turn it back to Arturo.

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [5]

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Thank you, Emilio. We started 2020 with a clear objective of driving shareholder value through long-term profitable growth. We hit the ground running with a fast start in implementing our plans and maintaining an efficient and optimal capital structure. What a difference a month makes. Although uncertainty remains, we're confident that the post-pandemic future of the business will be strong.

Our company is built for times like these. We have solid leadership and constant renewal is in our DNA. In the 93-plus years of our company history, our business has withstood many global crisis. Nevertheless, given the significant uncertainty in relation to the duration and economic impact of COVID-19 on our markets, we believe that it is appropriate to withdraw our guidance for the current year.

We remain committed as part of the Coca-Cola system to support our customers and consumers during the coronavirus outbreak. Our leading market share, our strong financial position and our unique portfolio of brands and talented people will allow us to weather this unprecedented crisis. We strongly believe that the negative impact of the COVID-19 pandemic in our business is temporary. We remain confident on the resilience of our industry. We are optimistic regarding the outlook for Arca Continental as we start to see gradual improvement in the second half of the year.

Operator, we're ready to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Antonio Hernández with Barclays.

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Antonio Hernández Vélez Leija, Barclays Bank PLC, Research Division - Research Analyst [2]

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First of all, congrats on your results and hope that everyone is safe. My question is around the MXN 79 million that were spent due to health emergency in the various operations. Is this something that you might expect a little bit of that in the second quarter? That's my first question. And then I have a follow-up.

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [3]

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Antonio, I guess, we're not hearing you very well. Can you repeat the question, slower, please?

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Antonio Hernández Vélez Leija, Barclays Bank PLC, Research Division - Research Analyst [4]

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Sure. Can you hear me now?

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [5]

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Yes. I think that's better.

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Antonio Hernández Vélez Leija, Barclays Bank PLC, Research Division - Research Analyst [6]

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Yes. Okay. You mentioned that during the quarter, you've had MXN 79 million health emergency expenses for the various operations. Is this something that you might expect also for second quarter? Do you have any idea on how much might be spent from that line for the second quarter? And then I have follow-up.

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [7]

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So in that expense is external expenses arising out of COVID-19 that were incurred in the first quarter, actually in the month of March, mostly. And how much of that would continue for the second quarter, is that the question?

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Antonio Hernández Vélez Leija, Barclays Bank PLC, Research Division - Research Analyst [8]

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Yes. That's correct.

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [9]

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Yes. Well, it's not, I guess, the most significant impact that we will have going forward. Certainly, there are things that we continue to be -- that we will continue to do. And mostly, it is about taking care of the community, I would say. From the beginning of the contingency, in every country where we operate, we've been doing additional things to what we normally do in our operations, and that's why they were nonrecurring. And that is the basic stuff, supporting the health system and helping vulnerable groups in our community.

That's, I guess, a significant part of that in the first quarter. We do not anticipate material expenses in terms of layoffs or we're not considering those actions at this point. So I would not believe that would be as material as obviously the impact of the business that we anticipate from the crisis itself.

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Antonio Hernández Vélez Leija, Barclays Bank PLC, Research Division - Research Analyst [10]

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Perfect. And then my follow-up would be regarding sales mix. You gave some light on how sales mix have shifted in the U.S. for these couple of weeks due to COVID-19. How can that be relatable to South America and Mexico?

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [11]

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Yes. Well, in every country, we've had, obviously, an impact during March. January and February were good months in general for all of our markets. And as you know, there are very clear and identifiable stages of the pandemic. And they start with just the initial concerns and fear. And then you're moving to the lockdown and restrictions in mobility phase, which is what we are facing at this point in all of our markets now. It's been more severe in South America. That's why our markets in South America are more impacted, particularly Peru and Ecuador.

In the U.S. and Mexico, we are in a better situation now. But we are seeing that shift in volumes that you mentioned, the pantry load phase we experienced in March led to growth in modern trade. If you look at March figures in Mexico with supermarkets, convenience stores, they were up 7% and in Southwest, the large store segment and small store -- convenience retail were also growing. And proximity channels have had a slowdown now, and that is also natural. It's expected that will recover given that they are channels that sort of replacement purchasing during the phase. The ones that are more affected, obviously, are the food service, on-premise, the at-work channels. Well, those have declined significantly in all of our markets.

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Operator [12]

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Our next question comes from Sean King with UBS.

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Sean Roberts King, UBS Investment Bank, Research Division - Equity Research Analyst of Beverages [13]

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I guess similar to what the Coca-Cola Company provided earlier this week, can you provide sort of an aggregate number for what you're seeing in the month of April for volume trends across your markets?

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [14]

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Thank you, Sean. What we're seeing, as I was explaining, is the continuation of what we are seeing, an impact in March. And we are at the point in which we've identified mostly the factors that are influencing our performance. Mandatory lockdowns are the most relevant factor affecting demand. That is impacting not only our consumers, but also the mobility of our frontline sales force. Many times they require public transportation to get to our distribution centers and our plants. So that is the current situation and the most severe impact is in Ecuador and Peru. Ecuador and Peru were down 22%, 24% volume in March. And the trend is worsening in April in those countries.

But again, we have identified that factor and a second very relevant factor, which is then the closing of points of sale, particularly in those markets. During the lockdown period, we've seen up to 35% of small retailers closed in Peru and up to 45% also that had closed in Ecuador. And Argentina is better than that. Mexico is much better than that and the U.S., obviously. So if you consider those factors, you see how the performance in volume moves accordingly and that's why, in Mexico, it's a much better situation in that regard, both in March and the April trend, and the U.S.

So we see, again, a deteriorating trend in South America, Peru and Ecuador, basically. But we see, at the same time, reopening of stores. For example, in Peru, we had 35,000 stores in operation. The last few days, we've seen 38,000. So I think that is a good sign. And again, in Mexico and the U.S., we haven't seen that impact. In Mexico, we have more than 90% of stores still open. Traditional trade is a key factor in Latin American markets. So that's why the trend, it's worsening in all of the markets. But it's still better in our main markets, which are Mexico and the U.S. as compared to South America.

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Operator [15]

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Our next question comes from Fernando Olvera with Bank of America.

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Fernando Olvera Espinosa de los Monteros, BofA Merrill Lynch, Research Division - Associate [16]

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Can you hear me?

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [17]

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Yes.

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Fernando Olvera Espinosa de los Monteros, BofA Merrill Lynch, Research Division - Associate [18]

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Great. Perfect. Basically, I have 2. I mean the first one is regarding taxes, I mean, in Mexico. Now given the government's cash constraints, do you see any risk that the government could increase the excise tax on beverages in the short term? That's the first one. Then regarding pricing, again, given this new environment and considering the positive outlook on costs, I mean, can you comment what will be your pricing strategy going forward?

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [19]

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Thank you, Fernando, and it's always good to talk to you. Let me address the first part of your question regarding taxes in Mexico. And then I'll hand it over to Pepe so that he can talk about pricing.

So yes, as you say, there's always a risk in Mexico with these type of initiatives. We actually have seen just one in this week about increasing in special taxes to certain products, including our categories. And as you know, we've seen this initiatives before. We know that they are not part of the current government strategy or what the President has expressed. We didn't even heard -- just now, just today, one of the leaders in Congress for the party that is empowered is saying that it's not part of what they want to do, but we continue to see those initiatives.

I think that these proposals, obviously, don't make any sense and even less now. The problem is they impact mainly the poorest segment of the population. So if you think about how we're facing this challenge, which is an unprecedented crisis and the economic aftermath of what we're seeing, it would be not only highly unpopular, but it would be a very hard hit to small retailers that are working their way out of the crisis. Again, this is a terrible tax because it affects the poorest consumers and the mom & pop channel.

So it does not seem to be a very prudent measure at this point. So we continue conversations with government to show them that in addition to what I said, taxes -- these type of taxes have proved ineffective as a solution to the problems of public health that they're trying to solve. The resources obtained do not have a direct allocation to health programs. And as a company, on the other hand, we try to be a part of the solution. We fulfilled our commitment to be part of that solution by positioning our footprint in recent years, offering a balanced portfolio. So there is a weaker argument behind those proposals at this point. But I guess what is making them less prudent or less timely now is exactly the situation that vulnerable groups in our population are facing nowadays and will be facing for the rest of the year.

So with that, I'll turn it over to Pepe to talk about pricing strategy.

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José Borda Noriega, Arca Continental, S.A.B. de C.V. - Chief Commercial & Digital Officer [20]

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Thanks, Arturo and thank you, Fernando, for your question. Our strategy remains to increase through rates in line with inflation. But in the second quarter specifically, we're going to have some impact mainly due to the mixes. As On-Premise channels and entertainment and specifically those channels in which immediate consumption is higher are affected, that is going to negatively affect our price mix.

And also as water category grows over some other categories, that also has a negative impact in our pricing. We expect that to affect us -- to have an impact on second quarter, but that is going to gradually be corrected during the third and fourth quarter.

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Operator [21]

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Our next question comes from Álvaro García with BTG.

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Álvaro García, Banco BTG Pactual S.A., Research Division - Research Analyst [22]

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Hope you and your families are well. My question -- I have 2 questions. First, I was wondering if you could remind us your exposure to the On-Premise channel in the 2 largest markets in Mexico and the U.S.

And then my second question is on Texas. I mean this is more of a longer-term question. Obviously, oil is a very important economic driver in Texas. And well, there's the potential, we don't know yet, obviously, but of some form of recessionary environment in Texas. So I was wondering if you could sort of provide your preliminary views on sort of the general defensiveness of soft drink consumption in Texas given what might be softer economic activity there and how to sort of think about affordability and how you might shift your portfolio in the face of that recession.

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [23]

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Thank you, Álvaro, for your question and your message. Talk about the first part and the On-Premise channel. The On-Premise channel has a -- in the case of Mexico, it has a mix of maybe less than 10%. Maybe Pepe can give you more detail about that. In the U.S., what we call on-premise is a little larger in terms of mix, it's about 15% overall. That is the channel that has basically collapsed in the last few weeks, and that is natural. It's only a takeout service in most of those outlets. So we're seeing declines that are not down as 0, but they're very, very, very significant.

So obviously, that is going to be temporary. And as the certain degree of normality is reestablished, those are going to be recovering. So we're already working on the comeback plan for those -- for that channel, what we're going to do about it. But they are the biggest impact in terms of channel that we're facing. As you see, the mix is not as high as you will find in maybe other markets around the world because the traditional channel also makes -- kind of serves as an away-from-home consumption in our markets, especially in Latin America. And that is the channel that we're more focused in at this point because it's the key variable for volume performance. So our efforts in the region, in Latin America, are focused in maintaining small mom & pop retailers' strength, and that is not only about timely delivery of our products and service, but also communication of sanitary and prudent measures recommended by local governments to keep them in operation because they work in part as an away-from-home consumption for people that are still -- somebody who need to be out on the street.

So in the case of Texas, what I would say -- and maybe Pepe, if you want to add to the mix of channels, you can do in a minute. Just addressing your question about Texas. We've seen the impact of decline in oil prices in Texas before, especially in our West Texas region. To put this in context, West Texas for us in Southwest is about 10% of the total volume. And it's very clear that when prices of oil have been -- gone down before, it impacts that market. Significant oil price reductions have resulted, I would say, in the low single-digit decline of volume for us. That's what we've observed throughout the years. The Odessa, Texas region, by the way, is the most critical. We've seen up to, in some cases, 10% decline just in that particular area. But generally, it would be like maybe a low single-digit impact, what we've seen.

I don't think that when oil prices go all the way down to 0, it continues to be a straight line. So it's hard to actually model that, but we have been -- have seen also declining volumes in West Texas, even before the COVID crisis. So it's very important for us to take action in terms of affordability with certain packages and our on-premise plan to capture opportunities with the reopening of businesses, some prospection of new outlets also to capture some of the volume in our red truck. Our go-to-market strategy will adjust these frequencies because we need to adjust also OpEx to that new reality in that region. So that's the summary of what we're doing.

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José Borda Noriega, Arca Continental, S.A.B. de C.V. - Chief Commercial & Digital Officer [24]

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Thank you, Arturo. And just -- Álvaro, just adding some data to what Arturo said. In the U.S., the On-Premise channels represent around 16% of our volume. So that's where we have our main impact. In Mexico, it's around 10%, as Arturo said. And we have learned from the experience of Peru and Ecuador. There, when this confinement started, many of our customers closed and they closed because of fear or really not knowing they could open and not knowing how to do it. So in those countries, we are now working with the government and with the customers to help them and to show them that they can open and they can serve our customers.

And you know that our products for these customers weigh around 30% of their business. So they are our best partners, and we are also their best partners. So we're helping them to reopen.

But we're using that experience in Mexico. And in Mexico, that has not happened. In Mexico, traditional trade represents around 60% of our mix. And we are on the positive side most of April. I hope that was useful.

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Álvaro García, Banco BTG Pactual S.A., Research Division - Research Analyst [25]

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Pepe, that was very useful. And just one quick follow-up. I was wondering if you could just comment on the resiliency of the traditional trade. I mean it's pretty remarkable how strong it's been. Is that the case through April? And why do you think sort of people are still in the streets in Mexico?

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [26]

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Well, the traditional trade has a huge advantage of being the channel of proximity of people that need to stay at home. So it's natural that they are more resilient. The problem we had with traditional trade, as I mentioned, in South America is that the -- some of the stores have been closing, and it's not happened in Mexico. So we're anticipating in Mexico this type of situation and support those customers to remain open in a safe way.

But there is a very close correlation with the percentage of stores that are closed and our performance in volume in those markets. And as I said, the trend is improving in Peru and Ecuador so that is a positive as you see those stores coming back in operations. But they really have the strength, and this is something that's going to continue, I guess, for some time because habits of consumers are going to change maybe definitely or at least for a longer period of time than this emergency would last. So being close to homes, having that immediate access to basic products, I think, is going to be very valuable.

So we're working now not only on the crisis itself, but what we are going to do when we are reestablishing certain normality. And we're giving special focus to the traditional trade, supporting its recovery and helping them face the new situation. One of the things that we're doing with them is our digital B2B platform. That's an example of important things that we were doing before, but we have now accelerated because it helps them face this situation. And at the same time, it helps accelerate something that made sense even before crisis.

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Operator [27]

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(Operator Instructions) Our next question will come from Luca Cippisano (sic) [Luca Cipiccia] with Goldman Sachs.

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Luca Cipiccia, Goldman Sachs Group Inc., Research Division - Equity Analyst [28]

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Just a clarification on the previous discussion. I think I understood you mentioning that South America has been tracking in the mid-20s negative in April and 20 -- minus 24% in March. I'm not sure I got -- if you made any comment on the overall volume performance in April or if you could put some range for Mexico and the U.S. And again, apologies if I missed this already, but I think I got the South American comment, but not with regards to Mexico or the U.S.

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [29]

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No. You got that right. Thank you, Luca. The volume declines in March in South America are around 24%, 22%, I said, for Peru and Ecuador. So that's the worst performance that we had in the quarter, but the situation in April is worse than that because we are facing the worst stage of the crisis.

So we have the initial stage, the first cases and the initial fear, and then we are at the lockdown and restriction of mobility stage. And that's where the impact is most severe. We're facing that in April. April is going to be our worst month for the overall year. And then we're going to have a gradual recovery. We anticipate that to be in some markets in mid-May, maybe June would be really our initial recovery as we return to the new normal.

So we're at the stage where restrictions are the highest, severe limitations of mobility. So it's hard to predict because it depends on how the government are defining those restrictions. And they are adjusting almost on a day-to-day basis. What we can say is that Peru and Ecuador are the hardest hit. Mexico and Southwest seem better so far. And that naturally, this measures that restrict mobility are limited duration. So that recovery should be near. We're already seeing, again, customers coming back into operation even in South America.

So it's hard to present -- the curves of all this performance in volume, it will not be really gradual -- not that gradual in the second quarter. Some of the post pandemic effects are still going to be expected. So what we can say is that April and May again are our most adverse environment, some recovery in the June, July, August period and a much better trend in the fourth quarter. It really depends on when the markets start to reopen. So that's why we have withdrawn our guidance. And as I mentioned, given the great uncertainty of the current environment, we feel that is the prudent thing to do. But we expect to come back with you soon with greater clarity and -- because many of these variables are not under our control, and again, are hard to anticipate. When we are more confident about those estimates, we'll be ready to provide some guidance to you.

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Luca Cipiccia, Goldman Sachs Group Inc., Research Division - Equity Analyst [30]

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But if I may -- and I appreciate you might not want to disclose it fully, but -- or in a range, but when you say Mexico, U.S., relatively better, should we assume still declines in the 20s? And I guess my question comes from the fact that Coca-Cola did say that in April, I think global volumes were down 25%. I'm just trying to get a handle of whether it's relatively better, but does it mean 10% to 15%, 15% to 20%? Or -- and I appreciate that the situation is very fluid, but just not to be too far from what might be realistic.

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [31]

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Yes. It should not be too far from what Coke has estimated, but just take into account that there is an average of many, many different situations of the stages of the pandemic around the world. I hear that the China market is recovering. Europe is at a different stage. It's hard to compare, but let's say that as a general number, it's going to be pretty much like that and gradually improving as the year goes on.

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Operator [32]

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Our next question comes from Ulises Argote with JPMorgan.

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Ulises Argote Bolio, JP Morgan Chase & Co, Research Division - Analyst [33]

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Thank you for the additional color that you have given us. So most of my questions have already been answered. So I was just wondering if you could give us any additional color there on the Houston plant. I mean you said in your prepared remarks that it has already been opened, fully operational, but I was wondering what are you seeing there in terms of logistics, like the routes. Are route changes working appropriately? And if there are any incremental costs there that we can expect going forward that could maybe kind of disturb the good margin trends there for the U.S. operations?

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [34]

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Thank you, Ulises. Well, yes, our Houston plant is now fully operational. And this -- as we've mentioned before, is a significant part of our synergy projects in the U.S. So we have 5 lines that began producing late last year and then throughout the first quarter so we continue to work on to achieve the stabilized and rated efficiencies of the lines, but we are working according to plan.

Additionally, there was another part of that project, which is the Vertique system, the semi-automatic picking for the plant. That also started testing during the first quarter. It's very important, that portion of the project because it brings significant synergies to the overall operation. And it's building the talent according to the customer orders and all that. So it guarantees a very high degree of picking accuracy. So that's working really well.

We're very excited about what the future holds for Northpoint as we fine-tune the operations. It's a pity that we cannot have our grand opening, which was scheduled for mid-March. But we look forward to have some kind of celebration and having the opportunity of hosting visits via YouTube at the plant. So the expected CapEx is in line with what we anticipated. And also the synergies that it will bring in addition to what we had as carryovers for 2019 are also in line with the plan. And this comes from lower manufacturing costs, freight reductions, again, warehousing and picking efficiencies, what we've said before.

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Operator [35]

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Our next question comes from Emiliano Hernández with GBM.

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Emiliano Hernández Marván;GBM;Analyst, [36]

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My question is regarding Bokados. If you could give us a little bit more color on the double-digit growth in EBITDA in the quarter. And what should we expect in that business for the next couple of months?

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [37]

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Thank you, Emiliano. Well, Bokados has a slightly better situation than the rest of the business units. It did have still a month of March where we grew in revenues, which is a very good sign. I would say in general that the categories of snacks are a bit more resilient sometimes. So they're still performing with the clients, but not as severe as we've seen in some of our beverage markets. We had a positive low single-digit sales growth and double-digit EBITDA growth. Our comparisons in profitability are fairly easy. We have also better raw material environment in the first part of the quarter. And then we -- that has been changing mostly because of the peso devaluation, and that's impacting cost a little bit.

We are seeing, again, the strength of the traditional trade in Mexico is helping Bokados. So this show, obviously, that when volumes start to decline, and we're already seeing that in April and that's natural, though it's not as severe, the lower margins in Bokados result in a bigger impact on our profitability. So that's why we started working on our savings plan even before the sales start to be impacted. So they are an important part of our optimization plan going forward to make sure that we maintain a good profitability of this.

The margin for Bokados in the month of March were still at the 9% level or so, 9% to 10%, which is still good, but it's not the margins, obviously, that we have in beverages. So we need to make sure that we protect that. And we are -- we have many opportunities in Bokados, as you know, for expanding to other regions. We have been successful in expanding Bokados to the center and south of Mexico. That has -- at the moment, obviously, it's been suspended, but I think that the growth will recover in the second half of the year for Bokados as well.

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Operator [38]

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Our next question comes from Leandro Fontanesi with Bradesco BBI.

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Leandro Fontanesi, Banco Bradesco BBI S.A., Research Division - Research Analyst [39]

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I have 2 questions. You mentioned that you have been seeing a decline in volumes in the 20s, right? We understand this is a sizable decrease in volumes. And at the same time, we understand that consumers, they still need to drink, right? So just wondering if they're not drinking your products, what products is consumer drinking?

And the second question, you mentioned some of the effects in your mix due to the coronavirus, which is, for example, higher sales of water. But just wondering, what changes do you think will be permanent due to the coronavirus? So thinking beyond the temporary effects that we are seeing right now, such as, for example, permanent changes in product mix or also in your distribution channels.

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [40]

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Thank you, Leandro, for your question. And well, yes, we're seeing so many changing in habits of our consumers. Some are temporary due to the emergency, maybe some will stay for a longer time. Let me address the first part of your question, which is what are the consumers drinking or having.

Obviously, we are, as in normal times, competing with tap water. This is the natural thing to which consumers resort to when they are not able to drink our products. We've been mostly stable in our share of value throughout the market. We're winning slightly in some markets, we're maybe losing marginally in some others. So in general, we're stable. So the situation is that when people don't go out as much, it's natural that consumption patterns change.

Again, we believe that we are in a very resilient industry, considering the current emergency. And there are many reasons to believe that we're going to be back in the path of growth in the near future. There's going to be an effect in the mix of channels. I would say that the biggest effect I can identify, and maybe Pepe can add to that, is how the e-commerce is going to start to grow. People who were not ordering online are going to start ordering online. We've seen that in the U.S., and that might change some of the habits going forward. So it's very important for us that we have been working on digital initiatives and transformation for a long time so that we can adapt to the new circumstances.

In terms of mix of products in itself, probably it's not going to be that relevant going forward, but we're going to be looking into also consumer information to identify any possible trends. So there are 2 ways in which habits can change. One is the channel, the purchasing habit and then the consumption categories in itself.

But again, we have the reasons to believe that we are in a very strong position going forward. Our categories are, in general, resilient, if you consider the industry. We have strong market presence and leadership in all markets where we participate. We have been improving our customer relationship through this crisis through the many things that we're doing. So we're going to come out of this with strength in our relationships and the goodwill that we have built in the market.

And we -- as I said, we have the digital capabilities that we've developed for some time now, that are so important to have that agility to adapt to new circumstances. I think agility is going to be key as we move into that new phase of normality. And very importantly, something that I have not mentioned before is the capacity to optimize our OpEx because some of the go-to-market models are going to change. We have to be more efficient. And I think we've also proven that we are able to adapt in that way as well.

So with that, I'll turn it over to Pepe if he wants to add something to the change in mix that we envision for the future.

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José Borda Noriega, Arca Continental, S.A.B. de C.V. - Chief Commercial & Digital Officer [41]

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Yes. Thanks, Arturo, and thanks, Leandro, for your question. As you know, we have overcome other crisis. I know this one is probably one of the biggest the whole world has gone through. But I think it's too early to talk about important permanent changes. We're studying the consumer and -- as we always do, but we offer a whole line of beverages to tackle each of the different hydration needs.

As Arturo said, I think that the change in channels and the change in mixes can affect the type of beverages people consume, the type of beverages they consume at home can be different than the ones that they consume on-premise. And maybe people will start working more from home, and we're going to see more online, more home deliveries. So at the end, it's going to be a mix between how that channel impacts the different beverages that consumers choose. So I can tell you this, we will -- we are very resilient, as Arturo said, and we have a whole line of beverages to offer, and we will adapt to any change in situation.

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Operator [42]

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This concludes today's question-and-answer session. I'd now like to turn the call back over to Arturo Gutiérrez for closing remarks.

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [43]

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Thank you. Thank you for participating in our earnings call today and for your continued interest in Arca Continental. As always, our Investor Relations team is available for any additional questions that you may have.

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Operator [44]

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Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.