Kimberly-Clark de Mexico SAB de CV

BMV:KIMBERA

Earnings Call Transcript 2022-Q1

[Operator]

Good day, everyone, and welcome to the Kimberly-Clark Mexico's First Quarter 2022 Earnings Call. [Operator Instructions] Please note, this call may be recorded. [Operator Instructions]

It is now my pleasure to turn the conference over to the CEO, Pablo Gonzalez.

[Pablo Roberto González Guajardo, executive]

Thank you. Good morning, and thanks, everyone, for your participation on the call. We hope you and your families are all safe and healthy.

A few brief remarks. Our first quarter results represent a significant improvement as we increased top line, bottom line and margins versus the previous quarters. We're on the right track and expect to continue delivering better results as the year progresses. We achieved record net sales for a quarter, including a monthly record in March, and both our prices and volumes were stronger sequentially. Our pricing actions, improved operating efficiencies and solid advances in our continuous cost reduction efforts outpaced the raw material sequential cost inflation. And we were able to improve our profits and margins versus the third and fourth quarters of the last year by a double-digit margin in the case of the latter.

Progress no doubt, but our results are still lower than last year, and we still have much to do. Our focus in greater price realization, achieving further efficiencies and expanding our cost reduction program, while aggressively innovating and investing behind our brands and state-of-the-art technology and strengthening our shares, is steadfast.

I'll share more details on each of these after Xavier provides a review of our results.

[Xavier Cortés Lascurain, executive]

Good morning. During the quarter, our sales were MXN 12.6 billion, a 3.8% increase versus the first quarter of 2021. Volume was down 3.5%, with price and mix contributing 7.3%. Sequentially, volume was up 3%. Price was up 4%. And overall, our record sales increased 7% versus the fourth quarter of last year.

Compared to last year, consumer product sales decreased 0.9%, with volumes down 7% and prices up 6%. As is usually the case in our categories, when we lead price increases, we take a temporary hit in volumes while competitors follow. This time around is no exception. However, pricing increased 5%, and volume increased 4% to add up to a 9% sequential improvement from the fourth quarter as our market shares are coming back. Given the cost pressures, we will continue to focus on price realization, and we will continue monitoring prices and volumes to find the best combination going forward.

Away from Home product sales increased 12.4%, reflecting a gradual return to in-person activities. Export sales grew 51%. Sales of finished products continue growing at a very good pace, increasing by more than 20%. Cost of goods sold increased 16%. Against last year, every commodity and raw material category compared negatively. Pulp was up approximately 30%, depending on the grade. Imported recycled fiber prices grew close to 70% and domestic recycled fibers and fluff averaged high-teen increases.

On the personal care side, superabsorbent materials were up 50% and resins up low teens. Finally, energy compared negatively, while natural gas compared positively given last year's February winter storm. The FX was slightly higher, averaging 1% more.

Our cost reduction program once again had very good results, and yielded approximately MXN 300 million of savings in the quarter. These savings are mainly at the cost of goods sold level and are generated by sourcing, materials improvement and process efficiencies.

Gross profit decreased 15.5%, and margin was 31.3% for the quarter. SG&A expenses were 0.6% higher year-over-year and as a percentage of sales were 50 basis points lower.

Operating profit decreased 26.8%, and the operating margin was 15.9%.

We generated MXN 2.5 billion of EBITDA, a 22.4% decrease versus last year or a 20.4% increase sequentially. EBITDA margin was 20%, which is a 220 basis points sequential improvement, underscoring that we are on the right track towards margin recovery.

Cost of financing was MXN 419 million in the first quarter compared to 422 million in the same period last year. During the quarter, we had a MXN 4 million foreign exchange loss, which compares to an MXN 18 million gain last year.

Net income for the quarter was MXN 1.1 billion, with earnings per share of MXN 0.36.

We maintained a very strong and healthy balance sheet. Our total cash position at March 31 was MXN 12.4 billion. Our net debt-to-EBITDA ratio was 1.5x, with an EBITDA to net interest coverage of 5x.

Thanks. Back to Pablo.

[Pablo Roberto González Guajardo, executive]

Thanks, Xavier. Progress in the first quarter, as anticipated, was spearheaded by our focus and execution in different fronts. Let me briefly comment on some of them.

First, greater price realization. As you are all aware, we implemented a price increase in the November-January time frame, which was partially reflected in the quarter, but fully reflected in March. This, together with our efforts to achieve better efficiencies and returns behind our promotional and advertising investments, allowed us to achieve greater price realization, a key component of our strategy given the substantial and unprecedented cost increases we have experienced, particularly during the last 9 months.

Unfortunately, costs have not abated. On the contrary, in many areas, they continue to increase. Such is the case of pulp, recycled fiber and energy. A few others have stayed constant or have come down slightly and are still at very high levels compared to the last year and even historically.

We may see some marginal improvements in all derivatives, but prices are very volatile. That is why in addition to ramping up our efficiencies and cost reduction efforts, which I will touch upon in a moment, price realization will continue to be a top priority. Efficiently executing this strategy while protecting our market positions will be key as we strive to continue to improve our results sequentially and end the year with margins that are much closer to our targets.

Second, efficiencies and our cost reduction program. Another pillar of our strategy is achieving further efficiencies and expanding our cost reduction program. With the volumes coming back, we saw volumes in consumer products grow 4% sequentially. Cost absorption has improved, and our personnel continues to make improvements in productivity and waste measures.

Further, we're investing to strengthen our operations and logistics footprint and incorporate data and technology to improve our execution. On the cost reduction front, we continue to identify opportunities, and for 2022 expect to achieve record savings. As you know, our program is rooted in our culture and made up of an important number of initiatives, some of them small, some were impactful and all add up. Let me mention a couple of initiatives of particular importance.

In March, we started the operation of a new nonwovens machine at our Tlaxcala mill. The state-of-the-art technology significantly improved the feel and quality of products in the personal care segment of our business, while at the same time bringing about important cost savings, both in the short term as well as going forward, as we take advantage of our technical capabilities to continuously improve product performance as well as our cost structure.

Also, we're making important investments to improve our tissue footprint. By the end of the year, we expect to have an incremental 15% converting capacity with a 20% reduction in assets, achieving improved quality and performance as well as lower distribution expenses. These are only a couple of the numerous projects we are undertaking. Every peso counts, and we will continue to look for and find ways to expand and accelerate our program for 2022 and the coming years.

Finally, our relentless focus on consumers. We will continue to invest in the most advanced technologies to bring relevant and differentiated innovations to market, offer the best products to consumers and increase their preference. Our innovation pipeline is very strong, both for the short and long term. We are supporting our launches and brands aggressively and efficiently. As we do so, our volumes, sales and shares are responding.

As examples, during the quarter, we launched 2 embossing patterns and improved products for Petalos [ oventa ] tissue. We improved our Depends lineup, and we recently launched new digital tampons and menstrual cups under the Kotex brand. Consumers are at the center of all we do and together with our clients, we're coming up with better ways to serve them and meet their needs.

It's worth mentioning that our investments behind innovation, data and state-of-the-art technology and efficiencies will be at least $100 million for 2022 in the coming years. We see great opportunities and will invest accordingly.

And on a final note, our shareholders approved a dividend of MXN 1.64 payable in 4 installments during the year, which currently amounts to a 5.7% yield. This is consistent with our continuous commitment to deploy our earnings in a shareholder-focused manner.

In summary, our actions are taking hold and allowed us to post significant sequential improvements. We still have much to do, and we're confident that our laser focus on consumer needs, greater price realization, incremental efficiencies and acceleration of our cost reduction program will allow us to continue to improve results sequentially and have a strong second half in 2022.

With that, we'll open it up for your questions. Thank you.

[Operator]

[Operator Instructions] We'll take our first question from Ben Theurer with Barclays.

[Benjamin Theurer, analyst]

Hello? Can you hear me?

[Pablo Roberto González Guajardo, executive]

Yes, we can.

[Benjamin Theurer, analyst]

Okay. All right. Let me try to -- all right, let's start again. Two questions. I'll keep it short. So one, obviously, you have still -- you've mentioned -- you talked about the raw material price inflationary environment, and a lot of that is most likely going to be accelerated into the coming quarters, and it most likely will require an incremental pricing action. So how do you feel now about the consumer?

Because I remember 2 months ago, you weren't too excited about the state of the consumer. So where do you think the consumer stands now, and also in light of like inflation coming from every single item you can just think through, be it food, energy and so on. So how confident are you that you can further push on the pricing side to offset what your cost inflation is, to hopefully get those margins even higher than the just 20% level, what we at least got this quarter, which was already significantly better sequentially, but clearly still far off from where you would want it to be? So how do you feel about the consumer? First question.

[Pablo Roberto González Guajardo, executive]

Thanks, Ben. Thanks for your question. And so far, consumption in Mexico is holding up. Growth in volumes is weak, I would say, but there's still some growth. And most of the growth really in sales is coming from price increases, but we continue to see some growth. And we'll see going forward because, as you mentioned, there's quite a bit of inflation going on, and we'll see how the economy functions going forward, and then we'll see how consumers react.

So as we always do, we will try and balance our price realization together with the -- what's happening with consumption, volumes and our consumers' needs and try to figure out what's the best combination going forward.

Having said all that, and notwithstanding some of the cost pressures that we continue to see, we are fairly confident that as the year progresses, and particularly as we get closer to the end of the year, our margins will be much closer to our target than where they are right now.

[Benjamin Theurer, analyst]

Okay. Perfect. And then the second question is really on the cost reduction combined with some of the operating efficiencies. And you've done obviously a tremendous job in the quarter with your operating expenses being very much under control.

How much of a -- how much more can you achieve here if you think about it going forward in the coming quarters? Is there more room for efficiencies on cost savings? And then obviously, within whether it's on the cost side, on those savings, what is your expected run rate what you're then going to get particularly with the new nonwoven machine at the Tlaxcala mill that you've just opened about a month ago.

[Pablo Roberto González Guajardo, executive]

Sure. This -- we expect our cost reduction program to accelerate starting this quarter and throughout the rest of the year behind our investment, as you mentioned, at the Tlaxcala mill, and our tissue footprint investments that we're going to be making. Those will probably really take hold at the end of the year and will have a greater impact in 2023, but they'll have some impact this year.

And again, those are just a couple of examples of many projects that we're undertaking. Overall, Ben, we again expect our cost reduction program to accelerate starting this quarter and throughout the rest of the year, and we expect to achieve savings when it comes to our reduction program and efficiencies. When it comes to our operating expenses, we continue -- we are very confident that we'll continue to hold those steady throughout the year.

[Operator]

We will move next with Luis Yance with Compass Group.

[Luis Yance, analyst]

Two questions from my side. One on the pricing side. I know you mentioned you're going to focus a lot on pricing realization, and you did this price increases in November, January time frame. Just wondering, what's the plan for the rest of the year? Are you trying to implement something again this quarter? Or would you wait until the second half? If you could talk a little bit about the magnitude of that, that would be helpful.

And then the second question goes back to margins. I mean, we saw a good improvement sequentially, as you mentioned before. Just wondering that we saw a big spike on some of the -- your key inputs kind of later in the first quarter, so I'm assuming it didn't impact you as much because of some inventory you may have had. But I just wonder if the second quarter is going to be the most challenging from a cost standpoint and whether you feel comfortable that despite that you could still achieve improvements in margin sequentially again. That would be my 2 questions.

[Pablo Roberto González Guajardo, executive]

Thanks for the question, [ Jim ]. First on the pricing, again, we continue to analyze the market, the consumer to see what additional opportunities we might find. And we will move up on them as we identify them clearly. So we do expect to do more in terms of pricing going forward, just not completely defined at this point, at least on the consumers' front.

When we think about professional business, we are moving ahead. We recently implemented a 7% price increase and we'll probably move ahead with another 5% to 6% price increase during this quarter. And when it comes -- that's on the open market, then we're trying to accelerate the renegotiation of the contracts on the professional side to bring about more pricing over there. Professional is one of our businesses that is a little bit further down the road in terms of improving its margins. So we're moving quickly over there to improve that.

The other thing we're doing on exports is trying to make sure that we reflect the cost that you just mentioned as quickly as possible on our pricing for our sales and exports products, and that should also help. So it's really on the -- those 2 are very clear on the consumer side. That's what we're -- we just are coming out of the last price we implemented, and we're analyzing what additional opportunities we have, not only on pricing but also we're about to enter the heavy summer promotional season, and we're being a lot more careful in how we allocate resources to those different promotions so that overall, not just through pricing but through less and more efficient promoting, we get greater price realization. So that will continue to be a focus going forward, and we expect to improve our prices throughout the year.

When it comes to margins, you're right, some of the costs that we mentioned, particularly fibers, pulp, we'll see some more impact in the second quarter, and we'll see how our prices -- as I said, our price realization holds up, and we'll see how our margins come out in the second quarter. But what we're confident of is that by the end of the year, you will continue to see margin improvement and again, margins that will be much closer to our target range. So for the year, we do expect an important improvement in margins.

[Luis Yance, analyst]

And just a follow-up on that. The margin target still kind of the 25%, 26% you've mentioned before?

[Pablo Roberto González Guajardo, executive]

Correct. That's our target. And again, by the end of the year, we should be much closer to that than where we are right now.

[Operator]

We will move next with Bob Ford with Bank of America Merrill Lynch.

[Robert Ford, analyst]

Congratulations on the sequential improvement, Pablo. Pablo, the export business was particularly strong. How should we think about the sustainability and profitability of that part of the business and the role of KCM in KCC's North American production plants?

[Pablo Roberto González Guajardo, executive]

Sure, Bob. Yes. As you mentioned, our export side of the business, both were strong. And when I say both [ this one our parent roll ] sales, but particularly our sales of the finished product to our partner, Kimberly-Clark Corporation. And we continue to, again, identify opportunities with them and think about the footprint for North America and see how we can be a part of that and improve our results for our partner and certainly for us.

And those discussions are ongoing. And again, it's great that it seems every quarter, we find different opportunities to build upon. And we'll continue to work very aggressively on that, but together with them to find the best opportunity for both companies. So we're very excited with what we see going forward on that end of the business.

[Robert Ford, analyst]

That's great. And Essity seems to be signaling some price increases this morning. Has there been any evidence of that so far in Mexico? And might there be a strategic reason that they would lag further?

[Pablo Roberto González Guajardo, executive]

Sorry, Bob, we didn't quite get this second question. Can you repeat it, please?

[Robert Ford, analyst]

Yes, I apologize. Essity seems to be signaling some price increases this morning. They also reported results, but this morning, right? And I was curious if there's any evidence of pricing from Essity in Mexico or if there might be a strategic consideration that we should -- that would cause them to lag even further?

[Pablo Roberto González Guajardo, executive]

No, we actually have seen, as we mentioned in the last call, we usually lead price increases, and then we have our competitors follow. And what we've seen throughout the quarter is that, that has been exactly the case. So we led and they have followed. And again, we're all in the same cost pressure mode, and we expect that we will all be looking for additional opportunities for greater price realization. I think that will continue throughout the year.

[Operator]

And we'll go next to Sergio Matsumoto with Citigroup.

[Sergio Matsumoto, analyst]

Could you please give more color on the investments on -- this year on the innovation in the nonwoven and tissue footprint? I just wanted to understand those better, particularly on like where is the -- how does that reduce cost for you, like how was it done before? And then with this investment, how would that improve? So before and after picture. And also if you could touch up on this data analytics investments that you will do?

[Pablo Roberto González Guajardo, executive]

Sure, Sergio. First, I mean, as I mentioned, we see great opportunities, and that's why we're increasing our investments behind them and not only for this year but for the coming years. And particularly when it comes to this nonwovens machine, there's quite a few areas where we improved because, one, this is a machine that will allow us to produce many materials internally versus going out and sourcing them from third parties, and we get certainly a much better pricing or cost when we do that. So that's one very big advantage.

The other one is that since we're going to be operating this equipment, and we've shown this throughout our history, we're very good. And we've got very good people operating and technology for this equipment. And we usually find that we start them up, and as we progress, we find ways to improve the materials and reduce the costs significantly. And we expect this time will not be different.

So not only are we seeing initial savings, we are confident that we will see continued savings going forward. And on the product side, you get great advantages because they're going to be better products, nonwovens that are more soft, more resistant and that will provide a great product performance. So we expect to improve our lineup in our personal care products in an important way, and both not only improve the lineup but also reduce costs going forward.

So a lot going on there. Also, as I said, on the tissue footprint, which we're also implementing and again, those are just a couple of examples. And as we do all of this, we're bringing in technology and to be able to get more data and use the data to operate more efficiently in our mills, and we're making great strides on that front. And that will also allow us to be more productive, more efficient to reduce waste going forward. And that certainly will have its advantages and cost savings. So they come hand in hand, if you will. And again, we see great opportunities, and we'll be investing more aggressively.

[Sergio Matsumoto, analyst]

Okay. And on the data analytics, is that more of a supply chain data or at the point of sale?

[Pablo Roberto González Guajardo, executive]

It's really broad-based because we are doing it in our operations. We are certainly doing it on the logistics side, and we're also doing it on the commercial side. I mean, our revenue growth management models are helping us become much more efficient in how we implement price increases and how we implement our promotions. So it's really broad-based that we're using data and technology to make better decisions more and more, and better overall for the company.

[Operator]

We'll take our next question from Luis Willard with GBM.

[Luis Willard Alonso, analyst]

Congrats on the execution improvement. So follow-up, I hope I don't repeat a question that you have answered before. I apologize, I got disconnected. But I wanted to ask regarding I mean, competition -- so far, as you mentioned, competition has followed with price increases. In other calls you told I mean if they are suffering, probably should suffer a bit more given their [ sights ].

So what's your base case in terms of pricing for the rest of the year? And especially, do you see any of your competitors are probably reducing their sights or being more cautious in the remainder of the year, that will be my question?

[Pablo Roberto González Guajardo, executive]

Luis, I hope I get to answer your question because you're not coming out too clearly. If I don't answer it, please tell me. But on pricing, and again, let me repeat a couple of the things we've said. One, as we moved ahead on pricing, as we expected because we're all subject to the same cost pressures, competitors have followed.

Two, as we look further ahead, given that we continue to have cost pressures, one of our main focus will continue to be greater price realization, both behind identifying additional opportunities to increase prices and by using our data and technology, again, to be more efficient in how we spend our money behind -- or invest our money behind promotions, particularly now that we're getting into the heavy summer promoting season.

So we will continue to monitor the market and look for additional opportunities, both in pricing and both in being more efficient in our promotions. So we expect pricing to continue to move forward throughout the year. And again, we're all subject to the same cost pressure. So as we, as just happened, we expect to lead and for competitors to follow.

[Luis Willard Alonso, analyst]

Yes, perfectly. I might just add -- maybe I just add, do you see any of them reducing capacity or promotional efforts or something to prevent their balance sheet or their results, something that you could take advantage of to gain market share?

[Pablo Roberto González Guajardo, executive]

Again, I'm not sure I'm getting all of your question, but we don't see -- I mean, as we're moving forth and they're following and we're bringing innovation to the forefront, et cetera, we see our shares recovering. We see our volumes recovering. And again, we expect, as we -- if we move with further price increases, as always happens, we'll see an impact in volume.

But over time, as they'll follow, we expect that to come back. And so far, shares are still very healthy, and we will continue to balance price share and make sure that both are healthy going forward. And again, you're not coming out too clear. So I'm hoping I'm answering your questions.

[Operator]

We'll take our next question from Mohammed Ahmad with FGP.

[Mohammed Ahmad, analyst]

Two questions -- 2 quick-ish questions. One, just what was the volume growth in consumer products specifically? And then second question, can you just give us some color on that lawsuit issue in Texas? And any potential -- I know you can't give me any numbers presumably, but how does the mechanics of it work a little bit, since it was a subsidy (sic) [ subsidiary ] which I believe was shut down.

[Pablo Roberto González Guajardo, executive]

Sure. Mohammed, and likewise, I hope you and your family are doing great. The consumer products, sequentially, volumes increased 4%, and pricing increased 5%. So sequentially, we saw overall an improvement of 9% in sales.

Again, that's sequential. When you look at it versus last year, our volumes were down 7%, and our prices were up 6% for a decrease of 1% versus last year, which was still a tough comp. So that's both the comparison sequentially and -- to last year. And then I'll ask Xavier to comment on the question regarding 4e in the U.S.

[Xavier Cortés Lascurain, executive]

Mohammed, sure, 4e, all of the restructuring to finalize the recall process that started almost 2 years ago is in plan. It's coming to an end, and we expect very little negative impact from it going forward. The business is going strong in Mexico. We have not been selling in the U.S. for 2 years. So again, everything in plan and with a positive outlook going forward.

[Operator]

We'll take our next question from Jens Spiess with Morgan Stanley.

[Jens Spiess, analyst]

Building up on what just Mohammed asked about 4e and in an effort to calibrate your cost on a year-to-year basis, just wanted to ask how much were costs impacted by 4e last year, considering that there should be no or very small impact this year due to that?

[Xavier Cortés Lascurain, executive]

Jens. The impact from 4e last year, I think -- I don't recall exactly the impact for last year, but for the last 2 years, it was close to MXN 900 million. And I'll check on this and get back. But I -- if you assume it was half of it last year and half of it the year before, it's not going to be far from that. And not all of that is in cost. A lot of that was in reduction of sales, because we have to return product. And some of it was also in cost saving in expenses. So it was across the board.

So we'll come back to you, Jens, if you'd like, with a little bit more detail on that so that you have the answer.

[Jens Spiess, analyst]

Yes, that would be extremely helpful just to avoid assuming that, that cost doesn't run into this year. And also, 2 more questions, if I may. What was the sequential growth of finished products -- export products? And lastly, I didn't get -- and probably I joined a bit late, the tissue capacity, did you provide any details on that, on the additions?

[Xavier Cortés Lascurain, executive]

Addition capacity? Yes. I mean on export finished product, export sales sequentially, we're up, I'm going to say single, mid-single digits because we had a very strong fourth quarter of last year. So slightly ahead of fourth quarter. And again, with some very interesting opportunities going forward. But we need to work with our partner to materialize the -- we hope that will happen here in the coming months. But overall, as we look to that business, for the next couple of years. Again, very excited about some of the opportunities we see there and with interesting and improving margins.

And on the tissue side, our wadding export sales continue to grow, and we're also about mid-single-digits up sequentially 4%, 5%. And we see strong demand for that and pricing is reflecting the cost increases we're seeing in both fibers and pulp. So we expect that also to continue here in the coming quarters.

And when it comes to the tissue side that I mentioned of capacity, we're doing a whole footprint analysis, and we are doing investments so that we can, as I mentioned, increase our converting capacity by 15% with a 20% reduction in assets, and that will certainly be an important improvement for our footprint in terms of logistics and moving things around, moving paper around, being closer to the sources of demand. And so it will all have an important impact in terms of efficiencies and cost reductions.

[Jens Spiess, analyst]

Okay. Perfect. And the time line for the capacity addition, did you provide any...

[Xavier Cortés Lascurain, executive]

This will be -- I mean, it's a program. Just to give you an idea, we're -- it's about 20 assets that are coming out and about 7 new assets that are coming in. So that will be happening throughout this year. And that's why I mentioned that we'll see a little bit of the impact of this improvement late in this year. But really, the improvement will be felt completely by 2023. That's when we'll see the greater part of the footprint reduction improvement.

[Operator]

[Operator Instructions] We will move next with Bernardo Malpica with Compass Group.

[Bernardo Malpica, analyst]

I hope I'm not being too repetitive, but this question is also related a lot to pricing and competitors. Since you are the first ones to increase prices and -- I mean by looking at competitor performance, has this gap made you see something in terms of your market share so far in the year? And what can we expect to happen in this area during the rest of the year?

[Pablo Roberto González Guajardo, executive]

Yes, Bernardo, as we mentioned, as we moved ahead with price increases and initially competitors lagged, we saw some impact on our volumes and on our shares. And as they moved forward and followed the price increases, we've seen those volumes come back and our shares, again, come back.

I want to just reiterate that our shares are very healthy. We still have a little bit of room to recover, but they're very, very healthy.

And an example of this is, as I mentioned, the consumer products volume sequentially grew 4% while our pricing grew 5%. So you can see both the pricing that we implemented really take hold. And as competitors follow, our volumes come back and our shares come back. So we -- that has always been the case. And if we continue to move forward on pricing throughout the year, we expect that to continue to be the case.

[Operator]

And it appears we have no further questions at this time. I would now like to turn the call over to the CEO, Pablo Gonzalez, for closing or additional remarks.

[Pablo Roberto González Guajardo, executive]

Well, thanks again, everyone, for all your participation on the call, for your questions and your interest. And glad to -- we're here for any additional questions that you might have and look forward to having our next call in July. Thanks, everyone, and have a terrific weekend.

[Operator]

This does conclude today's program. Thank you for your participation. You may disconnect at any time.