Kimberly-Clark de Mexico SAB de CV

BMV:KIMBERA

Earnings Call Transcript 2022-Q2

[Operator]

Good day everyone and welcome to today's KIMBER's Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded.

It is now my pleasure to turn today's program over to Pablo Gonzalez, Chief Executive Officer. Sir, please begin.

[Pablo Gonzalez, Chief Executive Officer]

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

A couple early remarks. Our second quarter results show continuous 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, a second in a row, including a monthly record in May with stronger prices sequentially. Greater price realization, higher operating efficiencies and solid advances in our 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 last year as well as versus the first quarter of this year.

From its lows in the fourth quarter, our EBITDA margin has improved 300 basis points, notwithstanding the continuous cost pressures. Progress, no doubt but we still have much to do. Our focus on greater price realization, achieving further efficiencies and expanding our cost-reduction program while aggressively innovating, investing behind our brands and in state-of-the-art technology and strengthening our shares is steadfast.

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

[Xavier Cortés Lascurain, Chief Financial Officer]

Thank you. Hello, everyone. During the quarter, our sales were MXN12.9 billion, a 10% increase versus the second quarter of 2021. Volume was down 3.1% with price and mix contributing 13.1%. Sequentially, volume was down 2.3%. Price was up 4.8%. And overall, our record quarterly sales increased 2.5% versus the previous record in the first quarter.

Compared to last year, consumer product sales increased 7.8% with volumes down 4% and prices up 12%. As is usually the case in our categories, when we lead price increases, we take a temporary hit in volumes while competitors posed. This time around is no exception. Sequentially versus the first quarter, consumer products pricing increased 4% and volume remained stable. 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 12.8%, reflecting a gradual return to in-person activities. Export sales grew 42.5%. Cost of goods sold increased 13.8%. Against last year, every commodity and raw material category compared negatively except for resins. Pulp was up in high double digits depending on the grade. Imported recycled fibers grew 17%. Domestic recycled fibers averaged high 20s and slot high-teen increases.

On the personal care side, superabsorbent materials were up 30% and resins were down single digits. Finally, energy compared negatively as natural gas nearly doubled. The FX was slightly lower, averaging 1% less. Our cost-reduction program once again had very good results and yielded approximately MXN400 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 increased 2.8% and margin was 32.3% for the quarter. SG&A expenses were 10.4% higher year-over-year and as a percentage of sales were stable. Operating profit decreased 3.4% and the operating margin was 16.7%. We generated MXN2.7 billion of EBITDA, a 1% decrease versus last year or a 6.4% increase sequentially. EBITDA margin was 20.8% which is an 80 basis point sequential improvement and a 300 basis point improvement versus the fourth quarter of 2021, underscoring that we are headed in the right direction towards margin recovery.

Cost of financing was MXN429 million in the second quarter compared to MXN453 million in the same period last year. Net interest expense was lower because we reduced our debt position and we are in higher rate on our cash investments. During the quarter, we had a MXN4 million foreign exchange loss which compares to a MXN4 million gain last year. Net income for the quarter was MXN1.2 billion with earnings per share of MXN0.38. We maintained a very strong and healthy balance sheet. Our total cash position at June 30 was MXN9.7 billion. Our net debt-to-EBITDA ratio was 1.5x with an EBITDA to net interest coverage of 6x. Considering that we have approximately MXN10 billion of debt maturities in the next three years and in view of the current interest rate environment, we have assessed the convenience of issuing of issuing debt in advance. Consequently, we are in the process of issuing MXN10 billion in local bonds certificates [ph].

Thanks. Back to Pablo.

[Pablo Gonzalez, Chief Executive Officer]

Thanks, Xavier. Our continuous progress is spearheaded by our focus on execution on different fronts. Let me briefly comment on some of them. First, greater price realization. As you are all aware, we have implemented price increases which together with our efforts to achieve better efficiencies and returns behind our promotional and advertising investments, allowed us to achieve greater price realization, key component of our strategy given the substantial and unprecedented cost increases we have experienced, particularly during the last 9 to 12 months.

Unfortunately, costs have not abated. In many areas, they continue to increase, such as the case of pulp, recycled fiber and energy. A few others have stayed constant or have come down slightly but are still at very high levels compared to last year and even historically. We're seeing some 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 priority. We will continue to seek opportunities in consumer products and we'll focus on reflecting increases in the professional contracts business during the quarter as well as the cost increases in our bankroll and finished product export sales.

Efficiently executing our 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 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. Our personnel continue to make improvements in productivity and waste measures. Further, we're investing to strengthen our operations and logistics footprint and in covering 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, the program is rooted in our culture and made up of an important number of initiatives, some of them small, some more impactful and all add up. Every peso counts and we will continue to look forward 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 and we're supporting our launches and brands aggressively and efficiently. As examples, during the quarter, we launched a new technology to improve the integrity of the absorbent core in our economy diapers as well as softer covers in our premium line and we introduced new tissue products that balance quality and price. 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.

In summary, our actions are taking hold and are allowing us to continue to post 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.

Thanks, again, for participating in the call. And now we will open it up for questions.

[Operator]

[Operator Instructions] And our first question will come from Luis Yance with Compass.

[Luis Yance, Compass]

Pablo, Xavier, congrats on the sequential improvement that you've had for two quarters in a row. Two questions on my side. First one, I guess, on pricing. And I know you mentioned and we saw it in the results very strong price realization but as you mentioned, the cost side of the equation hasn't abated yet. So just wonder if you could comment a little bit about your plans in terms of further price increases as we go into the second half. Where do you see most of the opportunities? Perhaps we sit on the consumer segment and the Away from Home, et cetera. So anything you could comment there?

As well as what's been the lag so far of your competitors because you kind of closed the gap in terms of pricing? Now you increased prices there again behind. But do you feel they're being quite diligent in terms of following use of this kind of volume decline is just temporary as it usually is when you leave the price increases? So that will be my first question.

[Pablo Gonzalez, Chief Executive Officer]

Thanks for the question, Luis. And yes, the price realization will continue to be a priority for us. We're looking at all the different scenarios and opportunities as we move forward. On the consumer front, particularly on the tissue side, where -- that's an area where we continue to see quite a bit of pressure on the raw material side. So we will continue to move forward with pricing on tissue and certainly on the Away from Home business, both in the open market and in the contract business. This -- the latter one is taking a little longer to take hold because we just renegotiated the contracts with our clients. And so that will -- should be showing up here late in this quarter and certainly into the fourth quarter. So we'll see some improvements over there.

And we'll continue to focus on passing on those costs that we're experiencing on our parent roll sales and our export sales as those continue to increase sequentially. So that's a little bit of the picture. And again, we will continue to look at and take advantage of any opportunity, not only of increasing prices but being more efficient on our promotional set. When it comes to competitors, for the most part, we have seen them follow but as usual, with a lag. And this last price increase that we implemented is exactly what we're seeing. They're lagging a little bit but they've announced that they're following. So that has been the scenario that we faced here in the past year or so.

Now when it comes to volumes, we'll see what happens going forward. The one important thing to mention is that in our categories, volumes are, for the most part, either flat or slightly growing or slightly down. And I'm talking about the category here, not our volumes. We've lost a little bit more given our price increases. But volumes for the categories are, for the most part, flat. The increases or growth is coming from pricing. So no doubt when it comes to volumes, inflation is having -- it's taking its toll.

[Luis Yance, Compass]

Great. That's great color there. And then my other question would go to margins. As I put everything together that volumes are a little bit weak for you on a temporary basis because you said the categories are still holding up quite well. Pricing will continue but you have this kind of cost pressures. It seems like some of the derivatives, as we mentioned, with oil coming down have been more stable, we'll have to see, at some point, hopefully, both also that. But as it pertains to margins, I mean you seem to be delivering in terms of what you were saying and sequential improvement which in twice in a row. Just wondering if you still feel comfortable that by year-end, you should be closer to that kind of normalized range of the 25%, 27%? Or given what you see today in order to get there, you will need some further cost relief? Or even if things have stayed here, you think we should continue to see the sequential improvement in margins that we've seen so far? Or how do you feel about that portion on the profitability side?

[Pablo Gonzalez, Chief Executive Officer]

Yes, Luis. Well, that's really sort of one of the key questions, right? But we're pretty happy with what we were able to do in the second quarter because we did not expect to continue to see such sequential pressure on the cost side. And notwithstanding that, we were able to improve our margins, certainly not at the rate we would have liked to and at the speed we would like to but given that the costs continue to increase sequentially, we were happy with the fact that we could improve those margins for the second quarter.

Going forward, it really depends on what will happen to those cost pressures. So far, what we're expecting is that we will continue to see sequential pressure on pulp, on recycled fibers, maybe even on superabsorbent material. We might see a little bit of relief on resins but energy will continue to most likely put some pressure sequentially. So again, we're trying to catch up. But costs are not abating and that makes it a little bit harder. So we will stay focused on greater price realization. We will be very aggressive on our negotiations to try and mitigate the impact on raw materials. We will be very aggressive on our cost-reduction program and we believe that, that will help us continue to improve margins as we move forward in the year and certainly have better margins at the end of the year than where we are right now.

Now whether that will allow us to get a very -- or much closer to our target range, it's really hard to say because we -- every quarter, we seem to get a different picture of what will happen to the costs. So we'll see. We're again trying to catch up. And we're very confident that at some point in the next quarters, we will get back to our margins. But don't know if by the end of the year, we'll be there but we will certainly be closer.

[Xavier Cortés Lascurain, Chief Financial Officer]

We'll be closer than where we started. That's the fact.

[Luis Yance, Compass]

Okay, great. Congrats again for the results.

[Pablo Gonzalez, Chief Executive Officer]

Thanks for your questions, Luis.

[Operator]

Our next question will come from Jens Spiess with Morgan Stanley.

[Jens Spiess, Morgan Stanley]

I just want to ask a bit more on the volume side that you commented. We have seen now a few quarters with negative volume growth. You mentioned that volumes of the categories have been flat. So can we imply that you have basically lost a bit of market share while you were leading the price increases? And hence, once the competitors follow you, do you expect those to recover those percentages that you lost? And secondly, on natural gas, could you just give us a sense of how much of your energy -- of your total cost those represent? Because I think energy is maybe around 10%. So how much of that 10% is actually directly natural gas?

[Pablo Gonzalez, Chief Executive Officer]

Thanks, Jens and thanks for the questions. First, on the share side. Yes, I mean it's a mixed picture. There's categories where we've been able to hold our ground, some, where we've increased our share and some where we've lost our share. And in the latter case, it is tied to us being the first prices out there and the competitors lagging and that certainly hurt our volume. So we will work hard as competitors follow to recoup those share losses over the coming quarters. And again, it's very common for that to happen but we need to work to make sure that we recover that -- those shares.

[Xavier Cortés Lascurain, Chief Financial Officer]

Jens, the gap is approximately 2% of our cost.

[Operator]

Our next question will come from Antonio Hernández with Barclays.

[Antonio Hernández, Barclays]

The question is regarding pricing versus sales mix. I know most of your overall top line is, of course, driven by pricing growth. But also can you give a little bit more light on sales mix and maybe your expectations on this for the rest of the year?

[Pablo Gonzalez, Chief Executive Officer]

Antonio, unfortunately, you're not coming out too clearly. Can you try and repeat the question?

[Antonio Hernández, Barclays]

Sure. My question is regarding pricing and sales mix. I know most of your top line is, of course, driven by pricing growth but also wanted to get a sense of sales mix. What has been the performance throughout the last quarters? And especially what's your expectation for the remainder of the year?

[Pablo Gonzalez, Chief Executive Officer]

Great. Thanks. We were able to hear you. Thanks for repeating, Antonio. Yes, I mean, when we talk about the increase, it's really price. We haven't seen an impact on mix or at least an important impact on mix. That has been the case so far. Going forward, it remains to be seen because, again, with the inflation being so persistent and so high and consumers being stretched, you would expect that there might be some trade-down going forward. We have not seen it yet. But going forward, if this continues for some time, you would expect some trading down.

[Antonio Hernández, Barclays]

Okay. And you haven't seen any difference perhaps from the beginning of the quarter compared to the end of the quarter? No specific difference in terms of trade-down?

[Pablo Gonzalez, Chief Executive Officer]

Not in our case. When I see somewhere -- when we take a look at the categories as a whole, there's a little bit of a shift to value and economy products but we've been able to maintain our mix pretty stable. And the shift we've seen in the categories in the market is not significant.

[Operator]

Our next question will come from Bernardo Malpica with Compass Group.

[Bernardo Malpica, Compass Group]

My question is regarding the cost-reduction program. I just was wondering if you could give us a little bit more color in terms of the push of projects you had already going on. If I remember correctly, some of the projects you had right now were going to deliver full impact by 2023. So I just wanted to know if you could give a little bit more color and update of maybe how much -- what percentage of the impact is already in place right now and what we could see towards the end of the year.

[Pablo Gonzalez, Chief Executive Officer]

Sure, Bernardo. Great to hear from you. Sure. I mean, talking about some of the projects that we mentioned last quarter, one of them having to do with our new nonwovens machine. We were able to get that on time, under budget and it has really ramped up very, very efficiently. We're very happy with the way that's going. And we're getting better raw materials for our products at lower costs and that's certainly helping. And given that, that really started up March-April time frame, we saw a little bit of that -- of those savings in the second quarter but we will see the full impact during the third and fourth quarters. The other one I believe we mentioned which is another big one, is our reorganization or new footprint for tissue. And that one really will take -- we're starting -- that process is just starting and it will really happen in the second half of the year. So we won't see the full impact of that new or reorganized footprint until really next year. That's when we expect to see the benefit.

But overall, our -- we continue to move ahead with not only these big projects but many smaller ones that are adding up so that we expect to have a record cost savings for this year. And so you should expect the second half our cost savings to be stronger than what we achieved in this first half of the year as things ramp up.

[Operator]

Our next question comes from Sergio Matsumoto with Citigroup.

[Sergio Matsumoto, Citigroup]

Just needed to ask just on this line of the projects that you're working on. Is there a -- I thought there was another one with -- that involved data analytics. And if so, could you comment on how that project might help you? And also, I know this is kind of not the optimal timing to ask this but just wondering given the -- how things are, whether some change in dividend payout or the level of it could change in any way next year? Those are my two questions.

[Pablo Gonzalez, Chief Executive Officer]

Thanks, Sergio. Well, first on data and analytics. I mean that really spans across the company. There are a whole bunch of areas where we're really leveraging data and really diving deep to understand what it says and what it tells us and how we can make better decisions. And that's certainly helping and it's certainly helping on the price realization front, where we -- our revenue growth management program has really been key in us determining where we move, how we move and with what percentages and what the response is in the market. And we are more and more confident with that information and really using it, again, to leverage our decision-making and to push forward. I think it's allowing us to be much more efficient in our promotional mix and our pricing and mix efforts.

And with that, we're also doing it in the logistics front to understand how we're moving our products and how we can improve costs in that area. We're certainly doing it in the operations front to better understand our operations and our metrics and how we can improve. So it's really an enterprise program that we're really working on and that continues to allow us to make better decisions -- more informed decisions and better decisions and that is really helping us in different fronts either on the productivity, cost or pricing side. So we're very happy with it and we'll continue to push aggressively to move forward there. When it comes to the dividends, no change in our policy whatsoever. And we'll see where we end up in the year. And as we always do, we try to deploy our cash in the most shareholder-friendly manner. And the better results we have, the better the dividend will be but there's absolutely no change to our policy.

[Xavier Cortés Lascurain, Chief Financial Officer]

But I would only say, Sergio -- I would only add that for next year, basically -- the dividend will basically be what we make this year in net churns. So it's going to be very close to what we're paying this year.

[Operator]

[Operator Instructions] And our next question will come from Bob Ford with Bank of America.

[Bob Ford, Bank of America]

Congratulations on the improvements. Pablo, the export number, can you comment on cost versus KCC's cost structures less? And how should we think about that export opportunity over the next year or two?

[Pablo Gonzalez, Chief Executive Officer]

Sure, Bob. Great to hear from you. Thanks for being on the call. I mean when we -- the export number is -- it's a combination, of course, of our parent roll sales which have grown significantly here over the past quarters and our finished product exports which, as you know, are mainly to KCC and those continue to perform well. Sequentially, we didn't see a strong growth in this latter part of the business as we have been seeing. And that's just a part of the cycle of working with Kimberly-Clark on different projects to move forward. But when I see the pipeline that we've got going with them, we're very excited about this opportunity in the coming years. We've had the opportunity to sit down with them and really think about the North American footprint and how together we can be more efficient and we can improve our cost structure and we can improve our innovation capabilities and we can improve our productivity and certainly our sales going forward.

And again, quite a bit of projects that were analyzing and that are on their way and very, very excited about what we expect to be getting -- or achieving together with our partner in the coming years in those programs. And again, we're really looking at the North American footprint as a whole. So that's why it's so exciting and why we believe it could bring such benefits to our partner and to our company.

[Bob Ford, Bank of America]

Pablo, it sounds like -- and I don't want to put words in your mouth but it sounds like maybe we can expect more elevated growth rates. But at the same time, when we envision some of the benefits to Mexico, there are some product lines that, that were not scalable for the Mexican market but now maybe and there's some new sales opportunities as well. Is that fair?

[Pablo Gonzalez, Chief Executive Officer]

No. I mean remember, what we're talking about our main product lines which our partner, of course, sells around the world. Anything we do selling those products is working with them so that they have more capacity for different kind of products but working and selling it through them. And again, in those, we see some great opportunities going forward in those product lines. Maybe some things that we'll be producing in Mexico and providing for them to sell in the U.S. within those categories. And again, very exciting. But we're going to see some ups and downs on that because there -- we're talking now about some bigger projects but it takes a little bit of time to put that in place and to move forward. So we might see some lulls and some highs. But overall, when you see it comprehensively, it's very exciting what we think we can accomplish together going forward.

When it comes to other product lines that -- where they're not involved and where we participate, we continue to move those forward and selling both in the U.S. and Latin America. And we continue to increase our sales in -- with those product lines in different markets. We're also excited about what we believe we can accomplish with those in the coming years. So it's really a two-pronged approach, one together with Kimberly and the other one on our product lines where they don't participate and we see great opportunities, both going forward, Bob.

[Bob Ford, Bank of America]

In the -- when you mentioned product lines were product -- would that also include maybe some of the Mexican that could be sold into the U.S. in the Hispanic markets?

[Pablo Gonzalez, Chief Executive Officer]

No. No, at least not at this point, Bob. Again, we're really just right now looking at their product lines and seeing how we can help provide a more robust and a better cost footprint for North America. And if there's opportunities for us to help out there, that's what we're exploring and that's where we will continue to move forward. We'll see what those conversations take us going forward.

[Bob Ford, Bank of America]

Understood. And again, congratulations on the results.

[Pablo Gonzalez, Chief Executive Officer]

Thanks, Bob. Appreciate it.

[Operator]

[Operator Instructions] And our next question will come from Ulises Argote with JPMorgan.

[Ulises Argote, JPMorgan]

So just a quick one here on market dynamics. So you mentioned industry volumes there on key categories remaining kind of flattish but wanted to get your sense if there is any downtrading within those broader categories. Or how do you see this evolving given that the price increases we have seen kind of industry-wide now? So any color on that would be appreciated.

[Pablo Gonzalez, Chief Executive Officer]

Ulises, thanks for the question. When you look at the categories in the consumer segment in the market, really most, as I mentioned, are slightly global. That was slightly declining on volume, except for, of course, food categories and nonalcoholic beverages which are growing also a little bit stronger in volumes. But for the most part, again, categories are somewhat flattish and growth is coming from pricing. In our categories, particularly I mean we've seen, again, a little bit of a mix shift towards value and economy but it hasn't been substantial to this point. We'll see how that evolves going forward. Again, if inflation continues to be an issue and is here with us for quite some time and with the consumers being stretched, they really held up nicely so far. And I guess that, in many ways, has to do with remittances and with some parts of our economy growing well like tourism and certain manufacturing experts to the U.S. And that's all helping.

And I think the consumer has held up reasonably well but inflation is there. Inflation has been very sticky. And if it lasts a little longer, we might see some more trading-down in the coming quarters. It hasn't been the case so far but we might see it going forward.

[Ulises Argote, JPMorgan]

Okay, very clear. Congrats on the results again.

[Pablo Gonzalez, Chief Executive Officer]

Thank you, Ulises.

[Operator]

At this time, we have no further questions in the queue. And I would like to turn the call back to our speakers for any additional or closing remarks.

[Pablo Gonzalez, Chief Executive Officer]

Well, thanks again for participating in the call. We really, really appreciate it and we really like the dialogue we can have with you. And we're open to receiving any additional questions and talking to all of you. I hope you have a great weekend and I hope you have a terrific summer. Looking forward to talking to you after we -- the third quarter ends.

[Xavier Cortés Lascurain, Chief Financial Officer]

And just a reminder to add your fixed income teams to buy our [indiscernible].

[Pablo Gonzalez, Chief Executive Officer]

Terrific. Great point, Xavier. So thanks again, everyone. Appreciate it.

[Operator]

Thank you, ladies and gentlemen. This does conclude today's call and we appreciate your participation. You may disconnect at any time.