Kimberly-Clark de Mexico SAB de CV

BMV:KIMBERA

Earnings Call Transcript 2020-Q2

[Operator]

Excuse me, everyone. We now have all of our speakers in conference. [Operator Instructions]

I would now like to turn the conference over to Mr. Pablo Gonzalez, CEO. Please go ahead.

[Pablo Roberto González Guajardo, executive]

Good morning, everyone. I hope everyone is safe and healthy. Let me start by saying that we are very pleased with the progress we've made on our priorities and operating guidelines to navigate through the current environment with our second quarter results. Despite an extremely complicated environment on many fronts, we delivered strong top and bottom line growth and increased margins.

With respect to our priorities and operating guidelines, we implemented a large number of measures and actions to protect the health of our employees and their families, our #1 priority, and we have worked with the authorities and communities to assist during the pandemic and mitigate its impacts. Also, we took several actions to guarantee our continued operation as well as that of our suppliers to ensure all our customers and consumers have access to our products, all the while ensuring we become more efficient in every aspect of our operation to deliver the best possible results and generate and protect cash.

Our consistent and good execution on these priorities enabled us to take good care of our workforce, provide support to those in need, continue operating efficiently and again, deliver strong results.

On the sales front, despite private and B2B consumption being severely affected by the COVID lockdown and its impact on the economy, our strong growth reflects the fact that several categories performed well, particularly those related to personal hygiene, health and protection, and that we capitalized on new growth opportunities. Altogether, our top line grew for the 23rd consecutive quarter through a combination of volumes, price and mix. On the cost side, most raw materials compared positively, and together with our increased productivity and very good results on our cost reduction program, allowed us to deliver strong bottom line growth and improved margins year-over-year in spite of the significant peso depreciation. In summary, a good quarter in a very complicated health, economic and consumer environment.

Xavier will provide more details on the quarter's results.

[Xavier Cortés Lascurain, executive]

Hello, everyone. During the quarter, our sales were MXN 12.3 billion, a new record and a 9% increase versus the second quarter of 2017 -- of 2019. Volume grew 5%, while price and mix were 4% higher. Consumer products, which include sales of our affiliate companies, posted an 11% increase. Away from Home product sales were down 42%, a significant contraction, as offices, hotels and restaurants shut down. Finally, our exports business performed very well, with sales growing 64%.

Cost of goods sold increased 7%. Against last year, pulp, fluff, superabsorbent materials and resins compared favorably in dollars as did domestic fiber prices. Imported recycled fiber and energy prices compared negatively. Finally, the FX was significantly higher, averaging 21% more.

A cost reduction program had very good results and yielded approximately MXN 600 million of savings in the quarter.

Gross profit increased 12.4% and margin was 38.3% for the quarter. G&A invested was in line with last year and as a percentage of sales was 150 basis points lower, leveraging our top line growth and reflecting our emphasis on improving our investment in advertising and point of sales efficiency while reviewing the expenses and supply chain costs across the board.

Operating profit increased 23% and the operating margin was 22.9%. During the quarter, we generated MXN 3.3 billion of EBITDA, a 19% increase, and EBITDA margin was 27%.

Cost of financing was MXN 401 million in the second quarter compared to MXN 379 million in the same period of last year. Net interest expense was lower as our net debt position has been reduced.

In the quarter, we had a MXN 33 million foreign exchange loss, which compares to a MXN 20 million gain last year. Accordingly, net income for the quarter was MXN 1.6 billion, a 22% increase. Earnings per share were MXN 0.52.

We ended the quarter with a strong balance sheet as EBITDA, efforts to improve working capital and our strategy to protect cash have translated into significant cash generation. Our cash position was MXN 10.3 billion and net debt represented MXN 11.9 billion with a net debt-to-EBITDA ratio of 0.98x.

In July, the company placed $500 million 144A Reg S senior unsecured notes at 2.431% with partial maturities of 1/3 each in years 2029, 2030 and 2031. This so-called soft wallet structure minimizes refinance risk. Needless to say, we entered into a related swap agreement to hedge the currency risk, both the principal and the interest are converted to pesos. The funds will initially and primarily be used to pay down debt during late 2020 and early 2021. With this placement, we doubled our debt profile average life. We were very pleased with the spreads, coupons and demand for our debt.

Finally, as you may know, our affiliate, 4e is voluntarily recalling its hand sanitizer in the U.S. due to the potential presence of methanol. We will support 4e in doing what's necessary to comply with all the FDA requirements.

With that, I'll turn it back to Pablo.

[Pablo Roberto González Guajardo, executive]

It goes without saying that we are experiencing a new operating environment, together with very high uncertainty regarding the magnitude of the impact of the COVID-19 epidemic on several fronts, including the spread of the virus among the Mexican population, the health of the Mexican economy and private consumption as well as the impact on the Mexican peso. At this point in time, it's simply impossible to try to determine the impact and what may occur. At KCM, we remain focused on our stated priorities and operating guidelines. We have always been committed to improving the lives of our consumers, personnel, communities where we operate and the country as a whole, and we will be doubling our efforts to have an even greater impact in these very tough moments.

When it comes to delivering the best results and creating shareholder value, while we don't foresee that our growth rate in the coming quarters will necessarily match our second quarter results, we are very pleased with the resiliency of the company and optimistic that we'll continue to find ways to grow our top line as we leverage our brands, our technology, our innovation capabilities and our multi-tier and multi-channel strategy. There's great uncertainty and all is in flux, but as consumer habits and interests evolve, we're carefully reviewing our portfolio to ensure we better meet their needs, and we have some promising prospects and are working diligently to act on them.

With respect to costs, most raw materials will still compare favorably versus last year, although we are seeing some sequential increases and imported fibers are up significantly. The Mexican peso and how it performs could continue to be an important headwind. Accordingly, we're reviewing and optimizing our pulp and fiber strategy and we'll continue to push operating efficiencies and work to reduce costs and expenses to offset negative impacts.

Our strong financial position and cash generation ensure that we can not only withstand what is a very difficult economic scenario, but we will be able to emerge stronger from this environment.

In summary, we've got a very good first half of the year, and we're confident we can continue to deliver good results for our shareholders despite an extremely uncertain and challenging environment.

With that, let me open it up for questions, and thank you all again for participating on the call.

[Operator]

[Operator Instructions] We will now go to our first question. That comes from Bob Ford with Bank of America.

[Robert Ford, analyst]

Okay. I hope you're safe and well as well. Pablo, exports were very impressive. Can you talk a little bit about any progress and maybe partnering more closely with KCC to keep that going? And additionally, can you comment on opportunities in hand sanitizer exports beyond the recall or any other material categories you might see?

[Pablo Roberto González Guajardo, executive]

Sure. Bob, thanks for being on the call. And likewise, I hope you are also well and healthy. Sure, when it comes to partnering with KCC, as we said, there are very -- there are new growth opportunities that we want to capitalize on. And certainly, our exports, both of parent rolls and finished products of KCC and others are one of those new growth opportunities. And we continue to progress very nicely with them on several fronts and have different projects that we'll be analyzing in the coming months. So hopefully, we can continue to support KCC and increase our sales to them going forward.

In terms of other opportunities that we're seeing out there, you've certainly mentioned one, which has to do with gels. But there's quite a few others. Certainly, our soaps business is performing very well, both bars and liquids under Escudo. Our surface -- new surface cleaning wipes are doing very well. Disinfectant aerosols, which we introduced in the markets are also doing well. We see opportunities in the nonwovens category for personal protection equipment. So there's quite a few areas that we are exploring and working on and already producing results, and we're very confident that going forward, they'll provide strength to our sales.

[Robert Ford, analyst]

That's very encouraging, Pablo. And then one last question, and that is with respect to the imported fiber costs. How do you think that plays out as you look at your competitors and their cost structures, compared to you in terms of the relative pressure you may be experiencing?

[Pablo Roberto González Guajardo, executive]

Look, we are all experiencing the same pressure when it comes to fiber costs. Now the good thing is that those fibers increased significantly between January and June. So what we're starting to see now is that prices are coming down. The increase was significant, so it'll -- they'll still compare negatively versus last year in the coming quarters. But prices are no longer going up. They're starting to come down. And that's why we're looking at our fiber and fluff strategy to see how we arrange it. We've got different factors in that strategy. I unfortunately can't get too much into it, but we've got different factors, and we'll make sure that we're maximizing the use of fibers that allow us to reduce our costs, but all competitors should be feeling the same pressure from recycled imported fibers.

[Robert Ford, analyst]

I guess where I'm coming from is I feel that the relative importance in your COGS from fiber on a comparable product may be less. Is that fair to say?

[Pablo Roberto González Guajardo, executive]

Well, on the tissue front, I think it may be less. But we don't know exactly, but it could be less, yes.

[Operator]

Our next question comes from Ben Theurer with Barclays.

[Benjamin Theurer, analyst]

I wanted to dig a little bit into the sales performance, which clearly was very positive, and you've highlighted it in your prepared remarks, there was a combination of price, volume and mix. Could you elaborate a little more on the different sales channels and how that helped you perform throughout the quarter, what was basically modern channel versus the traditional channel? Just to understand a little bit of the demand dynamics within your personal care items. That would be my first question.

[Pablo Roberto González Guajardo, executive]

Sure, Ben. Thanks for being on the call. We see -- we have experienced growth in most of our channels. And it really depends on the category. As I said, several categories performed well. And it depends on some of those categories, they performed differently in the channels but overall, our sales were up in the different channels when it comes to consumer products. Certainly, on the professional side, we saw a big impact, and we expect that to improve as the economy reopens. And again, our export sales did very, very well for the quarter.

[Benjamin Theurer, analyst]

Okay. Perfect. And then just to understand a little bit of what else you can do. I mean it was for sure impressive what you've already reached in terms of cost savings, and you've highlighted that in the press release, approximately $600 million. So where do you think we can end up with that number? I mean it's a pretty sizable amount now on a quarterly basis. So where else would you see opportunities to save cost? And maybe would that react a little bit to some of the cost pressure you've mentioned on fiber, et cetera?

[Pablo Roberto González Guajardo, executive]

Look, we continue to look everywhere to make our operation more efficient and we performed very well in the second quarter in all fronts on the purchasing area, on product redesign and improvements in material use and operating efficiencies. So we're very proud of what we were able to accomplish in the second quarter. And given the rate at which we're running, we expect total savings for the year to be between MXN 1.6 billion to MXN 1.7 billion. So it will be a new record for the company. And again, we are looking everywhere. The environment is very uncertain, very challenging. And it requires us to look at every single area of our operation and improve in every single area. And we did very well in the second quarter. We expect to continue to do well and again, deliver between MXN 1.6 billion to MXN 1.7 billion for the year.

[Benjamin Theurer, analyst]

Okay. Perfect. Congratulations again on the results.

[Operator]

Our next question comes from Jens Spiess with Morgan Stanley.

[Jens Spiess, analyst]

Congrats on the results. I have a related question to the previously -- previous question. Was the price/mix increase mainly due to mix? Or were there also some price increases included there? And I mean, was it a function of the shift from Away from Home to consumer products simply causing that increase? And with the -- within the consumer products, did you see any trade downs as the economy has contracted?

[Pablo Roberto González Guajardo, executive]

Jens. Yes, on the first question, the -- most of the improvement in price and mix, as you mentioned, came because of mix. Mix within our categories and mix within our business. So it was nice to see the combination of volume, price and mix. We'll see going forward, how we can continue to perform at this level. When it comes to shift or trade down, there are some categories where we are seeing some trade down but overall, we are still not seeing any big impact in that respect. And it remains to be seen whether we will see that going forward.

[Jens Spiess, analyst]

Okay. And related to that, do you think you will be able to increase prices in the second half of the year?

[Pablo Roberto González Guajardo, executive]

Well, we -- really, what we're doing is we will monitor what's happening with commodities, the impact of the exchange rate and certainly the market dynamics, including the consumer behavior, and then we'll decide how to proceed in each category. So we'll see how that goes on into the third and fourth quarters.

[Operator]

Our next question comes from Mohammed Ahmad with FGP.

[Mohammed Ahmad, analyst]

A few questions. Just consumer volume growth, if you could just tell us that? Second question is, has the FX impact fully flown through or gone through your income statement in Q2? Or should we expect that to sort of ramp into Q3 given the pace of depreciation happened at the end of Q1? And finally, on the OpEx side, it was very good performance, but we've heard from some other consumer companies that a large part of it was, for them, at least, related to event sponsorship, concert sponsorship. So I just want to sort of understand if it's just a temporary dip or part of it is a temporary dip due to a marketing budget underspend that will catch up later in the year? Or part of it is it for something like oil price, which has come down a lot?

[Pablo Roberto González Guajardo, executive]

Mohammed, well, on volumes in the consumer products segment -- let me go to the -- got it. Sorry, I was just checking something here. The growth in consumer products was pretty evenly split behind volumes and price and mix on the first question. When it comes to the exchange rate, I think the biggest impact we've already seen in the second quarter. Some of it might spill into the third quarter, but again, the biggest impact already happened in the third quarter. And when it comes to…

[Xavier Cortés Lascurain, executive]

Depending on what happens going forward.

[Pablo Roberto González Guajardo, executive]

Yes, I mean, we need to monitor what happens…

[Xavier Cortés Lascurain, executive]

As long as it stays where it is right now.

[Pablo Roberto González Guajardo, executive]

That's right. Assuming the exchange rate stays where it is right now, but the initial impact we saw flow through in the second -- most of it flow through in the second quarter. And when it comes to SG&A, what we experienced is that we continue to invest heavily behind our brands and our innovations, and we'll continue to do that. But we saw an improvement on our distribution expenses. And we -- the improvement came behind higher spot arrangements versus dedicated arrangements and new strategies that we're implementing along our supply chains and along distribution of our products, for example, on how we handle the last mile and quite a few of the strategies that we're putting together. So we saw better distribution costs, and that certainly helped on SG&A.

[Xavier Cortés Lascurain, executive]

And we did not delay any -- we did not delay an expense on the SG&A.

[Pablo Roberto González Guajardo, executive]

No we didn't.

[Xavier Cortés Lascurain, executive]

So it's not that they will -- they should not ramp-up going forward.

[Mohammed Ahmad, analyst]

Okay. That's great. Just so that I understood the first answer correctly. You said it's basically the growth in consumer split evenly, so 1/3, 1/3, 1/3 between volume, price and mix?

[Pablo Roberto González Guajardo, executive]

No. Evenly, sorry, half of it is volume, half of it comes from price and mix.

[Operator]

[Operator Instructions] We will next go to Luis Willard with GBM.

[Luis Willard Alonso, analyst]

Congrats on the results. So Pablo, can you tell us about how do you feel in terms of the capacity and utilization levels that you have currently? And how does that move your capital allocation [indiscernible]? I mean for 2020 it's mostly said, but maybe 2021 or 2022, especially in the face of your -- the things you get -- you have going on with KCC.

[Pablo Roberto González Guajardo, executive]

Okay. Let me see if I got your questions correct. So I'll answer, Luis. And if I miss something, please let me know because you're not coming on too clear. On capacity utilization, certainly depends on the categories, but particularly on those that have to do with hygiene. We're running at very high capacity, both because we are -- those categories have momentum here in Mexico, but we're also exporting finished products to our partner, and we're using some of our paper making capacity to also export parent rolls. So on the tissue side, we're running at high capacity. On personal care, we are running pretty much at the rate we have been running. And we're pretty confident there that we don't need any additions here in the short term. We have enough for us to continue to innovate and push our brands and push our growth here in the coming quarters and years. When it comes to KCC, again, very robust plan that we've developed with them. Some of it has already materialized. Some of it is in the planning process. And we're very confident that we'll be able to continue to support them and continue to add sales to our export business through what we're doing with KCC and other partners in the U.S. and other parts of the world.

[Operator]

And at this time, there are no further questions.

[Pablo Roberto González Guajardo, executive]

Okay. Thanks again, everyone, for attending the call. We would be glad to take any additional questions that you may have in the coming days. And I hope you and your families all stay healthy and safe. Look forward to talking to you in the third quarter, and we'll continue to work diligently to deliver and create value for our shareholders as we've done through this first half of the year. Thank you all so much for participating.

[Operator]

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