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Edited Transcript of AC*.MX earnings conference call or presentation 25-Oct-19 3:00pm GMT

Q3 2019 Arca Continental SAB de CV Earnings Call

Nuevo León Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Arca Continental SAB de CV earnings conference call or presentation Friday, October 25, 2019 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

* Felipe Ucros Nunez

Scotiabank Global Banking and Markets, Research Division - Analyst

* Fernando Olvera Espinosa de los Monteros

BofA Merrill Lynch, Research Division - Associate

* Luis Miranda Valenzuela

Santander Investment Securities Inc., Research Division - Head of Food and Beverage

* Marcella Recchia Focaccia

Crédit Suisse AG, Research Division - Research Analyst

* Miguel Angel Tortolero

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research 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 now 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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Thanks, Katie. Good morning, everyone. Thanks for joining the senior management team of Arca Continental to review the results for the third quarter and the first 9 months of 2019. Earnings release went out this morning. It's available on the company website as well as the webcast 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 Chief Financial Officer, 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 as usual that you refer to the disclaimer and the conditions surrounding those statements, which -- it's in the earnings release for your review. This call is for investors and analysts only.

And with that, I'm going to now turn the call over to the CEO, 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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Thanks, Melanie, and good morning, everyone. Thank you for joining us today. Our continued focus on strategic priorities enabled us to deliver positive top line growth with underlying margin expansion. We are moving swiftly to modernize our platforms and capabilities while finding new ways of collaborating and leveraging data to improve execution and deploy more agile ways of work. The digital transformation journey that we embarked on last year sets a clear direction to deploy the programs that create significant value to the current business and enable new business pensions.

Moving now to our consolidated results. I am pleased to report that we delivered strong financial results and a solid operating performance in the third quarter. Total consolidated volume grew 2.5% in the third quarter to reach 587 million unit cases and net consolidated revenues reached MXN 42.4 billion, up 6.7% from the same quarter last year.

We are winning at the point-of-sale with our commercial capabilities by accelerating the pace of innovation and investment in platforms, advanced analytics and data governance. On the profitability front, consolidated EBITDA in the quarter rose 11.4% to MXN 8 billion, representing a margin of 18.9% for an expansion of 80 basis points. The outstanding results of the quarter reflect our ability to capitalize on our existing capabilities while innovating with new ones.

As we articulated during Investor Day in August, the essence of our company and our business is connecting and creating that share value with our consumers. We are about building true partnerships with customers, partnerships that are strengthened over time.

In important news during this past quarter, Arca Continental was selected to become part of the Dow Jones Sustainability Index for Latin America, joining other international companies with the best results in environmental, social and corporate governance management. We are honored to be recognized as part of this index. We're committed to integrate sustainability to an even greater extent in our business strategy.

Now let's review the performance across our operating groups, beginning with Mexico. Our beverage business delivered a solid 4.3% total volume growth on top of a strong 3.4% growth in the same quarter of last year. This was driven by 2% drop in sparkling beverages, 5.3% in still beverages and 11.3% in personal water. Jug water also posted solid volume growth, up 10.1%.

Our beverage business in Mexico delivered its 17th consecutive quarter of net revenue growth, up 9.8% to reach MXN 18.8 billion, as we adjusted prices in line with or above inflation across our markets. Average price per case in Mexico, not including jug water, rose 6.4%, reaching MXN 62 as we continue perfecting execution at the point-of-sale and refining our ACT commercial model.

Year-to-date, we have installed over 76,000 cold drink units to increase coverage to 90%, one of the highest in the global Coca-Cola system. EBITDA increased 11.9% for the quarter to MXN 4.6 billion, representing a margin of 24.4%, an expansion of 50 basis points.

Among the highlights of the quarter, we launched in conjunction with the Coca-Cola System in Mexico our first energy drink under the Coke brand, Coca-Cola Energy. This is part of our ongoing innovation plan in the sparkling category, particularly, no-calorie segment.

I will turn now to our operations in South America. This past quarter, the region was challenged once again by the volatile macroeconomic environment. Total volume was down 3% for the quarter due to declining volume in Argentina and practically flat volume improved, which was partially offset by growth in Ecuador. Total revenues for South America decreased 5.8% in the quarter to MXN 7.9 billion mainly affected by the currency devaluation in Argentina that offsets revenue growth in Peru and Ecuador. EBITDA in the second quarter was practically flat at MXN 1.5 billion, representing a margin of 18.6%.

Our disciplined revenue management initiatives as well as product innovation under formulation should enable us to sustain value share growth and overall profitability. Let me provide you with more color on each of our countries.

In Ecuador, our beverage business posted a solid 4.1% volume growth during the third quarter driven by growth in colas, personal water and still beverages, up 7.2%, 8.2% and 8.4%, respectively. We continue reinforcing our affordability strategies, actively promoting returnable presentations. We will further expand the mix of these packages with our new 200 -- 750-milliliter multi-serve format.

Throughout this year, we have placed special efforts in launching new formulas to offer more low- and 0-calorie options in sparkling beverages, specifically in core brands such as Sprite, Fanta, Fioravanti and Inca Kola.

In Tonicorp, our value-added dairy business in Ecuador, we posted a low single-digit sales decline in the quarter. Despite pressures on domestic demand, our core categories posted low single-digit revenue growth and sustained market share.

The ice cream category outperformed the market, supported by the launch of new products and flavors as well as the price point affordability plan in the 1-liter take-home package. Execution at the point-of-sale and perks innovation are the main pillars of our successful commercial strategy.

Shifting gears to our beverage business in Peru. Total volume was almost flat. Consumer and business confidence were severely affected by the country's political uncertainty. Despite the economic weakness, we expanded our EBITDA margin and sequentially improved profitability in this key business. We will continue investing in market-focused initiatives, bolstering our returnable base and increasing rural coverage. Year-to-date, we have installed over 11,000 cold drink units.

Political instability may continue undermining investor confidence and weighing on growth in the near term. Nonetheless, solid macroeconomic fundamentals are supportive of Peru's medium-term prospects.

I will conclude my commentary in South America with our business in Argentina, where consumer spending was -- has been negatively impacted by a severe currency devaluation, runaway inflation and high interest rates. Volume was down 16.1% in the third quarter. Despite the prevailing economic turmoil, we've gained both volume and value share across all our categories in sparkling and still beverages by promoting immediate consumption with general packages and driving affordability.

In order to support these initiatives, we accelerated the rollout of a new 2-liter package in the multi-brand returnable bottle format, which further allows affordability while optimizing production cost. We're doubling down our cost discipline efforts and we are fully capitalizing on the vertical integration in cane sugar as we continue to acquire this key input at lower prices compared to the market.

Turning now to our beverage operation in the United States. Coca-Cola Southwest Beverages delivered its 10th consecutive quarter of net revenue growth, up 7.6% in the third quarter to reach $745 million. Our results continue to make steady progress with a healthy balance of price/mix and volume. Sales growth was driven by strong price improvement, up 4.2%. True rate grew 1.5%, cycling last year's July price increase. The remaining 2.7% was mainly due to higher price per case products, such as 8-ounce mini cans and 500-milliliter bottles as well as BodyArmor and Monster. Volume in the third quarter grew a solid 3.2%, mainly driven by the supermarket channel and the recovery of the convenience retail channel and despite the volume loss from DASANI case pack at Sam's Club, which we addressed last quarter.

These outstanding results in both top line and bottom line performance were due largely to our focus on executing revenue management initiatives to grow our price/mix over time, coupled with a consistent approach to expense control and synergy extraction.

EBITDA increased 13% to $98 million, representing a margin of 13.1%, with an expansion of 60 basis points. Importantly, EBITDA growth in the quarter nearly doubled the growth of revenue and came in well above inflation.

The ACT corporate commercial model continues to be the backbone of our strategy as we refine point-of-sale execution with a strong focus on consolidating our fundamentals. We have begun developing the new generation of go-to-market models for large stores and small stores as part of our customer intimacy project.

Also, as we mentioned on our previous call last quarter, an effective strategy was developed for the On-Premise channel, increasing customer connections via face-to-face interactions and deploying tailored action items to secure the right package brand assortment and executional elements.

Let me report now on the progress of our synergy program. We are on track to capture $90 million in synergies over a 3-year period. To date, we have completed several initiatives and many projects are already underway to achieve $30 million in 2019.

In closing, we are convinced that we have positive momentum coming out of the third quarter as we remain focused on accelerating EBITDA growth over revenue.

To conclude our operations review, let's move now to our food and snack business. Wise in the U.S. posted single-digit sales growth in the quarter while expanding value share, confirming the sequential recovery. Once again, growth was mainly driven by the potato chips category as Deep River expanded product coverage in existing customers such as Stop & Shop with 200 additional locations and new accounts such as Wakefern, Key Foods and [Kingkong].

Bokados in Mexico posted sequential high single-digit sales growth for its 17th consecutive quarter driven by growth in its [Quito] chips, popcorn and mixes. We're leveraging the recent geographical expansion into key

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(inaudible) to the combination of our pricing initiatives and volume differing, (inaudible) products, volatile conditions and circumstances in Mexico, the U.S., and Ecuador.

Our top line growth, coupled with stable raw material pricing

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Operator [4]

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Please excuse the technical difficulty and remain on the line while we reconnect with our speaker line.

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Thank you for holding. We now have our speakers back in conference. Sir, please go ahead.

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Emilio Marcos Charur, Arca Continental, S.A.B. de C.V. - CFO [5]

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SG&A expenses increased 5.6% in the quarter and 2.8% year-to-date, representing 30 basis points of contribution to our EBITDA margin expansion in the quarter. This is the direct result of our commitment to improving efficiencies in all the operations. Consolidated EBITDA in the quarter reached MXN 8 billion for an increase of 11.4%, representing a margin of 18.9% for an expansion of 80 basis points. Margin expansion, as I just mentioned, is mainly due to a higher price/mix and stable raw material prices combined with a tight operating expense control. Year-to-date, EBITDA rose to MXN 22.4 billion, reflecting a margin of 18.5%.

Excluding the effect from the adoption of the IFRS 16 accounting standards in the quarter, EBITDA grew 9.4% and had a margin improvement of 50 basis points, an extra 20 basis points versus the first and second quarter.

In the third quarter, comprehensive cost of financing was down 41% mainly due to a MXN 139 million benefit from the monetary position in our Argentinian operation and an exchange rate gain of 38 -- MXN 34 million compared to last year's exchange rate loss of MXN 272 million. Net income in the third quarter reached MXN 2.7 billion for an increase of 15.5% versus last year, which is directly attributed to a 6.9% increase in operating income plus a lower comprehensive cost of financing. Year-to-date, net income increased 13.8% and MXN 7.3 billion, reflecting a margin of 6%, also due to an increase in operating income of 4.7% and a lower comprehensive cost of finance.

As of September 30, 2019, we have accumulated debt of MXN 55 billion and a cash position of MXN 21 billion for a leverage ratio of 1.17x. We should soon reach a onetime net debt-to-EBITDA ratio, unless there is any M&A transaction. The operating cash flow reached MXN 20.1 billion year-to-date deployed mainly for CapEx and dividends. The CapEx investment reached MXN 7.6 billion, around 20% below of year-to-date initial estimates, as one of our best practices to adjust investments in line with the top line performance in each operation. As always, we are and will be conservative in the use of our cash flow.

For the last part of the year, we will continue enhancing our commercial capabilities with innovation at the point of sale. These capabilities should be combined with a balanced portfolio of products, an effective price-pack architecture plan, and endless pursuit of operational improvements to fully capture value creation to our shareholders in 2019.

And now I'll turn it back to Arturo.

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [6]

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Thank you, Emilio. With the third quarter behind us, we see the challenging global environment continuing, but we remain committed to the midterm targets that we outlined at our Investor Day last August. We will continue to align our efforts to our core principles of paying customer-centric, results-oriented, transparent, innovation-driven and people-focused. And we will strengthen our leadership by combining our robust processes with new technologies and digital innovation, a combination that creates new competitive advantages for our company.

Our focus is on serving our customers with passion and excellence. We have a trust-based relationship with those customers and other stakeholders. We have the best brands, with processes and experience and, more importantly, the commitment of more than 60,000 associates ready to take our company into the future and to strengthen Arca Continental's performance for now and for tomorrow. Thank you for your continued support.

Operator, we are ready for the 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 Marcella Recchia with Crédit Suisse.

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Marcella Recchia Focaccia, Crédit Suisse AG, Research Division - Research Analyst [2]

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First one about U.S., some of the initiatives you have been talking about for quite some time both in terms of top line and margin seem that this quarter, they yield more tangible results. Is there any one area that you would highlight as contributing more to that inflection point? And do you think that this trend remains in the future? I wait the answer to take my second question.

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

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Thank you, Marcella. As we have explained, in the U.S. market we've had several initiatives, a few that we believe are pretty transformational. I will mention 3 of those, and there are other things that we're working on as part of our synergy plan. One is our revenue management strategy in the U.S. As we have committed to, we want to increase prices in line or above with inflation, and that is certainly a challenge in the U.S. because we need to act in coordination with the rest of the system in most of our channels. So it's not only about having the will, but it's certainly about having the right processes in place and the right tools and also being very effective in the management of discounts as well. It's not only about prices. It's about revenue per case, in general. So that's one important aspect.

A second aspect is that our culture of execution in the market, which is called fundamentals, and this is about tracking all the executional elements at the outlet and having complete visibility from the top and cascading down all the way to the front line and having the necessary tools for the frontline associates to know exactly where they need to focus on and have all the action items also flowing so that they can, again, focus on the right things in the marketplace.

The third aspect that I would highlight is our new go-to-market approach in the U.S., and this is something that I believe has not yet delivered full results, but we've been rolling out our new -- what we call the service models, mostly for the On-Premise market. And if we look at the operational indicators so far, we have doubled the number of face-to-face visits. We've increased our points of interaction with our customer, the number of sales visits versus previous year. And very importantly, this has been done mostly by reallocating resources, not by investing or spending more as part of our cost to serve, but actually by just reallocating resources for things that we believe did not bring significant value to things that we are convinced are the ones that create a better relationship with better connection with customers, ultimately, better execution at the store, availability of products, a picture of success, those are the metrics that we are tracking day-by-day now in the U.S.

That is aside from our synergy program, and that also is contributing to improve our profitability overall. We have some of the synergy projects that are on the revenue space and some from the cost and savings space, but they both are on track and they all are contributing to have better results quarter-by-quarter.

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Marcella Recchia Focaccia, Crédit Suisse AG, Research Division - Research Analyst [4]

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Perfect. My second question is about Mexico. We saw the volumes very strong this quarter. Can you comment on the sustainability of that in light of the macroeconomic situation in Mexico? And any potential update in the tax regime for the next year?

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

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Yes. Well, in Mexico, the market continues to grow. I mean consumer confidence is still strong and we have many elements on the consumer side that remains strong where business is -- remain upbeat in Mexico. While the economy might not be growing much, we still see a healthy demand in the market. That is aside from the opportunities that we identify, and we continue to do things better in the market. It seems like Mexico might be one of those business units where we've matured and captured many of the opportunities, but we still find things that we need to do better. One example is our out-of-stocks projects. Very important to roll that out and using advanced analytics to reduce our stocks in the traditional trade channel.

I will turn it over to Pepe Borda, if he wants to add to that. But before, just let me mention about taxes. You asked about the situation in the taxes in Mexico. First, just to put things in context, I think everybody knows that taxes have proved ineffective as a solution to problems of public health. And resources obtained really do not have a direct allocation to the health program. So we have fulfilled, as a company, our commitment to be part of the solution by reducing our footprint of calories in recent years. We're offering a balanced portfolio. We have more than 40% of our portfolio in low- and no-calorie options and we promote physical activation.

And in this case, the tax was actually an adjustment with inflation. We're going to be adding the inflation of 2018 and whatever results for 2019, and that updating of the original tax would be done on a yearly basis instead of the original regulation. And this is a tax that is transferred to the consumer. We've expressed over and over that we believe that this is a tax that ultimately is paid by the lowest economic segment of the population, so it doesn't make a lot of sense from that point of view either. So with that, I'll turn it over to Pepe to -- if he wants to make a few more remarks about the Mexican market.

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José Borda Noriega, Arca Continental, S.A.B. de C.V. - Chief Commercial & Digital Officer [6]

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Thank you, Arturo, and thank you very much for the question. I think there are many things that we are doing in Mexico that are starting to bring consistent results. Starting with that, probably I would say that the basic ones, the things that we've been always doing like enhancing refillables and really betting on affordability for our customers, continue expanding our cooler base despite having an important cooler base already, we still find opportunities in which we can expand our portfolio and offer cold product to our consumers.

I would say, another important thing is we've had a good set of new product launches that -- each of those might not be big products that in itself -- by themselves, but when you add all of them, they bring up some important volume like Coca-Cola Coffee, Coca-Cola Energy, increasing distribution of Coca-Cola without sugar, innovating in Fuze Tea, ISOLITE and all those. So it's an important enhancement of our portfolio that comes together with this.

And last, I would also like to focus on our direct-to-consumer business that is also growing. We have a steady growth of 25% year-to-date with consistent expansion of our portfolio, especially dairy and other still beverages. So it's a combination of any of those things.

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Operator [7]

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(Operator Instructions) Our next question comes from Luis Miranda with Santander.

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Luis Miranda Valenzuela, Santander Investment Securities Inc., Research Division - Head of Food and Beverage [8]

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I have a follow-up to Pepe's comment on innovation. And yes, when you take a look at the recent launches and innovation, and you mentioned the coffee, energy, low sugar, reduced sugar. Can we have an idea of the rate of growth that you're having in this product? I know it's a very low base, but -- and if it has come relative material size? Or how much of the portfolio is becoming innovations? And the second question is with regards to your outlook for raw materials entering into the end of the year or beginning of 2020.

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

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Thank you, Luis. I'll let Pepe answer the first part of the question and maybe Emilio can address the second part. And just going to say about growth rate of these products. It's very important to understand that although they might be a small part of the mix, they might be a higher part of the growth. And that's one thing that we look at many times. We have to know what is providing the growth. And we know that sparkling categories may not be growing as much. Well, they continue to grow even in the most mature markets like the U.S. You see brand Coca-Cola continues to grow in our territory. But certainly growth is mostly driven by these other categories.

I think the challenge for us as bottler is being more effective in understanding and dealing with the complexity of granular growth. And most of what we're doing in our go-to-market approach and our ACT processes is finding new ways to make sure that we are effective in how we execute and how we manage all the process related to the smaller categories that might not be as exciting, if you look at them from a point of view of the mix of total volume, but they are certainly exciting when you look at the growth. And think about in Mexico, not only these new launches, but think about dairy and think about energy as a whole. So these are great opportunities. But I'll let Pepe expand a bit on that.

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José Borda Noriega, Arca Continental, S.A.B. de C.V. - Chief Commercial & Digital Officer [10]

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Thanks, Arturo. And thank you for your question, Luis. Just to give you some examples, some of these launches don't have a comparative base because, as Arturo said, they are pretty small. But I can tell you that low- and no-sugar products are growing around 3%. And for example, when we see some categories like the dairy category, we're growing around 19%. In energy, we're growing around 11%. Isotonics, where we have Powerade together with ISOLITE, we're growing at 19% in the last quarter and 11% for the year-to-date.

So as Arturo said, these products are small by themselves, but they make a big component of our growth. And most important than that, many of these are products that have higher contribution. For example, when we are selling Coke Coffee, we're selling it at a 25% premium price versus original Coke. Coca-Cola Energy is selling at 100% premium price versus original Coke. So these products not only give important volume and revenue contribution, but they also give an important profit contribution.

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

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So turning to your second part of your question. Emilio, can you give us some insight on the raw material question?

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Emilio Marcos Charur, Arca Continental, S.A.B. de C.V. - CFO [12]

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Sure. Thank you for your question, Luis. For the end of the year, we should expect similar price than in the third quarter, which are lower than last year. As we have said, we have a better comparison on raw material prices in the second half versus the first half of this year. I think with the exception of sugar in Ecuador that we expect an increase for the end of the year only in Ecuador for sugar.

And talking about 2020, I think that in general I would say that we see a stable raw material prices. Again, only -- we're expecting some increases in sweeteners in line with inflation. But we have already hedged some of the prices for next year. For example, in U.S., we have hedged 50% of our high fructose needs, a higher -- a little bit higher price in line with the increasing inflation in U.S. for high fructose.

In Mexico and Argentina, in sugar, as you know, we're vertically integrated. So we should be able to maintain stable prices on sugar in Mexico and Argentina for 2020. And in Peru, we already hedged 40% of our needs for the first half of 2020 at better prices than 2019.

And in U.S., aluminum, as you know, it's a very important raw material. We have already hedged 65% of our needs on aluminum for 2020 at a lower price than 2019. So that will be a benefit for next year in U.S.

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [13]

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Luis, that is the price of aluminum, the LME component of the price.

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Emilio Marcos Charur, Arca Continental, S.A.B. de C.V. - CFO [14]

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That's correct.

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [15]

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We also expect that Midwest premium to maybe be lower in 2020 as compared to 2019. We know that, that is artificially very [positive] now. So we expect that maybe to improve at least marginally for next year.

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Luis Miranda Valenzuela, Santander Investment Securities Inc., Research Division - Head of Food and Beverage [16]

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Perfect. That was very clear. And just clarification, in aluminum was 60% hedged?

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

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It's actually 65%, I believe, for next year.

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Emilio Marcos Charur, Arca Continental, S.A.B. de C.V. - CFO [18]

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65%.

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Operator [19]

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Our next question comes from Felipe Ucros with Scotiabank.

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Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [20]

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Actually, Luis just asked my question on the Midwest premium. So I wanted to follow-up on another issue that I wanted to ask about, which is what I've noticed is the Coca-Cola system being a little more open to the bottlers distributing alcoholic beverages. And slowly but surely we've seen players experimenting with it. Andina signed a couple of contracts for Pisco and with Diageo in Chile. And KO just disclosed in the previous call this morning that they're also exploring distributing spirits in Brazil and trying to test other things in other locations. So I was wondering if you're looking at this and how you're exploring it.

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [21]

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Yes. Thank you, Felipe. Let me just elaborate a little bit because you wanted to ask about Midwest premium. I didn't go into a lot of detail. Just -- I'd like to add there that, that component of the aluminum price, as I said, it's very high. It's been above the $400 per ton level in the last 1.5 years or 2. Ever since the duties for aluminum were imposed in the U.S., those duties were worst for Canada. And this is a logistics component of the price, so it should not be at that level. It is completely absurd that there is a duty imposing the logistic price when there is an over-duty in the logistic operation of aluminum.

So we are not discounting it. That is going to be solved. So we're discounting a marginal improvement for next year. But that is certainly an upside for our business because that was at the $200 per ton level in the previous years, and now it's at the $400 per ton level. So if you think about that, that's certainly an upside when that might be resolved. And this is something that's been discussed by the industry as a whole in the U.S. I just wanted to point that out. With respect to...

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Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [22]

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That's very clear, Arturo. I don't know if I can do a follow up about it, but do you know why it hasn't been arbitraged down? I mean in theory you should be able to...

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

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That's a great question. That's a question I'm making. There are hundreds of smelters of aluminum in the U.S. I just wonder how can they be so coordinated. But this is something that we even addressed with the DOJ in the U.S. It's a big deal. Brewers are also questioning that. So that's something that, I guess, at some point, it would be solved. But we're not -- again, we're conservatively not discounting that, that is the case. But it doesn't make any sense. That's the answer.

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Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [24]

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Okay. That's very helpful.

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [25]

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But then going to the question about the KO system being open to other products. Yes, we've seen a different perspective and approach by The Coca-Cola Company on these types of initiatives. As I've said, the company is more flexible, is more pragmatic to see how we can synergize and make the system more profitable as a whole. And you know that in Argentina, we've been distributing beer for quite a long time. Ever since we acquired those franchises, we've been distributing beer in the [red truck] in some of the territories in Argentina successfully and profitably.

So I think the answer is that there is not one single model that would work for all the markets. It depends on the structure of the market and the particular relationship that you may have with a certain brand. We are now exploring in Argentina where we want to increase our drop size under the current economic situation of that country to expand the portfolio of these products to other similar products like cider, which is consumed a lot in Argentina. So we've launched that just recently. And we will continue to explore those opportunities, taking advantage of both, that The Coca-Cola Company is more pragmatic about this; and second, that we have a very good relationship and dialogue with them about these possibilities and opportunities.

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Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [26]

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Great. And if I can do a follow-up on this, when you talk about different opportunities in different markets, what are the most important factors for you? Obviously, where you require a license to distribute alcohol and when you don't matters. But what other factors are kind of...

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [27]

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I think another factor is many times the bandwidth of your system and the opportunities that you can capture with your own portfolio of stills and dairy and the different brands that we might be distributing and managing in a particular market.

So obviously, our first option would be to expand as a non-alcoholic beverage company as much as possible. If the economic situation in Argentina now results in a reduced demand is when these things could make sense. But we would be looking, in the case of Mexico, first, to capture the opportunities that we have, for example, in dairy, which is a great upside there for that segment.

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Operator [28]

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(Operator Instructions) Next question comes from Miguel Tortolero with GBM.

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Miguel Angel Tortolero, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [29]

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Regarding the labeling initiative in Mexico, we would like to hear your thoughts on what effect would you expect from this initiative and what sort of internal initiatives you could be implementing to mitigate a potential impact. Is there any lesson you could take from other countries that have already faced this situation? And the second one, on the sugar side, do you think there's any sort of impact that we should expect from the recent news on the sugar trade agreement between Mexico and the U.S. will bring some volatility to local prices?

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [30]

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Thank you, Miguel. Let me talk about labeling regulation in Mexico. First, we should say that it's very important to know that we, as a beverage and as a food company as well, we are in favor of industry transparency. For many years, we have been very active in informing our consumers clearly about the content in our products in all the markets. We pioneered with GDAs before any regulation in Mexico, and we also reduced our footprint for calories, as I said, and the size of proportion regardless of regulation.

So now the General Health Bill is approved by the Senate, but it will take some time until it becomes specific regulation in Mexico. We are now in the stage of consultations and analysis. There's a proposal of norm that was published. But to have the final official norm, there is a period of consultation and then after that, there's a period of implementation as well. And as you said, we have the lessons from other countries like Ecuador or like Peru recently, and we are actively participating in this process to have mostly a framework for labeling that is based on science that is comparable to what's worked internationally. The idea is to really help the consumer to make informed decisions and, in our case, to create incentives for reformulation of our products. And that's what we've been doing for several years.

So we're not concerned, to the extent that we've been very transparent over the years, on informing the amount of calories that our beverages have. And also, we are better prepared because we have made a lot of progress in reformulating products into low calorie or no calorie with great improvements in taste. As you know, the Coca-Cola without sugar is a great product in terms of taste as compared to the original Coke.

So now as I said, more than 40% of our portfolio is now 0-calorie or low-calorie, and almost 20% of our volume in Mexico is in non- or low-calorie presentation. So even when we are still expecting the details of the new labeling regulation, an important portion of our products would be free of those seals or maybe have just one seal. So this is not a concern of a great magnitude. But certainly, there are things that can be, as I said, incentivized to improve our portfolio.

With respect to sugar, Emilio explained the sweetener environment for the future. And we expect that to be fairly stable. As you know, we're also integrated into sugar in Mexico and we acquire fructose from the U.S. And we anticipate that to continue to be fairly stable, as Emilio described.

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Operator [31]

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(Operator Instructions) 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 [32]

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I just have one, and it's related to Ecuador. I was just curious if you face any difficult from the recent process and if this process could affect your results for the third quarter? And also, if it's possible, can you share what is your outlook on consumption in Ecuador for the next 12, 15 months?

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [33]

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Sure. Well, as you've seen, Ecuador has faced a difficult situation in the last few weeks. There were social protests about 2 weeks ago, and we are now in the -- this recovery phase of the effects from that situation. We were 1 of the first consumer products companies to respond, delivering our products. We -- there are many examples in our team of our commitment to serving customers in those very, very difficult situations. Our operation was back to normal a short period of time after all these occurred. So there is not a long-term or permanent effect from what occurred.

What is going to happen now is that there is a new package of measures from the government because they reversed some of the things that they have decided before. So there is some impact there that we are evaluating, mostly increase in tax from 0.18 to 0.20. It's something that has been proposed, and it's part of that package. And this is, again, something that would need to be translated into adjustments in our pricing in Ecuador might have some effect for next year.

But in terms of our current operation, things are back to normal as we distributed products in that market. So our outlook for the short term is that we expect growth to resume basically because we are doing a number of things that are very important for growth in that market. I would say the most important one would be our focus on returnable packaging, which is, as we've done many times, this is the flexibility of having the affordability and the same time, growing profitably.

We also are improving distribution by adding new routes to capture new customers and improve the level of service. I think this is the market where we have the biggest opportunity from that point of view of reaching more customers. Ecuador is a very fragmented market. There are many, many small customers, but they're still important to us. And we know how to get there -- get to them in a profitable way. So we're adding 16 -- more than 16,000 new customers by the end of the year. So I think those 2 are some of the basic things that we're doing, and that will allow us to continue to be on the path of growth in that market.

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Operator [34]

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Next question comes from Álvaro García with BTG.

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Álvaro García, Banco BTG Pactual S.A., Research Division - Research Analyst [35]

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Congrats on results. My question is on snacks. We saw much better dynamism in Bokados specifically. You mentioned the better part of production and distribution strategies. I was wondering how you feel about the construct of that business today and whether or not we should extrapolate this double-digit EBITDA growth sort of going forward the next couple of quarters. That's my question.

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Arturo Gutiérrez Hernández, Arca Continental, S.A.B. de C.V. - CEO [36]

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Thanks, Alvaro. Let me tell you about what we're doing in snacks in our markets as well. Inalecsa is a more stable business unit for us in snacks. And -- but in Bokados, we're -- this is where we're trying to expand our coverage in Mexico to become more of a national brand. We're accelerating growth in the traditional channel and increasing our distribution in new territories. So that has an impact on our profitability in the short term, but we know that these are the things that we need to do at the same time that we invest in our brands and the construction for brands and also in the innovation of products.

We are also looking to maximize productivity in our facilities in Queretaro, which, as you know, is the center part of Mexico. And that is -- allows us to have more scale to go to the market in Mexico City, which is the largest market and increase our footprint in that part in the south region of Mexico where we have a very small presence.

So we're trying to gain that scale, and that requires having more distribution centers and also having more routes that have a natural curve until they mature, and that impacts sometimes the profitability. That's what we expect going forward.

But we are excited about growth in our products. I think we have a good portfolio of products and a good opportunity to have a stronger footprint as a national brand in Mexico.

And in the case of the U.S., it's -- my comment, the situation is different. In the U.S., we're focusing mostly in the markets where we are most profitable. We have very good presence and strong distribution in the northeast of the U.S., and I would say in the East Coast as well. So we continue to create a wider distribution network, particularly in that territory and leverage Deep River, which is a brand that has a lot of traction in the market. And as those new brands in our portfolio grow, we have a much more balanced business between the traditional brands and the better-for-you products as well. And we are rationalizing a portfolio of SKUs to ensure the profitability of the business. So as a result of that, you can see that we have a much improved business in snacks, both in Mexico and the U.S.

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Operator [37]

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At this time, I am showing no further questions in the queue. I would 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 [38]

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P Thank you. And as always, we thank you all for your interest and investment in our company. We look forward to speaking with you again soon. Have a great day.

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Operator [39]

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Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.