Arca Continental Sab De C

Good day everyone and welcome to the ALCA Continental first quarter 2025 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 questions by pressing the star and 1 on your telephone keypad. You may withdraw your question by pressing star 2. Please note this call is being recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Melanie Carpenter of ITL Advisors. Please go ahead.

Good morning, everyone. Thank you for joining the senior management team of Arca Continentalis to review the results for the first quarter of 2025. Their earnings release went out this morning. and it's available on the company website at arcaconsales.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, Mr. Jesus Garcia. 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 for being with us today to review our performance for the first quarter. As we enter 2025, our business is navigating a unique confluence of external challenges that are shaping consumer behavior and overall market dynamics. Geopolitical tensions and the impact of tariffs alongside persistent inflationary environment have added layers of uncertainty to the operating environment. These macro headwinds, coupled with less favorable weather conditions, have weighted on near-term consumption patterns. Even amid this backdrop of heightened uncertainty, our company made solid progress, delivering a resilient performance while continuing to invest for long-term growth. Let's take a closer look at our results. Total consolidated volume in the quarter decreased by 3.1% to reach 548 million unit cases. Still, averages grew 2.4%, primarily driven by volume gains in Mexico. This volume performance reflects a combination of factors, such as a subdued consumer environment and calendar effects, notably the leap year and the shift of Holy Week and Easter into the second quarter. Total consolidated revenue increased 12.4% year-over-year to 57 billion pesos, while consolidated EBITDA rose 10.2% to 10.6 billion pesos, representing a margin of 18.7%. This positive EBITDA performance was underpinned by solid contributions from our U.S. operations and strong momentum in South America led by a robust recovery in Argentina. Our results highlight the impact of proactive pricing, disciplined cost control, and prudent hedging, which enabled us to mitigate input cost inflation and currency volatility while protecting profitability. Let me begin our regional performance review with our various operations in Mexico. which experienced a softer start to the year. Total volume was down 3.6% in the first quarter, cycling three consecutive years of strong growth in the same period. Volume performance was partially influenced by high comparison base, given the strong uplift seen in the first quarter of 2024, supported by government incentive programs ahead of last year's elections. Volume decline was partially offset by an 8.1% increase in skilled beverages, mainly driven by the sports drinks, tea, and fruit beverage categories, capitalizing key opportunities in the modern trade channels. Notably, Coca-Cola No Sugar delivered robust growth of 17.8%, supported by its continued expansion across our territories and sustained innovation under the Coca-Cola Creations platform. Total net sales in Mexico grew 0.1% year-over-year to reach 23.3 billion pesos. The average price per case, excluding jug water, increased by 5.3%, reaching 89.51 pesos, reflecting our disciplined revenue growth management strategies. On the profitability front, EBITDA in Mexico declined by 6.2% to 4.9 billion pesos, with a margin of 20.8%. Following a strong track record of consecutive years of EBITDA growth in Mexico, this quarter was affected by slightly softer volumes and a temporary production pause at our Topo Chico plant in Monterey, caused by a longer-than-anticipated maintenance process. operations have since returned to normal and we remain confident in our ability to recover momentum in the coming quarters. I would also like to highlight that Tuali, our second generation B2B digital platform continues to deliver strong results. By the end of the first quarter, our app accounted for over 68% of total orders from the traditional channels volume in Mexico. Notably, we observed a meaningful uptake in performance among digitized customers compared to non-digitized ones, contributing to a 1.6 percentage points increase in overall sales volume. Moving now to our beverage business in South America, total volume declined 0.7% in the quarter, primarily due to softer performances in Peru and Ecuador. This was partially offset by growth in Argentina. Total revenue rose by 25.4%, reaching 12 billion pesos, supported by effective pricing and favorable mix. EBITDA increased 36% to 2.4 billion pesos, expanding margin to 19.9%. This strong profitability performance underscores our discipline execution, affordability strategies, and ongoing portfolio optimization. While challenges persist, we remain cautiously optimistic about South America's outlook in 2025, underpinned by signs of gradual macroeconomic recovery and stabilization across our markets. In Peru, total volume declined 4.6%, lapping a strong growth of 3.8% in the same quarter of 2024. However, we are seeing a sequential recovery trend. Despite softer consumer demand and below average temperatures, our actions to offer an affordable portfolio and the expansion of returnable package formats are supporting an improvement in volumes. In still beverages, flavor water and energy drink segments grew 33% and 41% respectively, supported by new product launches. Furthermore, we signed a five-year distribution agreement with Diageo, introducing their renowned portfolio of premium spirits to peruse traditional trade and on-premise channels. Turning to Ecuador, the country entered 2025 facing a complex landscape marked by economic slowdown, persistent political uncertainty, and severe rainfall in certain regions. Against this challenging backdrop, Volume in our beverage business declined 7.4% in the quarter, impacted by a strong comparison base following three consecutive years of solid first quarter growth. We continued investing in market-focused initiatives, including expanding cooler coverage and reinforcing affordability for a portfolio of returnable packages. As a result, the mix of returnable presentations grew by 0.5 percentage points this quarter, a positive step in driving value and maintaining consumer relevance. Our beverage operation in Argentina delivered solid volume increase of 19.8% in the first quarter. Growth was broad-based, with sparkling beverages increasing 21.8% and Coca-Cola brand delivering a standout performance up 22.6%. In still beverages, Cepita led growth in juices and nectars, Aquarius drove gains in flavored water, and Monster continued to perform strongly in energy drinks. Despite the still prevailing economic challenges, we gained value share across any RTD categories by driving affordability and promoting returnable packages. We saw strong performance across channels. The traditional trade was one of the best performers in the quarter, up 14.9%, and supported by our ongoing investments in market-focused initiatives, expanding cooler coverage, and increasing our share of visible inventory. Argentina's economic trajectory in 2025 has been encouraging. with meaningful progress in reducing inflation and a significant appreciation of the local currency. These developments are supporting stronger real wages and improving consumer confidence, a positive backdrop for our business. Our beverage operation in the United States closed out the first quarter with solid profitability improvements and its 28th consecutive quarter of EBITDA growth. This performance highlights the strength of our business model and our ability to successfully replicate the playbook that has delivered sustained results across our Latin American operations. Net revenues for the quarter increased 0.4% to $994.6 million. The average price per case rose 6.4%, reflecting a true rate increase of 2.8% and 3.6% in mix to reach $10.26. These results reflect the successful execution of her strategy to optimize price pack architecture, drive transaction growth, and effectively manage promotional spending as we continue refining point of sale execution with a sharp focus on the key metrics within our fundamentals. Volume for the quarter declined 5.6%, cycling strong 2.3% growth from the same quarter of 2024. Coca-Cola Zero was up 5% and the skilled beverage portfolio delivered 1.5% growth, driven by Body Armor, Powerade, and Fairlife. Notably, Fairlife recorded a double-digit volume increase in the quarter, with Core Power significantly outperforming across channels. we continue to focus on higher profit per case packages, such as 10-pack mini cans, smart water, and vitamin water, which increased 16.3%, 7.5%, and 2.7% respectively. The Topo Chico portfolio posted a 16.8% increase, with Topo Chico Sabores leading the volume growth. This quarter, we continued driving innovation and launched over 15 new SKUs, including Coca-Cola Orange Cream, Barrelitos, Body Armor Flash ID, and Monster Killer Brew. EBITDA grew 3.7% to $160.7 million, representing a margin of 16.2%. This marks our most profitable first quarter since assuming control of our franchise territories in the US, underscoring the structural improvements we've made to the business over time. We are also proud to share a series of recognitions that reflect our operational excellence. Our U.S. team earned the prestigious North America Market Street Challenge Award for the third time in seven years, and for the second consecutive year, recognizing best-in-class execution across the Coca-Cola system in the United States. Additionally, we were honored with Masters of the Claw designation for consistently leading in volume growth. On the innovation front, our U.S.-based advanced analytics team continues to enhance critical commercial processes for scalable, data-driven solutions. This quarter, we launched an upgraded version of our suggested order application, featuring enhanced value capture modules designed to drive incremental growth. To close our operations review, our food and snacks businesses started the year with solid results. During the quarter, we delivered double-digit sales increase and mid-single-digit EBITDA growth. This sustained earnings momentum was led by Bocados in Mexico, supported by effective pricing strategies, productivity enhancements, efficiency programs, and consumer-centric innovation initiatives. Now, I would like to briefly walk you through the progress we've made in our sustainability agenda. We continue to strengthen our energy strategy by increasing the use of renewable sources. which now account for an average of 43.3% of our total energy consumption. At the same time, we reduced our Scope 1 and 2 emissions by 32.6%, compared to our 2019 baseline, marking a meaningful step toward our long-term climate goals. In water stewardship, we maintain a strong efficiency ratio of 1.52 liters per liter of beverage produced in 2024. This performance reflects our continued focus on implementing best-in-class practices and managing water responsibly across our operations. We are proud to share that Arca Continental was once again recognized for its sustainability leadership, earning a spot in the S&P's Sustainability Yearbook for the third consecutive year. Moreover, we received the highest level prime certification from key financial institutions in Mexico, reflecting our strong corporate governance, financial discipline, and commitment to sustainable practices. In closing, I'd like to highlight the recent release of our annual Corporate Integrated Responsibility Report, which outlines our progress against key commitments, all under the vision of environmental leadership and a positive social impact. And with that, I will turn it over to Emilio, who will walk us through our financial results. Emilio, please go ahead.

Thank you, Arturo. Good morning, everyone. It's a pleasure to be with you today to review our first quarter performance. Our first quarter results were impacted by the volatility and slowdown of the global economy, resulting in a contraction of consolidated volume. However, due to our affecting pricing strategy, diversification, and the foreign exchange effect, we delivered growth in the low teens in sales and EBITDA. Let me offer further insight into our financial results. Consolidated revenues increased 12.4% to reach 57 billion pesos. Many driven are price-backed architecture and exposure to our US dollar. On a currency-neutral basis, revenue grew 2.2%. During the quarter, SG&A expenses increased 13.9%, reaching 18.6 billion pesos. While the SG&A to sales ratio increased 40 basis points, to 32.6%. On occurrence in neutral basis, SG&A grew 5.5%. Consolidated EBITDA reached 10.6 billion pesos for the quarter, reflecting a 10.2% increase and 0.8% on occurrence in neutral basis. The EBITDA margin experienced a dilution of 30 basis points compared to the same period in 2024, mainly driven by lower volumes. Net income rose 10.2%, reaching 4.1 billion pesos, with a margin of 7.3%, a slight delusion of 10 basis points, mainly driven by the operating income result. Now, moving on to the balance sheet. As of March, cash and equivalents totaled 36.5 billion pesos, while total debt was 55.6 billion pesos, resulting in an EBITDA ratio of 0.3 times. We reported operating cash flow of 6.9 billion pesos. Our financial discipline serves as a robust foundation to face the challenging landscape. A dividend of 4.12 pesos per share was distributed on April 3, 2025, which represents a payout ratio of 36% of retained earnings and a dividend yield of 2.1%. Total capex investment during the quarter reached 3.6 billion pesos, representing 6.2% of sales. Deployed in increasing production capacity and reinforcing our distribution and commercial capabilities to drive long-term growth and better serve our customers. Going forward, our priorities will remain unchanged as we continue to leverage our developed RGM and digital tools to optimize our operations and foster growth. At the same time, we will maintain our financial and operational discipline to navigate the volatile environment we are facing. will enable us to stay resilient and adapt to the challenges posed by the global economy as we continue to deliver value to our shareholders. That concludes my review and now I'll turn it back to Arturo. Please Arturo.

Thank you Emilio. Well 2025 has started on a challenging note I remain confident in our team's ability to execute with discipline, agility, and focus. Despite temporary headwinds, we stay true to our strategy, delivering results that demonstrate the strength and adaptability of our business model. As external conditions begin to stabilize, we are well positioned to regain momentum and deliver on the full-year targets aligned with the guidance we shared earlier this year. Thank you for your continued trust and support. Operator, please open the line for questions.

Thank you. And at this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. Please refrain to one question at a time. You may remove your question by pressing star 2. And once again, that is star and 1 to join the queue. We'll take our first question from Rodrigo Alcantara with UPS. Please go ahead.

Your line is open.

Hi, hello. Can you hear me, Emilio?

Yes. Good morning, Rodrigo. Ah, thanks. Good morning, Rodrigo. Good morning, Emilio. Thanks for taking my question. And on the interest, I mean, I would like to explore the following, right? I mean, when looking at retail sales, food retail sales, even at the Texas level, we did perceive a slowdown, right? But I mean, it was still kind of like a 2%-ish growth of retail in general, right? I mean, just help us understand, I mean, to reconcile these numbers that we see in the retail as a whole versus the magnitude of the volume decline in the U.S., right? I mean, it's hard for me to reconcile this number, again, in this slowdown context. And number two, in the U.S., also, I just want to make sure here that perhaps the pricing that you have, you know, amazingly executed, I mean, is not having an adverse inattentiveness here. I wanted to understand your thoughts on this in the U.S. And also, I mean, on the positive, Argentina, you know, amazing rebound there. meaningful implications on operating leverage. So, in this context, just wondering if you can give us any range, any guidance of where the EBITDA margin, you know, could be trending in 2025. I mean, just for us to have an idea here, right, again, as, you know, deals rebound, you know, 20% volume growth, nothing that we have seen, I don't know how many years old, you know, the operating leverage would be here, something that maybe any of us are currently modeling. So, it would be helpful to understand here, again, on the Argentina volumes, if you can share something on this topic. Thank you very much for taking my questions.

Yeah, thank you, Rodrigo. I will address the first part first. And, well, certainly, we had a challenging quarter in our U.S. market. The The economy faced these unexpected challenges that led to increased caution among consumers, and that impacted spending overall. Apparently, inflation concerns and rising prices of certain goods caused consumers to cut back on certain discretionary spending, and also the anticipation of potential tariffs. It's more of uncertainty than anything else. But that prompted consumers to adjust some spending habits. You have to take into account probably two other things. One is that our comparison includes the transition of the Sani case stack, which we explained before. And that would account for approximately 30% of the contraction of our volume on a comparable basis versus the first quarter of 24%. And the second effect there is that February 25 had one less day due to the leap year in 24. And then we had the shift in the Easter holiday that also has an impact. So all these factors contributed to the quarter challenges. You know, we recognize it was a difficult environment for sure, but those two additional factors contributed to a, you know, to a bigger contraction. But certainly the store traffic is So in terms of pricing, we were pretty satisfied with our results in pricing, especially considering that if you look at pricing in the U.S. total, price was up 6.4%, but true rate was only 2.8%. That means that we had a very positive shift in mix, which I think it's a positive sign of the consumer moving to some of the premium price and for us, more value-added packages and categories. Also, I think it reflects the work that we've been doing in our pricing tools and especially our promotional tools. So all in all, we know that we have to work in several fronts on innovation, our capabilities, on improving execution. There's a lot of things that are under our control and can be improved, and also on efficiency, on the efficiency front and protecting our margins. So, in summary, overall, we expect growth in volume for the entire year, but for sure this first quarter was very challenging. Then moving to Argentina, in Argentina, well, quite the opposite. I mean, the comps were more favorable, as you know, in terms of volume. The economic context has drastically changed compared – through previous years, lower inflation and gradual consumption recovery. 24 was the transitional period, many adjustments and volume contraction. But now we're seeing significant volume expansion, and we will capitalize on our investments and a more favorable economic outlook. So our levers there are going to be obviously increasing volume, but also focusing on pricing capabilities. It's a very, very important capability when even inflation is coming down, but it's still a challenge. And we have also cost inflation. And for that, there are also some advantages that we have, integrating into sugar, for example. And OPEX management is going to be critical throughout the year. But I will let Emilio expand a little bit on Argentina and the outlook for profitability this year.

Sure. Thank you, Rodrigo, for your question. And just as you mentioned, we're coming last year, volume declined on the quarter 26%. So we're expecting this positive result in margin of around 20% this quarter. And looking ahead, we anticipate that volume will continue this recovery and the positive business performance more stable inflation and exchange rates. And this, we expect to improve even the current margins of this quarter of 15.4 for the full year. So we're very positive on the trend for margins in Argentina for this year.

Thank you. Thank you very much for that, Arturo. And Emilio, if I understood correctly, I mean, reasonable to model sequential expansion in Argentina. Is that correct?

Yes. In terms of volume, yes. And in margin, the current margin first quarter was 15.4. Last year we had a margin full year of 12.3. So we will expect to have an even better margin than this quarter for the full year this year. But to be conservative, let's say that At least the current margin levels that we have this quarter.

Awesome. That was very helpful. Thank you very much. Thank you, Rodrigo.

Thank you. Our next question comes from Ben Sir with Barclays. Please go ahead. Your line is open.

Hi. Good morning. Thank you very much for taking my question. Just two quick ones. So number one on Mexico. Obviously, you know about the issues like the weather, the day that was missing in February, plus the Easter shift. But maybe any color that you can give us in terms of like this – consumer behavior on like a normal cadence, maybe how was January versus February versus March, and what are you seeing so far in April? And does that give you any confidence or ability to maybe work a little bit on the pricing side to drive to the top line? So that would be my first question, just the Mexico of the cadence. And then I have a quick follow-up for Amelia.

Yeah, good morning, Ben. Well, yes, Mexico had also a challenging first quarter. As you know, we were recycling growth from the past two consecutive years of significant growth in the first quarter. And there was a decrease in private consumption in this quarter. Consumption patterns were influenced last year, probably with a pre-election period. And then we had this uncertainty that also prevailed in Mexico. I would add to that, famous in the U.S., we had some factors that were particular to us, some supply chain issues that have been normalized, and then also the calendar headwinds that you mentioned. So what we have is insights from our own information. As you know, Yonk is now providing interesting information in real time. There was a decrease in consumption. across industries, and that's evident. But the resilience of the NARTD category was evident. Purchase frequency in our categories was less impacted compared to the overall basket. That's information we had in our market. And in terms of channels, I think another positive thing is that, you know, the traditional channel was somewhat more resilient in Mexico as compared to the other channel, so I think that also shows a sign of resiliency of that channel in the markets. But going forward and looking at trends for the rest of the year, we expect the rest of the year to be better. The second quarter comes, or comes, you know, we had an extraordinary month of May, and this month of April actually has one less day, but when we compare the daily volume in the last few weeks of the first quarter and the average daily volume in April, I think we see positive signs of recovery. So that makes us believe that we can have better quarters as we move forward and we maintain our goals of growing volume in Mexico for the year. And there are also reasons to believe that we're going to be doing better all the many, many things that we're doing that you know about, you know, new go-to-market models, investment in digital capabilities, our focus on affordability, and also what we've been doing in our infrastructure for supply chain manufacturing distribution that will result in us serving the market in a much better way in the summer months that we expect to be in very high volume. So that's the overall environment for Mexico.

Yes. And then just if you can comment real quick on pricing dynamics. And then for Emilio, one question I wanted to squeeze in. For some of your capital projects in the United States, have you seen any issues concerning A, on labor availability, or B, just the cost of raw materials going higher, some of the construction materials? just given the whole tariff-induced inflationary dynamics that we're seeing in the U.S., those two quick ones.

Yes. In terms of pricing in Mexico, Ben, our price first quarter was up 4.9%. True rate was a bit higher than that. We had a small mixed impact from transfer from single-serve to multi-serve, which is typical in Mexico. In quarters, we have contraction in volume, but we did have growth in stills, which kind of offsets it. So we are looking at a very similar pricing outcome for the year as we had anticipated. We actually had price increases starting this second quarter. So we're very much in line to meet our goals. As you know, we are leveraging our tools for pricing and promotions. Our PTO, our promotional tool, has reduced unproductive promo spend 30% versus the baseline of a few years ago. So that also continues to be very important for us as we meet our pricing goals in Mexico. So I'll turn it over to Emilio for your other question.

Yes, thank you for your question, Ben. We haven't seen any impact in labor, not in construction, not in the availability for labor in Mexico, in all the operations. We've been working really hard on the culture and with people, and I think we can see a very positive result on all these initiatives that we have in the business. The people engagement is very high, so we haven't seen any impact so far on labels.

Thank you. Thank you, Ben.

Thank you. We will move next with Alvaro Garcia with PTT Passion. Please go ahead. Your line is open.

Hi, good morning. Can you hear me? Yes, Alvaro. Good morning.

Hey, good morning. Just two questions. One on the U.S. to sort of on how the U.S. system is thinking about pricing versus big box retailers. in this environment. And my second question is on Duality in Mexico. You mentioned 68% of orders from the traditional channel are being taken via Duality now. What is sort of a key bottleneck to push that number higher and maybe give some more color? You mentioned the sales uplift of 1.6 points. How do you isolate certain variables within that and And, yeah, if you can give us more color on how you get to those 1.6 points, that would be very helpful. Thank you.

Yes, for sure. Good morning. Well, in terms of pricing in the U.S., as I mentioned, you know, we had a very good quarter in terms of pricing that was critical for our profitability in the first quarter, as I said, 6.4%. But it was an important mixed effect of 3.6% in the first quarter. driven by the high profit per case SKUs that increased in their mix. As I said, the TPO, the promotional tool, has been rolled out very effectively, and we've been focusing on a very good price-back architecture that includes pricing and promotions. We are working very closely with our retail partners. As you know, tool rate is not the only lever here. We improve the mix, and that requires working together to understand our consumers and especially to manage our promotions and make sure that they bring value to us based on the information that we keep collecting. So I think we have a very positive pricing scenario based on, again, on the investments that we've made and our tools and our team and the good relationships that we have with our retail partners. With respect to Tuali in Mexico, although it's being rolled out, as you know, in the rest of Latin America, well, yeah, we've had a tremendous adoption of that platform. As of March 25, we have In our digital platform, which is transitioning to Tuali, we have 760,000 customers registered. And that results in positive volume performance. I would say that more than having a percentage, which we actually have right now, as you know, 65% plus of the traditional trades volume in Latin America is now being transacted digitally by the customers this year. But I would think that more than a specific percentage, it's not going to be a completely separate go-to-market connection with the customer versus our traditional way of selling. It's going to be more of an omnichannel strategy where you have the salesperson still, you know, interacting face-to-face, probably in some cases complimenting, or supporting the order placing of the customer that they had, you know, taken care of autonomously. So it's going to be a system where we have both our call center, our frontline sales force, and the digital platform interacting to reach our goals. So we have very clear metrics of what we want to accomplish, not only in terms of sales uplift and adoption of our platform, of our tools, our suggested order, our algorithms. But very importantly, our net promoter score with customers increases. And as you know, that's what we are all about, of creating this customer intimacy. And that will be, you know, the foundation for our leadership in the future in traditional categories and in new categories and in other things that we are selling to the traditional trades. But additional to that, I think it's very important to point out that this is not only a B2B platform. That's also part of the metrics that we're going to be following. It's the use of other of the features and functionalities of Tuali, like loyalty program that's being rolled out in Mexico and Ecuador, the buy now, pay later option that we keep exploring and rolling out. in more of our markets so the point here is that we're creating really an ecosystem with the traditional trade more than just a transactional tool for placing orders and so we continue to refine that capability and we're very optimistic how that is going to transform go-to-market models for I would say the entire consumer industry in Latin America

Yes, very clear. Thank you very much, Arturo. Thank you, Alvaro.

Thank you. Our next question comes from Diego Portolucci with Goldman Sachs. Please go ahead. Your line is open.

Yes. Hi. Good morning, everyone. Thanks, Arturo and Emilio. It's a pleasure to talk to you guys. I have two questions. The first one is about further momentum and how it relates to your guidance, right? I appreciate there are a few tools and levers to deliver better momentum in Mexico, namely and chiefly the calendar, which is more favorable for this quarter. But when I see you are still reaffirming a guidance of high single-digit top-line growth while in this first quarter, with all these headwinds, you delivered 12% top-line growth, right? So I would just like to understand and reconcile, right, how this – potentially better momentum going forward ties up with a guidance that assumes some moderation in revenue growth over the next few quarters. And I might follow up with the second one.

Yes. Thank you, Tiago. Well, you know, first quarter was indeed a very challenging quarter and slowed down in overall consumption in most of our markets. And we additionally, as I said, had tough comps in most of our markets as well. We know that several factors contributed to the decline of volume, and some of those factors, as I said before, are non-recurrent. But given our playbook's effectiveness and what has been proven over and over, across various challenges and various difficult conflicts that we've gone through, we are very confident in future growth and and most of all, future profitability, even in this volatile environment. If we focus on things that depend more on us, and there are plenty of opportunities there. We have our cooler placement strategy, which is part of the, I would say, the more traditional playbook. The expansion of returnable packaging, which we've been investing in in our Latin American markets, and that's also going to be critical to face these challenges, the use of the universal technology. bottle in a wider portfolio of products. And the new go-to-market models, which those are, you know, based on the implementation of digital initiatives. But that will increase value-creating activities of our front line, improving our execution at the point of sale. And we have metrics for all of that, and those have been improving. Also, and despite the challenges, the external challenges, We continue investing in the business. We maintain a long-term perspective, and we're confident in growth potential in each market. As you know, we've installed many new lines, seven new lines in 2024, and we will install more in 2025, three more in Mexico, U.S. mainly, new distribution centers in those countries. So we will continue to capture volume opportunities driven by all these initiatives and the expansion of digital capabilities. So our main thesis here, Tiago, is that we have demonstrated resilience in difficult times, economic slowdowns throughout the pandemic, and we have delivered solid results. But most of all, setting the foundations for a stronger leadership as conditions improve. So we expect those to be sequentially improving throughout this year And we will come out much better position for growth in the future. So that's why we maintain our guidance.

That's for sure. Thank you. And then the second one, I think prior to the call, we saw some headlines with some comments of the potential impact of tariffs into your business there. Could you guide us through? Obviously, this is super volatile and ongoing, right? but potentially what could be the risks and the potential factors to mitigate that? I know concentrate prices is one area of attention. I would just like to learn from you, if anything, how the new cooperation framework could eventually protect you there, and what are the risks going forward? Thank you very much.

Yes, well, despite this uncertainty about tariffs, one of the good things about our business is that we – don't have a significant direct exposure to bilateral international trade in sourcing of our inputs or the sale of our products. Our business is mostly local, both in our exports to the U.S. of Mexican products and also for sourcing of inputs. And that puts us in relative terms on a better position that – you know, some other companies that are facing more uncertainty. There is exposure, though, and Emilio can comment on that, particularly in aluminum, which, as you know, is a key raw material for packaging, mostly in the U.S. So, Emilio, can you expand?

Yes, sure. Yeah, as Sudo mentioned, the only raw material that is having an impact from Five is aluminum. As we mentioned last conference call, the spot market of aluminum has already reflected some of the impacts on pricing. But thanks to our hedges, we will be able to mitigate a significant portion of that impact. At the end, as Arturo mentioned, the impact growth is only in aluminum cans in U.S. And that could be less than 1% of COGS in our COGS Southwest beverages in the U.S., considering that the tariffs remain at the current level. And the products that we export to the U.S., like the Pochico, Coca-Cola, Nostalgia, Barilitos, are excluded from tariffs because of the U.S. MTA agreement. And even if they were included, it's less than 2% of the business.

That's great, guys. Thank you very much. I appreciate it.

Thank you, Carol.

Thank you. We will move next with Fernando Orbea with the Bank of America. Please go ahead. Your line is open.

Hi. Good morning, and thanks for taking my questions. The first question that I have is related to Mexico. If you can give a follow-up about what was the main driver of the margin contraction in Mexico, and how do you envision the recovery of margins going forward?

That's the first one, and I'll have a second one.

Yeah, good morning, Fernando. I will turn it over to Emilio to talk about margins in Mexico, but I would say that it's mostly driven by, you know, the volume contraction, which was quite severe. And as I mentioned before, we are seeing a recovery and a positive trend decently. But go ahead, Emilio.

Thank you, Fernando, for the question. But, yes, basically the decrease in EBITDA in Mexico is mainly explained by the volume contraction during the quarter of minus 3.6%. In April, we have already observed a better trend in volume, so going forward, while we have still some challenges, we'll continue to evolve our commercial capabilities and digital transformation, and the advantage to offer to the consumer affordable options in our portfolio. We'll continue with our discipline aspects, as always, and with our hedges, changes that we have already, we should be able to reach the same EBITDA margin levels that we have last year. So this quarter, we expect next quarter to improve, to have a positive trend as we have seen in April.

And when you look at OPEX, Fernando, in terms of labor costs, it's not an entirely fixed cost. So it also has and anticipation of volume that, as it declined, it impacted as well, but it's all connected to the, you know, to the circumstances in the market. So that's what we expect that to recover.

Okay. And in this sense, does the pause in production in the Topo Chico plant generate extraordinary expenses?

Well, not extraordinary expenses. But certainly it was a disruption in our supply chain, which is, again, one of the explanations of our decline in volumes in the first quarter that is non-recurrent as, you know, as the situation has now normalized.

Okay, great. And my second question is related to Peru. If you can elaborate more on your distribution agreement with the IEOC. and if you can share some highlights, it would be great. Thank you.

Yes, well, as you know, in Peru is one of the markets where we have the opportunity to expand our portfolio to other categories beyond our traditional beverage category, and we've been exploring that with different partners. So I will ask Chuy to... comment on that, I'll turn it over to him. Go ahead. Thank you, Arturo, and thank you, Fernando, for your question. As you know, our current model currently consists of three categories, which focus on Latam's traditional and impremised channels, and that is beer, spirits, and a basic assortment of groceries. In the case of Peru, we have a partnership with Heineken, and that represents roughly 3% of our revenue. We also have a partner with which has enabled us to increase the share of value for , which is one of our products within the category. And we recently closed a long-term distribution agreement nationwide to sell in those two channels, traditional and on-premise. And what we have seen so far is Very good reception from customers related to the Diago portfolio.

Great. Thank you. Thank you, Fernando.

Thank you. Our next question comes from Alejandro Hoops with Itao. Please go ahead. Your line is open.

Thank you, operator. Hello, Arturo, Emilio, Jesus.

Thank you for the questions. I have a quick one on the U.S. I wanted to see if you could share with us maybe some of the early findings of the efficiency program that you have on the distribution level and the cost of serving consumers and so on and how is the plan developing so far and what do you expect maybe for this year and then years to come in terms of efficiencies looking at the U.S. business, maybe?

Yes, thank you, Alejandro.

Well, we have worked in a number of initiatives for efficiency in the U.S. as part of, you know, kind of the next stage of, you know, our improvement or profitability goals for that market. And I would say that the most important ones are supply chains. And there are a large number of initiatives, and we actually have a project management office to follow up and lead those. But one of the most important things that we're doing, as you know, is the investment in our manufacturing footprint in Texas and Oklahoma. In first quarter, we actually broke ground on all three sites, for the project, which is our largest project in this market. It's a $267 million investment. As you know, it was announced last year. And that will enhance significantly our supply chain efficiencies and also will support growth for the future. We have three new lines. We have expanded warehouse capacity. We also have implemented process automation, which, you know, are initiatives that have a very good return in that market. So that will bring an improvement in our overall cost, not in our secondary distribution, but our overall supply chain cost, both in production cost and warehousing, and that will support, again, our margins and profitability going forward. Another initiative was the new distribution center in Waco, Texas. Also that was opened this year. So it also will support our efficiencies in our supply chain. This is also supported by new planning technology has improved our forecast accuracy and reducing out of stock. There are a number of projects that we're implementing. These would be, I think, the most relevant initiatives that will provide very important returns for the years to come.

Thank you, Arturo, for your time. Thank you.

Thank you. Our next question comes from Felipe Ugros with Scotiabank. Please go ahead. Your line is open.

Thanks, Operator. Good morning, Arturo, Emilio, and team.

Thanks for the space. I think most of my questions have been asked, but I have a small one on Ecuador and Peru. In Ecuador, we're now kind of past the electoral uncertainty, and there's still other challenges with utilities and others, but do you expect an improvement in Ecuador from here now that we're kind of past that electoral cycle? And then in Peru, the economy hasn't been as bad as it has been in Ecuador, but And you also have easier problems on the next two quarters. So just wondering if you can comment on this quarter's weakness in Peru and how it might relate to the rest of the year. Thank you.

Thank you, Felipe, for your question. Well, first of all, in Ecuador, well, the challenges that we face have obviously impacted the consumer sentiment and volumes. There's an economic... but also an insecurity crisis in the country that affects consumption and traffic to stores. There was also this first quarter some climatic disturbances, you know, significant more rain than last quarter, so that's non-recurrent. And this pre-election uncertainty that also negatively impacted the economy and our businesses. So this obviously was expected to subside with the recent election outcomes, and that will bring more stability, more certainty. And so we expect that to improve. We also, as you know, had tough comparisons of the two previous years with the growth of 3.5% and more than 7%. So we are forecasting volume growth actually for the second quarter. and for the full year. And that would be consistent with a moderate GDP recovery projection that we have in Ecuador. And also considering all the things that we're doing despite these headwinds. And that would be a combination of the basic playbook, including coolers and returnable packaging. I would say those are the two fundamental strategies of things that we can control, that are under our control. And then, some of the more innovative things that we're doing in terms of digital capability, and also of, you know, reinforcing our strategies, particularly for power and energy strengths that are bringing incremental volume. So, that's our expectation for Ecuador. In terms of Peru, Well, Peru, the consumer confidence also declined. We had the tough comps of the last two years as well. Insecurity has also altered the behavior, I would say, in general in Peru. But we have a positive trend as well in the month of March, actually. So we anticipate... growth in the year as well. There's so many things that we can do in Peru to improve our business, and that depends really on us. The adoption of the digital platform by the customers continues to grow. All the usability of the digital tools by our own sales force. And the opportunity that we have within Coca-Cola that had growth in March, even outperforming Brand Coke, And just the deployment of coolers, 7,000 new coolers and 12,000 new racks in Q1. That, you know, has, it's going to bring incremental volume throughout the year. Still performance in Peru is a huge opportunity for that market, considering our market shares. And so we've seen good growth in some categories. energy, flavored water. So those are very good signs of recovery for the future. So we have very good plans to mitigate external factors and at the same time capitalize on the sequential improvement of the economy. So that's where we maintain our goals for the year.

That's fantastic. If I can throw a follow-up in there to the Diageo distribution question. Just wondering if you can talk about, you know, now that you've signed the Diageo deal in Peru and you've had such a good experience, what does that kind of imply or guide for the rest of the markets where you were experimenting with Diageo?

Yeah, well, every market has some particularities and dynamics. We do think that there's a possibility for a good partnership with Diageo in some of the markets. As Chewie explained, maybe there are some experience where, you know, more demand in current countries like Pisco in Peru or there would be other cases in particular countries in Argentina. In Mexico, I think Diablo is a good opportunity as well. And we've been working with them in our western market, particularly in the Jalisco region. So, even though, you know, our core products are still our main focus. With the adoption of technology, these opportunities, you know, can be really leveraged if we find the right partner, the right brand, and it does not really increase our routines in the market. It's really opportunities depending on

on finding the partner and the right branch in each of our markets. Great. Thanks so much for the call. Thank you. Thank you, .

Thank you. Our next question comes from Renata Cabral with Citibank. Please go ahead. Your line is open.

Hi. Good morning, everyone. Thank you so much for For the opportunity, good morning, Emilia and Arturo. It's just a follow-up about a commentary in the beginning of the call in terms of product needs in the U.S. and opportunities. So, yeah, my question is if you could give us some color of what opportunity you are taking right now in terms of product needs in the U.S., if it's more related to single-seller, Coca-Cola Zero, or other products. And they said that could be related also to China, for instance, you've been presenting traditional China and the opportunity here for improvement in margin in the future. Thank you.

Yes, thank you, Renata. Well, the U.S., the mix of products that we've seen recently is basically a system mixed, as I said, to more of the... of the value added or high profit per case products that has, uh, improved our, our, uh, average pricing. But we do see, uh, significant growth in some of the categories. Let me, let me just mention some of the ones that are, um, uh, you know, bringing, uh, uh, incremental volume. It's, um, Fairlife. It's, uh, Monster. It's, uh, Popochico. Uh, Coke Zero for sure has been a driver of growth and, uh, in that market. So going forward, I think it's going to be a matter of capturing opportunities in those categories, adding to also innovation. As you know, in the U.S., we continue introducing a number of new SKUs to the market. And this competitive market, I think that is very important. We will continue to do that. And I think it's basically working on three pillars. Innovation on these categories and supporting growth of this higher price per case packages. Second, working on capabilities in the marketplace for better execution, including deployment of digital capabilities. And third, working on efficiencies and our operation basically in our supply chain. So a combination of that jointly with, you know, still working on the culture of that organization, which has improved significantly, as you know. We've had an improvement in engagement score over the past five years that has been a key element for our execution and performance. I think all of that is going to combine to sustain the margins, the historical margins that we've seen recently.

Thank you so much for the call. Thank you, Renata.

Thank you. We will move next with Enrique Moreno with Morgan Stanley.

Please go ahead.

Hi, Arturo and Emilio. Thank you for taking my question. I just want to quickly explore a bit of market share trends in the U.S. We notice in the consumer takeaway data we follow some market share losses for Coca-Cola. in the soft drinks and in the cola categories in Southwest during the quarter. So just wondering if you also saw that in our operations and if it's perhaps related to competition being more aggressive or if you have any other takes on why that happened. And if you also could explore if you are planning any promotions or other initiatives to recover the share, that would be helpful as well. Thank you very much.

Yes, thank you. Well, you know, share market, share volume in our categories experiences natural quarterly fluctuations. So what we try to look at is like longer-term trends. What I can tell you is over the last two years in the U.S., we have consistently shown a positive or stable trend throughout, you know, in all of the categories. So we do track, you know, very particular movements in share, and we can react accordingly as you say, with, you know, our promotional activity or any adjustment that we need to make in our packaging. But all in all, we're pretty satisfied with the performance that we had in terms of our share, you know, in the last few years in that market.

That's clear. Thank you. Thank you, Ricky.

Thank you. We will move next with Antonio Hernandez with Acting Bell. Please go ahead. Your line is open.

Hey, good morning, Arturo, Emilio, thanks for taking my question. Just a quick one. You've been mentioning, you've been providing quite a lot of color of reordering operations in the U.S., but if you could maybe add a little bit more of how much of these benefits and sales and margins is originated from innovation. How much do they represent and how much do they positively benefit sales mix?

Thanks. Thank you, Antonio. So your question is about margins, how they have evolved, and what are the drivers behind that?

And how much, particularly innovation in the U.S., how much do they contribute to both sales and profitability? If you could provide a little bit more light on that.

Yes. Well, I think innovation in a broader sense has been very important for our margin expansion in the U.S., and in the last few years, but it has been reflected in many different aspects. I would say pricing is critical, obviously. As I said, promotion optimization in the US, which also has improved, you know, 25% of promotional spend since it was implemented. So it tells you how, and this is innovation because it's, you know, new technology and how we incorporate the information that we have into our models. So that's for, let's say, the top line. Then innovation in packaging, I mean, in products, it's also important. We continue to introduce a big number of SKUs to that market every year, and we're going to do that this year as well. Sometimes they're, you know, in and out initiatives, and some would stay for a longer time. But we have the flexibility to do that. And then you have all the projects in our supply chain and throughout our operations that would improve, you know, our profitability and our production and warehousing costs per case, our alliances. are now more agile and flexible and faster. That has required investment over the years. Same thing of what we are doing now in Fort Worth and San Antonio and Oklahoma. And that is innovation in processes in our plants. The other important thing that's also part of our, the changes that we made and the innovation in our processes is on our SNOP sales and operation planning. and the technology that has been incorporated there. And it reflects in many different ways, and, you know, less waste, better prediction of our demand, and better supply to the market. So a reduction in out-of-stocks, there's so many indicators where that is reflected. So that is, I would say, in general, a culture that we try to install in our U.S. operations.

Okay. Thank you very much.

Thank you. We will move next with Ulises Arote with Santander. Please go ahead. Your line is open.

Okay. Thanks so much for the questions. I just had a quick one I think similar to one that was asked, but this time focused on competitive dynamics in Mexico. So there with the challenging kind of consumer environment we're seeing in the country and the world before the first quarter. I just wanted to double check with you if there's anything worth noting there from competitions, any step up, any change in the dynamics there, or basically we're still in that scenario where you guys keep outperforming the rest of the peers.

Thank you. Yeah, well, Mexico, as you know, and thank you, Ulises, very competitive market. We have, you know, traditional competitors and, you know, some others coming in. What we know is that we have increased our competition weekly plus consumers in Mexico. I think that is very important to the health and the growth of our brand, and particularly our brand Coca-Cola. And we've been leveraging also the flexibility of our model. And I think that is really important for the introduction of returnable packaging, especially in you know, times that are more challenging as we are seeing now. So all in all, we are confident in, you know, in our price pack architecture and our brands and the investments that we're making. But for sure this year is going to be more challenging than others. But as I said before, we expect sequential recovery and growth at the end of the year.

Very clear. Thank you, Arturo. Thank you.

Thank you. We will move next with Ferdinand Mendez with JP Morgan. Please go ahead.

Hi, guys. Thank you very much for taking my question. Can you hear me well? Yes, Ferdinand. How are you?

Good morning. Good morning. Thank you. So a question on the U.S. We've been hearing about SNAP. program potentially removing soft drinks from their purchasing basket, let's say. Have you made any analysis or do you have any sense on how much this could impact demand for your product in the U.S.?

We don't have a specific impact. We keep analyzing all those initiatives and and potential changes in regulation and also how to mitigate that. But no, we don't have a specific number to provide at this point.

Okay. And just as a follow-up, just to understand better the impact of the Topo Chico maintenance, if you could give us more color on volume and margin impact, just to understand how much was a non-recurring on the drops this quarter.

Well, first of all, the Topo Chico situation only impacted Mexico, not the U.S. market. We had plenty of inventory in the U.S. Actually, Topo Chico in the U.S. was one of the categories that grew significantly.

I'm into Mexico.

Sorry if I wasn't clear. No, no, no. You were. I was just clarifying the point. So in Mexico, if we look at decline in categories, water declined 28% in Mexico, and that was driven mostly by sparkling, so that gives you an idea of the impact. But the volume, we expect that to be recovering throughout the year, and now the situation is normalized.

Understood. Thank you very much. Thank you for that.

Thank you. Our next question comes from Carlos Lavoie with HSBC. Please go ahead.

Yes. Good afternoon, everyone. The Dr. Pepper relationship is really important to you, and we don't hear a lot about it. Can you speak a little bit to how that relationship is working for you and how the really strong focus we've seen that you have behind those brands in some of your markets in Texas is helpful to how you sell Coke better as well.

Yes, thank you, Carlos, for that question. I think it's really important because, first of all, it tells you how, you know, what we are about is building strong partnerships with great brands and getting them to the market in an effective way and creating the connection with the customers. So we've done that. with our main partner, the Coca-Cola Company, for almost 100 years. But I think Dr. Pepper is also a great example of a very strong partnership. And as I mentioned in my initial remarks, we were recognized by them as being one of the best partners in the U.S. We've had the leading volume in that market. But I think the important point is what you mentioned. We are convinced that, at least in our market in Texas, the Dr. Pepper brand and Coca-Cola complement each other very effectively. As you know, Dr. Pepper is the number two brand in the state, and so they reinforce each other as we go to market, and that also has resulted in very, very good results, both for us in brand Coca-Cola and Dr. Pepper as well. We don't have that in all of the Texas market, as you know, And that allows us to compare. So we know how strong Dr. Pepper is and how we perform better if we have this unified approach to the market. And they're also very good in innovation. And I think we've also worked with them very closely and effectively in launching the innovation pipeline that they have.

Thank you. Thank you, Carlos.

Thank you. And now I will turn the call over to our CEO, Arturo Gutierrez, for closing remarks.

Thank you, and thanks all for joining us in today's call, for your continued interest and trust in our company. And as always, our investor relations team will be available for any follow-up questions. We look forward to connecting with you again in the next quarter. Thank you.

Thank you. And these also include today's program. Thank you for your participation. You may disconnect at any time.