Arca Continental Sab De C

Good day, everyone, and welcome to today's ARCA Continental Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing the star and 1 on your touch-tone phone. Please note this call may be recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Melanie Carpenter of Ideal Advisors.

Thank you, Operator. Good morning, everyone. Thanks for joining the senior management team of Arca Continental to review the results for the third quarter and first nine months of 2024. Their earnings release went out this morning, and it's available on the company website at arcacontinental.com in the investor relations section. It's now my pleasure to introduce our speakers. Joining us from Monterey is the CEO, Mr. Arturo Gutierrez, the CFO, Mr. Emilio Marcos, and the Executive Director of Planning, Jesús García. They're going to be making some forward-looking statements, and we just ask that you refer to the disclaimer and the conditions surrounding those statements in the earnings release for guidance. And with that, I'm going to go ahead and turn the call over to the CEO, Mr. Arturo Gutierrez, who is going to begin the presentation. So please go ahead, Arturo.

Thanks, Melanie. Good morning and thank you everyone for joining us today. I am pleased to report that we delivered sound financial results and a solid operational performance in the third quarter. By staying focused on our strategic priorities, we delivered top-line growth, expanded underlying margins, and increased market share. With the first nine months now in the books, we're on track to achieve full-year results in line with our outlook. Let's take a closer look at our performance. Total consolidated volume in the quarter decreased by 4.6% to reach 634 million unit cases. This decline followed strong volume growth in the same quarter over the past three years. which recorded increases of 7.4%, 4.2%, and 7.1%. Consolidated revenues rose 10% to reach 62.6 billion pesos. In terms of profitability, our results were rewarding. Consolidated EBITDA increased 10.2%, reaching 12.7 billion pesos. Remarkably, this is the highest consolidated EBITDA margin for a third quarter over the past eight years. While the third quarter proved to be challenging, we achieved sequential earnings growth through a disciplined approach to volume, price, and mix management. Now let's delve deeper into our performance across our regions, beginning with Mexico. Unit case volume, not including jug water, declined 2.6%, cycling an outstanding 8.7% record-breaking third quarter of last year, and strong growth rates in 2022 and 2021. Volume contraction this quarter was caused by heavy rains and unseasonably below average temperatures across most of our territories. This decline was partially offset by an 8.2% growth in still beverages, mainly driven by the sports drinks, tea, and coffee categories. Coca-Cola no sugar sustained its momentum up 19.1%, thanks to continuous product innovation with Coca-Cola Zero Sugar Oreo and appealing campaigns with Coca-Cola Marble. Total net sales rose 4.8% to reach 29.3 billion pesos. This marks the 33rd consecutive quarter of net revenue growth in Mexico. Average price per case in the quarter, not including jug water, rose 7.6%, reaching 85.88 pesos. Additionally, we gained value share in non-alcoholic ready-to-drink beverages this quarter, outpacing the industry in Mexico. EBITDA increased 6.6% to 7.4 billion pesos for the quarter, achieving a margin of 25.3% and marking the 23rd consecutive quarter of EBITDA growth. In South America, the region was challenged once again by the volatile macroeconomic environment and weakening consumer demand. Total volume was down 8.6% in the quarter, reaching 141 million unit cases. Volume performance in the third quarter is cycling strong growth rates of 8.1% in the same quarter of 2023, 6.4% in 2022, and 24% in 2021. Total revenues rose 8.7% in the quarter to 10.6 billion pesos, and EBITDA increased 1% to 1.7 billion pesos, representing a margin of 15.7%. Moving over to our various business in Ecuador, the country is facing a severe energy crisis due to the worst drought in 61 years, resulting in widespread power outages and economic challenges. Daily blackouts now last up to 10 hours, with industrial firms ordered to cut back on electricity usage. Volume declined 8.1% compared to solid growth in the previous three years, which is consistent with the trend seen in our other South American markets. While we cannot change the market conditions, we have continued to focus on the things we can control. We gain value share across NARPD villages by perfecting our price-back channel strategy, promoting returnable packages, and investing in market-focused initiatives. So far this year, our team in Ecuador has installed over 21,000 cold drink units and expanding our cooler coverage. In Peru, the country has been experiencing unseasonably cold weather, especially in Lima and other key coastal areas. Due to these challenges, volume declined 6.7% following strong double-digit growth in the same quarter of last year. However, we are beginning to see a moderation in the rate of volume contraction bolstered by our affordability initiatives and ongoing investments in returnable bottles. We continue to advance in our strategy to capture new revenue streams. As you may recall, At the start of 2024, we began distributing one of the top fiscal brands, which has resulted in double-digit growth in our ginger ale category. In Argentina, volume in the third quarter was down 13.1%. As anticipated, we are seeing positive signs that the economy's contraction is starting to ease. Our actions to provide an affordable portfolio and expand returnable presentations are driving sequential steady volume recovery across channels. Returnable presentations continue gaining positive momentum, up 9.3 percentage points in mix. Moreover, as part of our multi-category strategy, we began distributing two prestigious brands, one in the craft beer category and the other in the value-added dairy segment. We are encouraged by our results in Argentina and remain optimistic that this forward momentum will carry through the rest of 2024. In the United States, Coca-Cola's Southwest beverages sustained its business momentum and achieved strong third quarter results. Net revenues for the quarter rose 5.1% to $1.1 billion. Average price per case grew 7.6%, with 3.6% of true rate increases. This reflects our successful strategy of optimizing price packaging and promotional spending, growing transactions and value share while maintaining efficient labor management. Volume for the quarter declined 2.4% to 118 million unit cases. Importantly, the sparking beverages category grew 1.3% led by Coca-Cola brand and flavors. The sugar portfolio keeps growing too, led by Coca-Cola Zero and Sprite Zero, up 11.2% and 6.2% respectively. The Stills portfolio finished the quarter up 0.8%, as we continue to see positive momentum in Monster, Smart Water, Fairlife, Core Power, and Tea. The Topo Chico brand delivered 10.5% volume growth, led by Topo Chico Sabores. We gained value share in non-alcoholic ready-to-drink beverages this quarter, with growth in both the SSD packages and still beverages categories. For the quarter, EBITDA grew 10.5% to $182 million, with a margin of 16.2%. marking the 26th consecutive quarter of EBITDA growth. This represents the highest per quarter EBITDA margin since we acquired the U.S. operation, setting a record for the longest consecutive growth streak across all our business units. Our food and snack businesses posted high single-digit sales increase and sustained steady earnings momentum in the third quarter, led by Bocados in Mexico. I would like to take a moment to highlight an important announcement we recently shared. We're thrilled to unveil the next phase of our digital transformation with the launch of Tuali, our next generation B2B digital platform. Our core B2B capabilities have gained significant traction, with over 60% of traditional trade volume now captured digitally, contributing $2.4 billion in digital sales. Tuali builds on the evolution of AC Digital, aiming to further revolutionize the operations of nearly 1 million of our customers in the traditional trade across our geographies in Latin America. Developed by our digital nest in Monterrey, Tuali is designed to empower customers by offering a wide selection of features, including AI-powered predictive ordering based on data-driven insights. It also includes advanced loyalty programs and financial services, ensuring our customers not only streamline operations, but also benefit from these tools designed to grow their businesses. I'd like to conclude my opening remarks with an update on our sustainability efforts. Through PETSTAR, the world's largest DC recycling plant, and together with Coca-Cola Mexico and other partners of the Coca-Cola system, we've reached a key milestone by boosting our PET bottle collection and recycling capacity to 74%, meaning we now collect and recycle 7 out of every 10 bottles we sell in Mexico. This is equivalent to collecting 5.5 billion bottles annually, moving us closer to our objective of retrieving 100% of the bottles we put on the market by 2030. in alignment with the global initiative, a world without waste. This milestone was achieved through PestArts expansion, which included a 3.2 billion pesos investment. This expansion will increase the number of PST collection centers in Mexico from eight to 45 and double the recycling capacity. Furthermore, In collaboration with Coca-Cola Mexico, we implemented our 100th rainwater harvesting system in public schools, providing clean water to over 44,000 students and capturing more than 27 million liters of rainwater annually. We are committed to enhancing water stewardship by improving access to water in the communities we serve. And with that, I will now turn the call over to Emilio. Please, Emilio.

Thank you Arturo and good morning everyone. Thank you for joining our conference call. As Arturo mentioned, this was a challenging quarter in terms of volume performance due to the combination of unfavorable weather conditions and tough camps from a very strong third quarter last year. Nevertheless, our price pack architecture strategy along with the foreign exchange effect and key input cost tailwinds led to the solid top-line and bottom-line results, with double-digit growth in both revenues and EBITDA with improved profitability. Let me now provide you with further details on our financial results. In the third quarter, consolidated revenues rose 10%, driven by expected pricing and exchange rate gains. as a result of our exposure to US dollars and the depreciation of the Mexican pesos. For the first nine months of the year, revenue grew 5.1%. On a currency neutral basis, revenues rose by 5.9% in the quarter and 7.6% year to date. Gross margin grew ahead of revenue. up 11.3% during the quarter, reaching 29.2 billion pesos. This resulted in a contribution margin expansion of 60 basis points. In the nine-month period, gross profit increased 7.2% to 80.4 billion pesos, while gross margin expanded by 80 basis points. The improvement was largely due to our pricing strategy, favorable conditions for most raw materials, and our discipline hedging strategy. Operating income reached 10.3 billion pesos in the quarter, a 10.2% increase. Here today, it rose by 7.1% to 27.7 billion pesos with margin expanding by 30 basis points. For the quarter, consolidated EBITDA increased 10.2% to 12.7 billion pesos, with a 10 basis points margin expansion reaching 20.3%. In the nine-month period, EBITDA grew 6.6%, while EBITDA margin expanded by 30 basis points to reach 20.1%. On a currency neutral basis, EBITDA rose by 5.7% in the quarter and 7.9% as of September. These results explained by the expansion of the contribution margin, which is mainly due to its strong pricing and raw material benefits previously mentioned. net income in the third quarter reached 5.1 billion pesos for an increase of 13.1%, and the net profit margin increased by 20 basis points. For the nine months ended in September, net income rose 10.3%, reaching 14.3 billion pesos, while net profit margin expanded by 40 basis points. Continuing with the balance sheet, as of September, cash and equivalents reached 28.1 billion pesos, while total debt was 48 billion pesos, leading to a leverage ratio of .45 times. The operating cash flow totaled 29.7 billion pesos. On August 29th, an extraordinary dividend of 2.50 pesos per share was paid. reaching a total dividend of 6.30 pesos per share for the year. This implies a dividend yield of close to 3.4% and a payout ratio of 62% of retained earnings. For the first nine months of the year, CAPEX was $10.6 billion, representing 6% of consolidated revenues, in line with our guidance set at the beginning of the year, as we strengthened our production, distribution, and commercial capabilities. Looking ahead, our strategic priorities remain unchanged. Our commercial strategies, CAPEX deployment, sustainability initiatives, and the implementation of the digital transformation agenda will enable us to maintain overall profitability and generate value for our shareholders. And with that, I will turn it back to Arturo. Please, Arturo.

Thank you, Emilio. In closing, we are pleased with our overall year-to-date performance. Our superior execution capabilities, the strong brand equity of our product portfolio, and our exceptional team of dedicated associates provide a solid foundation for navigating a competitive landscape. Looking ahead, we are confident that we are in line to deliver full-year results consistent with our guidance. Thank you for the time, and we are now happy to answer your questions.

Thank you. At this time, we will open the floor for questions. If you would like to ask a question, please press the star key followed by the 1 key on your touchtone phone now. As a reminder, due to high interest and time, please limit yourself to one question. Again, press star 1 to ask a question. We will pause for just a moment to allow everyone the opportunity to signal for questions.

And we'll take our first question from Ben Thurow with Barclays. Your line is open. And Ben Thurow, your line is open. Please ask your question. Please make sure you are not muted on your end.

No response. Moving to the next question. We'll take our next question from Alejandro Suis with ICA. Your line is open.

Thank you, operator. Thank you for the space of questions and congrats on the results. Very two quick ones from my side. First, in the U.S., another strong quarter in terms of margin performance. Maybe you could walk us through what is driving the better margin performance and if we've already seen some of the benefits from the efficiency program in the distribution that you mentioned a couple of quarters ago. And then the second one very quickly on Mexico, volume comp was very challenging, but maybe the drop was a little bit you know, tougher than expected. Was wondering if you could comment on how you see overall consumption in Mexico towards the end of the year and your expectations for next year. Thank you.

Yes. Thank you, Alejandro. Let me address your Mexico question first.

And... Computer volume without jogs We were down 2.6%.

But we were cycling very tough costs from last year. We had more than 8% growth in the same quarter. And we also were facing very difficult temperature and weather conditions throughout the quarter. If you think about rain, if you think about, you know, how warm it was last year particularly, that reduced traffic in stores. But we... We continue to see growth for the remainder of the year. There's a mild industry contraction due to that. But, again, we're facing the highest growing period from the previous year. Some of the insights we have from our own system, from Yonk, as you know, we monitor traffic and consumption in the stores through our own sample of stores. We saw slowdown in some categories, but regional performance is starting to recover, particularly in the west side of Mexico. And we're gaining share value in our market in Mexico. So we still expect to grow low single digit versus previous years. We take 2024 as a whole. And we are focusing on... You know, things that we've already talked about, portability, very important on deploying our analytic capabilities on our cooler investment plans, and now we've reached 100% of that deployment. And very importantly in Mexico and for the future, we're going to be capitalizing on the new investments that we've made throughout the year. We've added six new production lines. Two new distribution centers are coming into operation very soon. And we also added 280 additional routes. So that's reflected in some of our OPEX, but that's, again, it's going to be capitalized throughout the end of the year and throughout the rest of the year in 2025. So we're optimistic about growth. Again, it's not going to be a straight line as we know in Latin America. but we still expect to grow in the year. Then moving into the U.S., and you asked about profitability in the U.S., our EBITDA for the quarter grew significantly. Our margins were very satisfied with our margins above 16%. We had mostly a combination of very good pricing and volume mix, Our pricing tools, our promotional tools have been very effective. We've had some raw materials fail-wins, but a good strategy also and good negotiations and hedging. And many of the efficiency projects that you mentioned are also coming into effect throughout the year and for the future. We have a number of projects in all of our operations, but specifically in the U.S., that are going to be very relevant to sustain margins for the future. We've been working through a digital transformation and project transformation office to focus on the most important initiatives to gain productivity. Let me just mention a few in the U.S. We are working on tools to help us figure out the SKUs that should be produced at each site. That would result in better logistics costs. We've been investing in predictive maintenance to improve equipment reliability and mechanical efficiency. We are working on light weighting as well. Some of these projects are giving results throughout the year, and some will come in the future. The most important one of those is we're expanding and improving our production facilities in Fort Worth, Texas. and that will result in supply chain efficiencies. It also will enable growth. It's a significant investment. In the next three years, we're going to bring into operation three new production lines. That's replacement and incremental. We're going to expand warehouses and process automation, and that certainly reduces our production costs throughout the system. So we are engaging in a number of projects. that will help us, you know, navigate this competitive environment and sustain our margins as we move forward.

Very clear. Thank you.

Thank you. And we'll take our next question from Philippe Bucros with Scotiabank. Your line is open.

Thanks, operator. Good morning. I'm Emilio.

I'm team. Thanks for the space. Perhaps one on distribution agreement. So congrats on formally adding PISA to the portfolio. I was wondering if you could talk about that experience, perhaps the data that you saw in the pilots, which eventually led you to sign the formal agreement. You talked a little bit about the results that you had on ginger and sales and that. But maybe also if you could give us some details about whether the agreement is exclusive or whether you expect to add other brands or other service categories as you show good performance in this distribution. And then probably the same for Argentina, maybe not exactly the same drivers in Argentina with the DOC card, but you'll find a couple of deals there. So congrats on that, and any details would be great. Thank you.

Thank you, Felipe.

With respect to this multi-category initiative that we've been working on, this is basically, again, the premise here is that we are leveraging our distribution capabilities based on, you know, two developments that are fairly recent. First, our new agreement with the Coca-Cola company that is, you know, that was executed about two years ago. And second is as we deploy new technologies, we're able to manage the complexity of a broader portfolio much better in the marketplace. So with that, as you said, we started some pilot tests with different categories. So we're basically exploring three categories for distribution agreements, which is beer, spirits, and groceries. And we've been doing this in all of the Latin American markets, and we believe these categories complement – our core portfolio very well. So we currently have track revenues in the traditional trade in the territories where we're operating those categories. And this is about, you know, it's about 2% of revenues where we have the penetration of those categories. But we still find a lot of opportunities to increase our coverage in the routes that we are presenting this option to our customers. But what we've noticed, and I think what's very important, and that's maybe the starting point, is the effect it has on the core business. Because we had historically this paradigm of, you know, will this distract our front line from focusing on the core categories of our business? But basically, the customers who are buying these new categories are actually buying more of our core product. significantly more, I would say. Let's say around 6% growth gap is what we've tracked. So it also helps in customer satisfaction. Our net promoter score, which we've also measured, is improving. And also the increase of the use of our digital platform in those customers as they expand also the portfolio of products they purchase from us. The increased time in the digital platform also increases and the number of users. So we also have the opportunity to have cross-category activations to create connections with those products that drive incremental volume. That's why we believe this basically increases loyalty with our customers, which is, you know, what our business is all about. With respect to exclusivity, we're analyzing potential partners aligned with our capabilities. We have not provided exclusivity to our partners. We're actually... discussing longer-term relationships with all of them, with, you know, brewers. I think it would be natural that we need a partner with a single brand or a single company. But then we have in groceries a number of different suppliers. And then in the case of spirits, we also think there are, you know, opportunities in the different categories. So this is something that – It's still expanding. We have our own aspirations, our own aspiration, but it's going to be evolving, and we believe in the next few years very favorably in all of our countries. In Argentina, it's particularly important because, as you know, we had distribution of beer before very successfully, and now we are replacing that with both beer and spirits, and actually we're also selling... dairy products and snacks in those routes as well. So, again, this is something that is complementing our core and strengthening our core, which is the most important part of that initiative.

No, very clear. Thanks for the call. Maybe if I could just do a follow-up on Argentina. Do you believe you're close to the point with all these new agreements that you have signed to kind of close the gap that CCU left behind, or is there more to do before you can sort of do like a full replace on the volume side? Thank you.

Well, Argentina, you know, we all know we have been facing a very adverse economic environment, a very adverse environment in general. The end of 23, the first half of 24, I think it was the most challenging situation we've seen. Consumption in the industry and the consumer goods industry declined significantly. But now we're looking at a much better outlook. We did decline volume 13% in the quarter, but September looked much better than the third quarter as a whole. So we are optimistic that the fourth quarter has a much better outlook. We expect to continue closing that gap, and mostly we'll be protecting margins and profitability. If you look at what we have been doing, it's focusing on returnables as part of our strategy, on the universal bottle as part of our returnable packaging strategy, and we've expanded our sales category, introducing new products. So there's opportunity to capture market share as well, And we are also deploying the digital and analytical capabilities, similar playbook to what we have in the rest of Latin America, service models, suggestible algorithms, and all those capabilities are being deployed here. So we're optimistic that the gap is being closed. It's been, obviously, a very difficult year, but the trend is certainly improving.

Fantastic. Thanks so much for the call.

Thank you.

Thank you very much.

We'll take our next question from Ben Burrett with Barclays. Your line is open.

All right. Does this work now? Yes. Yes.

All right. Sorry for that earlier on. A little tech issues on my side. No problem. I wanted to just dig a little bit deeper into some of the initiatives and the benefits you're seeing from it and wanted to understand, like, in terms of, like, a broader rollout, what are the things that you need to see or what are the things that you need to accommodate with your current pilot project, as you want to call it this way, in order to sign more formal agreements and what are, like, kind of, like, the principles

maybe a few steps that you can share where things are better, like the net promoter score, things you've highlighted.

How sustainable do you think that is as you kind of expand the product portfolio beyond the Coca-Cola beverages and have a little bit of these third-party distribution things on the truck?

Yes, Ben. Well, again, this is part of our overall strategy as we have been deploying new technologies in our processes, especially in our go-to-market model. And this has brought these new opportunities. It's not only, you know, distributing other categories. It's also opportunities and services to the stores through our platform. And now we're exploring fintech services and also the use of data that we collect, et cetera. So this is part of a... new ecosystem that we're building in the traditional trade in Latin America. So I think what technology has brought is the opportunity to manage complexity better, and that presents, again, the chance to have a wider portfolio of products that we didn't have before. And these are products that are part of the Coca-Cola branded products as well. If you think about alcoholic ready-to-drink beverages, this is also an expansion that was very hard in the past and a complexity that was more difficult to manage. And those are things that we're doing more effectively now as we, again, evolve our go-to-market models. So speaking about multi-category, again, the premise here has always been, you know, the loyalty with the customer, making the traditional trade more competitive and strengthening those customers' And these are the pain points that they present to us many times. They do want to have better management of the store with technology, but also they want to have a better assortment of categories. Similar to what we do with Veritas, because we're not really a distributor, if you look at what we do, we bring value and we create shared value with the store through training, through coolers, through suggested pricing, etc., So this is similar to what we're trying to do right now. So to your point, I think the evolution here is to identify the optimal portfolio of many of these products. Think about groceries. We're now delivering a basic assortment of what we believe makes sense for those stores and also what for us makes sense from the volume perspective and the capacity to distribute and deliver groceries. and based also on our improved order taking for the store. And that continues to evolve, and also our negotiations with those vendors continue to evolve because we certainly know that we bring significant value to that equation. So I think it's a matter of expanding our reach. If you look at the routes where we are selling those products, it's still probably around 30% of the customers that we reach through those routes. So we need to expand that and as we evolve our service models, we're gonna be able to achieve that. And also, obviously, we're gonna focus on profitability of those SKUs. And at the end, this is a virtuous cycle of increasing loyalty on our net promoter score with the customer, which is gonna reinforce our ecosystem and again, it connects to other things that we can do with our core or with services that we provide. So we truly believe this is an opportunity that connects very effectively with our core, and so that's why we're going to pursue it in all of Latin America with the initiative.

Okay, perfect. And then just a quick follow-up.

I mean, leverage is, like, really low, below 0.5 times now. And, I mean, despite having somewhat elevated CapEx, which would be of all runway history, how should we think about, like, this excess cash? What are the opportunities? What are you looking at? Yeah, well, you know, we've talked about this before. I will turn it over to Emilio to elaborate. But, you know, our priorities will, I would say, remain consistent with our priorities. historical track record in terms of capex and dividends. So I will let Emilio comment on that.

Yes, thank you, Arturo. Thank you for the question. Yes, as Arturo just mentioned, our priorities remain the same. Capex this year will be higher than the historical rate of 5% to 6%. This year we're planning to invest 7%, and maybe next year with the investment that Arturo already mentioned, And, well, the second one is dividend. As you know, we have a policy to distribute at least 3% of our return earnings. And the third one is M&A. We are constantly looking for opportunities in U.S. and Latin. But in the absence of M&A in the past years, we've been paying extraordinary dividends. We just did a payment of extraordinary dividends last August. We paid 2.50 pesos per share. So the total dividend this year is 6.30 pesos per share with a payout ratio of 62% and a dividend yield of 3.4%. So that's been the strategy in the absence of M&A. And again, we were very active on looking for opportunities that create value.

Perfect. Thank you.

Thank you, Ben.

Thank you. We'll take our next question from Renata Cabral with Citibank. Your line is open.

And, Renata, your line is open. Please ask your question.

hearing no response, moving to the next question. We'll take our next question from Rodrigo Alcantara with UBS. Your line is open.

Hi. Thanks for taking my question, Arturo Emilio. First one for Arturo. Arturo, if you can perhaps comment a bit more on the performance we have seen at most in the U.S. You mentioned during the press release a 7% volume growth. Also, if I recall, in the last quarter, you mentioned that you reported the highest among the voters of the brand, right? So, just curious to hear your thoughts on what you attribute to this performance, how the relevance that you see for this grant into your portfolio. And also, I mean, comparing the performance of Lossless versus the rest of the Steel's category, it doesn't look like it moves a lot, Emilio, right? So just curious on what happened there that mitigated or offset the performance of Monster within Steel from the US. That would be my question for you. I'll throw a very, very quick one for Emilio after that, just on the balance sheet.

Thank you very much. Thank you, Rodrigo. Well, yeah, and the U.S.

market for us, what we all know, is certainly different in its configuration and dynamics to what we face in Latin America. So skills categories, or I would say the categories are different to the core, which where we include Monster, are much more important in our portfolio. So if you look at the mix of Monster in the U.S., In volumes, it's around maybe 6%, I would say, approximately. And that means in revenues, it's going to be more because of the premium pricing. And so growth in those categories, it's important because of the mix and also because of how the market has been evolving. So we see sales as an important source of the growth in the U.S., and maybe some even of the subcategories where, you know, we see more of this granular growth phenomenon that we're going to see in every market. And that certainly adds complexity, but I believe it does work in our favor. So in our performance in the quarter, well, our sales categories grew in the quarter. We had a volume decline, but it's basically explained by the performance in – in water, but in spills, we grew 0.8. Monster had a better performance than that. We still are performing better than, I would say, the average. We have a great partnership with Monster, and we continue to find that as a tremendous opportunity and as a source of growth for our market. And having said that, we still believe in the U.S. There's a – a big runway for growing sparkling categories. The Coca-Cola brand, just to mention, in the U.S. grew 1.5% in the quarter, which for us is very relevant, in a quarter that we have some adversity from, you know, from not favorable weather in general. But again, these categories, Monk's in particular is providing growth, same as Topo Chico, for example, continues to grow in the U.S. 10%. And that is, again, where we have the sources of growth in that market.

I see. Thanks for your thoughts, Arturo.

Another one very quickly for Emilio. I mean, just looking here, I mean, it looks like the news that we can sense is kind of under-earnings pretty much came from the financial expenses, right, that I mean, having one third, a bit less of your debt in the U.S., you know, I mean, a depreciation of the Mexican peso, in theory, should help you, right, given your cash balance, but we didn't see that. Just to, I mean, you can help me understand what's happening here, Emilio, and how to think about your cash balance position as we move through the year. Thank you very much.

Well, the results in the first nine months of the year, we have this year a positive results on exchange gain in depreciation of the peso. And last year, we have, as you know, appreciation of the peso. We have some losses because we have a high... So that was the main effect on this regard since last year we have like around 700 million pesos in exchange loss and this year we have like 200 million pesos in gain. So that's mainly the difference on this concept. So, that's basically because of our position in US dollar in Mexico.

That's making the difference. And regarding the hedges, you asked about the hedges in Mexico? Yes, yes. Yes.

Well, this year we hedged 100% of our needs. as we have mentioned. And we already hedged 80% of our needs for next year at a lower exchange rate than the current level. So we're very well positioned there for next year. And also this year, our hedges are lower than 2023 levels. So we're good on that with a positive effect in Mexico. And also in Peru, we hedged already 80% of our needs of our effects of dollars need a lower exchange rate than 2024 for 2025.

Awesome. Thank you.

Again, the other thing is that the rate is very low, so we, as I mentioned previously, we are looking for opportunities, so we have a strong balance sheet in order to do a good investment there.

Thank you.

Thank you, Rodrigo.

We'll take our next question from Antonio Hernandez with Activer. Your line is open.

Hi, good morning. Thanks for taking my question and congrats on the results. I'm quite impressed regarding the margin in the U.S. and feel that you have plenty of opportunities there. Where do you see potential normalized margins there? Do we have any specific targets? Thanks.

Hi, Antonio. Thanks for your question.

Well, in the U.S., as I said, we're very satisfied with the margins that we have reached. If you look at the history of our operation in the U.S. now for, what, seven and a half years, our margin has been continuously improving. As I mentioned, it's a combination of the original synergies of the project and then our focus in revenue management and better mix of products on also promotion management and also the efficiency project to continue even after the original synergy plan that we had and our management of raw materials, the strategy, and hedging. So we are confident in our ability to sustain margins going forward, especially if we think about our pricing strategy, which continues to be priced at least in line with inflation for the future. And that's very important. As you saw, we increased price more than 7% in the third quarter. and this is driven by the strategy and the mix effect, are focused on the high profit SKUs is very important, and also the rollout of our trade promotion tool, which has reduced unproductive promo spend by 25%, which is pretty significant. We've been, again, focusing on the very effective price-back architecture and growing transactions, growing immediate consumption, And that also contributes to a more profitable operation. So we, in terms of raw materials, we've had a good environment for PC and aluminum. And we've been very effective in hedging our needs for fructose for this year. And we expect 25 to be pretty much in line with inflation in that input. Again, we are optimistic. There's still a lot to do in our facilities, in our supply chain, and more efficiency coming. So that's where we are confident on our ability to maintain a very profitable operation in the U.S.

Okay. Thanks a lot. Have a great day.

Thank you. We'll take our next question from Carlos Saboy with HSBC. Your line is open.

Yes, thank you. Good afternoon, everyone. I was hoping you could expand a little bit on how your digital needs in the U.S. might be different from your digital needs in Mexico or in Latin America and how you're going about to meet those needs.

Yes Carlos, thank you. Thanks for your questions. Well, the big difference if you look at our approach to digital is that there is a number of projects in Latin America that are focusing in the traditional trait and strengthening our relationship in that particular channel. And obviously, some of those very specific initiatives will not be applicable to the U.S., but if you look at the basic transformation initiatives that we have, I would say the building blocks are very similar. We actually have the digital net operating here in Monterey, but this unit is providing services to Latin America and to the U.S. operations as well. And let me mention a few things that we're focusing in in the U.S. One is the mycope.com platform in the U.S. And that would be maybe the equivalent of what we're doing in Latin America with Plali, which was recently announced. And the idea here is the same, to kind of deepen the connection with customers, improving our relationship and mostly customizing our communication with customers. It enables targeted promotions. It simplifies order taking. It resolves issues. It manages requests. It provides flexibility to place orders at any time. So that's similar to what we're doing in Mexico, obviously with a different channel. And for 25, we expect more than 20,000 users actively engaging through the B2B platform that we have in the U.S. And we're also piloting new features there, like the easy order, which is also similar to what we're doing for the traditional B2B. and to deliver a smooth ordering experience. Then we also have solutions to drive profitability, also launched from our digital nest, centralized. Our revenue growth management tools are leveraged on digital technologies. And these are also similar, obviously adapted to every particular market, but this is something we have been deploying in the U.S. I mentioned our trade promotion optimizer. This has enabled us to be more precise in our expenditures, in our promotions, and reducing unprofitable promotions. The suggested order algorithm also applies to the U.S. Again, it's based on the analytics, and it's been adapted in the U.S. actually to the modern trade as a new capability, and it basically works by recommending a base order algorithm to frontline associates, and it's been deployed in customers like Dollar General. So, again, it's a great example of what we've been doing in the U.S. for a number of years. We believe that the building blocks are similar, but it's not a template that we bring from Latin America, either in digital or in any other process. It's how we adapt it to that market, but based on developments that we are generating in a centralized way.

Thank you. Thank you, Carlos.

Thank you. And we'll take our next question from Fernando Oliveira with Bank of America. Your line is open.

Hi. Good morning, all, and thanks for taking my question. Just a quick one about Mexico. According to recent news, the sale of sweet peanut beverages will be prohibited in schools. starting in March of next year. So can you give us your thoughts on this and what could be the potential impact on sales? Thank you.

Yes, Fernando, thank you for talking to you. Yeah, we've read that in the news. Really, you know, in Mexico, as far as the Coca-Cola system, not only us as a company, but everyone in the system in Mexico, since a long, long time ago, We have been implementing self-regulation based on the marketing policy of the Coca-Cola company. So we basically sell only water in most of the schools and education centers, so we restrict advertising activities to kids under 13. This has been going on, I think, since 2015, basically. So we considered a... for sure, strategies to offer various options for everyone, and to be able to have a portfolio with all the options in low and no sugar products, in soft rates, and all the other categories that we manage. And we work very closely with the authorities to analyze, you know, regulation and contribute, but the impact is not significant, again, because we've been self-regulating for quite some time.

Great. Thank you so much. Thank you. Thank you for that.

Thank you. We'll take our next question from Renata Cabral with Citigroup. Your line is open.

Hi, everyone. Thank you so much for taking my question. My question is a follow-up regarding digital initiatives in the U.S. I wonder if you could quantitatively rank the stage that ARCA is today into digital initiatives versus other voters in the U.S. My question is more related to if the digital initiatives that you are developing now could be a competitive advantage when acquiring, potentially acquiring a voter in the U.S. Thank you.

Thank you, Renata. You know, the system in general has been pursuing these types of initiatives, I would say around the world, not only in the U.S., and we've been very open to sharing good practices because we also learn from other bottlers and we've incorporated practices from other bottlers. And the Coca-Cola Company has been coordinating and taking the lead also in the sharing of best practices, and even on developing some of the tools that then are being shared across the system. So I would mention two things. First, when you adopt practices, it's not something that's automatic. You have to incorporate data to adapt it to your market. So it takes a lot of effort to incorporate that idea into every market. And that's why, you know, sometimes the deployment takes time. But also, I think there's an element of scale. Many times for the larger bottlers, it would be easier to have the scale to develop some of these new technologies in their system because it requires a specific effort. Like in our case, we have our digital nest here in Monterey where we have 180 people working only on the developing of our digital tools and digital technology. So I would say that it's harder for a medium or small-sized bottler. So I think it presents the opportunity to partner throughout the Coca-Cola system, I would believe, in the future. And I think it's an example, again, of what we've said over the years, that the business of a Coke bottler has more economies of scale than maybe it had 20, 30 years ago. And, again, these new capabilities that, you know, require, I would say, a more sophisticated approach are a great example of how scale is becoming more relevant across the system.

That's awesome. Thanks so much for the call. Thank you, Renata.

Thank you. We'll take our next question from Tiago Bonavici with Goldman Sachs. Your line is open.

Hey, Taylor. I need to remind everyone thanks for taking our questions. I have two follow-ups somehow related. The first one in Mexico, right? You posted a very good data margin expanding from 50 basis points, which is based on the general expectation of keeping margins the same, right? Is there a scenario where you are considering eventually reinvesting part of this margin to unite consumption? This is the first one. And related to this, appreciate the core of the hedges for the remainder of the year. If we analyze this question, would you say the hedges you have for the fourth quarter I'll turn it over to your question, Hedges, to Emilio.

Let me talk about Mexico first. And again, the situation we've seen in Mexico is declining the quarter, but it's clearly explained with what we've been cycling, a very strong growth, not only in 23, but also in 2022, and not very favorable weather across our territories. So we're facing actually the highest growing period from the previous year. And even under those circumstances, we've been able to sustain our margins through a number of activities and initiatives that we're doing in our markets. So we We believe that going forward, we're going to have a better volume scenario in the fourth quarter, as I mentioned also. We're going to be focusing in the management of our key inputs that we had before. In Mexico, PET has been favorable. Also aluminum, although we don't use as much as in the U.S., but our requirements were also mostly HEDS. and they are also hedged to a great extent for 2025. Sugar has been above inflation throughout the year, and there will be some price hikes, but in the case of fructose, we also have hedged our needs very favorably for 2025. Same thing as FX hedges, which Amir mentioned before. So we look at our margins going forward, again, with... with optimism and even when our volume was impacted, we were able to sustain margins. If you look at margins in Mexico are among the highest and on a consolidated basis, the highest in eight years in the quarter that was very, very adverse in many aspects. So that's why we remain, again, very optimistic about profitability in the future. So I will turn it over to Emilio. Peter, second part of the question with respect to hedges.

Yes, thank you. Thank you, Arturo. Thank you, Diego, for your question. As Arturo mentioned, we're very confident to maintain the profitability trends in Mexico. So our hedges in Mexico, as Arturo already mentioned, we have for 2024 hedge already 80% of our aluminum needs in Mexico and also in U.S. this year. And talking about christeners, we had 100% of our needs in Peru for insurance below our 2023 prices. And talking about hospitals in Mexico, we had 100% also of our needs in line with 2023 prices. for this year and also in US we had 85% of our needs for this year in line with 2023 prices. And in Mexico also we had 100% of our US dollar needs below 2023 prices. That's for 2024. And as we mentioned already, we started hedging for 2025 in Mexico and U.S. and some in Peru. In Mexico, for example, we had already some of our needs for high fructose. We had 50% of our needs of high fructose and 60% of our aluminum needs for next year. And 80% of our hedges are also covering the needs of our U.S. dollar in Mexico at a level below 2024. So we are very well positioned on the hedges for 2025 and also for the rest of the year of 2024.

And very importantly, Tiago, we are confident that we're going to finish the year in terms of top line in Mexico in line with our guidance.

Great. Thank you for listening. Can I follow up on that first one?

Would you say there is any difference in the average prices realized for our clusters today in Mexico versus what we have had in the previous years?

Can you repeat your question, please, Tiago? It is about pricing in Mexico.

We cannot hear you very well. We cannot hear you very well, so can you repeat your question? Sorry. The question is,

Do you see any much of a difference in the cost realized year-to-date versus what you have had just for the first quarter?

Difference between margins, you say? Your question is about margins year-to-date versus going forward? It's one cost to me. Or hedges?

Talking about hedges, we have the same level of pricing for the whole year. But what we have for the fourth quarter is humor prices. Humor prices are going to stabilize and even going lower than third quarter. That's in Mexico. But hedges are at the same level for the whole year.

That's great. Thank you so much, Wolf. Thank you, Tiago.

Thank you. This concludes today's Q&A. I would now like to turn this call back over to management for closing remarks.

Thank you, everyone. We really appreciate your time today and your ongoing commitment to our company. And as always, our investor relations team will be available to address any follow-up questions that you may have. Thank you. Have a great day.

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