Kimberly-Clark de Mexico SAB de CV

BMV:KIMBERA

Earnings Call Transcript 2023-Q2

[Operator]

Good day, everyone, and welcome to today’s Kimberly-Clark México’s Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later you will have an opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note that this call may be recorded, and that I will be standing by, should you need any assistance.

It is now my pleasure to turn today’s program over to Pablo González, CEO.

[Pablo González, CEO]

Thank you. Hello, everyone. I hope you’re having a good summer, and thanks for participating on the call. As usual, I’ll make some preliminary remarks and pass it on to Xavier to provide details on the second quarter results.

Let me start by saying, we had another good quarter. Our sales were a new record for the Company, despite strong headwinds from our export business. Both consumer products and away from home grew double-digits, and in the case of the former, through a healthy balance of volume and price. On the profitability side, we also posted records and strong growth, and we reached our target margins. All in all, a strong first half to the year.

Let me pass it on to Xavier.

[Xavier Cortés, CFO]

Thank you. Good morning, everyone.

During the quarter, our sales were 13.7 billion pesos, a 6.4% increase versus the second quarter of 2022, and a new record. Net sales were boosted by consumer products and away from home, which grew 11.8% and 26.1%, respectively. Exports were down 41.6%. Sequentially, sales grew 1.2% supported by volume growth while price mix was nearly flat. Year-over-year, consumer products volume grew 4%.

We will continue monitoring prices and volumes to find the best combination going forward. Cost of goods sold decreased 3%. Against last year, virgin fibers, fluff and domestic recycled fibers compared negatively while imported recycled fibers, SAM and resins were favorable. Energy also compared negatively while gas was down. The FX was lower, averaging 10% less.

Our cost reduction program once again had very good results and yielded approximately 450 million pesos 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 26%, and margin was 38.2% for the quarter.

SG&A expenses were 10.4% higher year-over-year, and as a percentage of sales were up 60 basis points. We continue to look forward for additional opportunities to streamline our operations, while strengthening the investment behind our brands and also provisioning for higher variable compensation.

Operating profit increased 40.4%, and the operating margin was 22.1%. We generated 3.5 billion pesos of EBITDA, a 31.2% increase. EBITDA margin was 25.6%, a 150 basis points sequential improvement and a 480 basis points improvement versus the second quarter of 2022, underscoring our focus towards margin recovery.

Cost of financing was 381 million pesos in the second quarter compared to 429 million pesos in the same period last year.

Net interest expense was lower, despite our incremental gross debt because we earned more cash on our investments. During the quarter, we had a 1 million pesos foreign exchange gain, which compares to a 4 million pesos loss last year. Net income for the quarter was 1.8 billion pesos with earnings per share of 0.59 pesos, a 52.9% increase.

We maintained a very strong and healthy balance sheet. Our total cash position as of March -- as of June 30 was 19.1 billion pesos. Our net debt to EBITDA ratio was 1.1 times with an EBITDA to net interest coverage of 8 times. Thank you.

[Pablo González, CEO]

Let me make a few brief comments before going to Q&A. On the top line, the economy in general and domestic consumption more specifically continued to show resiliency and so far we see no meaningful changes in the dynamics of our categories. In addition, we believe our strong innovation pipeline together with more effective investments behind the brands will strengthen our market positions.

On the cost side, pulp and recycled fiber prices are finally coming down. Fluff, on the other hand, is still significantly higher than last year. Superabsorbent materials and resins will continue to be favorable. Continued growth in our most important businesses, a better cost scenario together with the investments we’re making to optimize our footprint and strengthen our execution as well as our consistent and effective focus on cost reductions should allow us to continue posting margins within our target range. We are pleased with our progress and excited with the opportunities we see going forward. And as always, we’re committed and we’ll be relentless in achieving the goals.

With that, let me open the floor for questions.

[Operator]

[Operator Instructions] And our first question comes from Jens Spiess with Morgan Stanley. Your line is open.

[Jens Spiess, Morgan Stanley]

Yes. Thank you so much for taking my question. And congrats on the results, by the way. I just wanted to ask on cost first. You mentioned that virgin and recycled fibers have a negative comparison year-over-year. But I was wondering, quarter-over-quarter, the sequential comparison, is it starting to look positive considering that pulp prices have started to decline, or have those not yet flown through the cost? And if I may, on volumes, how has the progression been there year-over-year and quarter-over-quarter? Thank you.

[Pablo González, CEO]

Thanks for participating, Jens, and thanks for the question. Yes, when you look at it sequentially, we do see both, pulp and recycled fibers coming down. There have not significantly had an impact yet on our results because as you know, prices have come down in the market more significantly, but we have contracts and we update the pricing on the contracts every quarter. So, we will see during the third quarter better pricing, both in pulp and in recycled fiber. So, again, a more favorable cost scenario overall going forward. Even fluff that is still at very, very high levels has started to come down a little bit, not as much, but a little bit. That’s the only one really that continues to be compared very negatively versus last year.

When it comes to volumes, as we mentioned, we had a better balance this quarter, particularly in consumer products between volume and price, with volume being 4% and price roughly 8%. Away from home products was still mostly price and mix, when it comes to the growth, that’s compared versus last year. When you take a look at it sequentially, again, consumer products showed a 3% growth in volume and was just slightly ahead in pricing away from home. Again, all of the growth came from price and mix also when you take a look at it sequentially.

[Operator]

Our next question comes from Luis Yance with Santander Asset Management. Your line is open.

[Luis Yance, Santander Asset Management]

Hi, Pablo, Xavier, Salvador. Thanks for taking my questions and congrats really on amazing quarter. I guess, a follow-up on Jens’ question on the cost front. I mean, it’s been remarkable, the margin improvement or recovery you’ve had, despite the fact that as you said, you still haven’t seen the full positive impact of costs rolling down. So, can we pick your mind in terms of the potential evolution of margins going into the second half, especially because you’ve been telling us and fortunately, you’ve been able to deliver on the idea that margins should recover, go back to that kind of 25%, 26% by year-end. Well, here we are, half of the year and you are already there. And it looks like and I understand it’s very difficult to know what’s going to happen in the next couple of months, but if things remain where they are with a strong peso, pulp prices coming down, oil prices kind of stable in these levels, it looks like you’re going to have all the stars aligned and you are already sitting at 25.6% margin. So, is it conceivable to see margins even outside that range on the way up for a temporary basis? And how do you expect competition and yourselves to react in terms of that moving, should we expect to start seeing some promotions coming into the market, or is it too early and perhaps the industry needs to recover for a longer period of time that profitability before we start seeing those dynamics happening? That’s my first question.

[Pablo González, CEO]

Thanks for your question and certainly a very important one. As you say, I mean, for now, really the improvement we’ve seen in margins over the past quarters has really been behind our pricing and price realization efforts over the past year, year and a half behind very important cost increases. And those prices have stayed into the market, and now raw materials are starting to come down. So, it’s a better combination. So just -- let’s remember that, I mean, our target range is for the mid to long-term and we certainly expect to be within that stated range. In specific instances, of course, as you mentioned, we may be above or below the same. And as things stand right now, again, a couple of this, but if domestic consumption remains relatively strong, if competitive dynamics remain reasonable, so prices are steady, yes, given decreasing raw material prices and the strong peso, we could see our margin either at the higher end or above our target range in the short-term. Again, a couple of ifs in there, but as things stand right now, it is certainly a possibility.

[Luis Yance, Santander Asset Management]

Great. That’s a great color. And my other question has to do with what that means in terms of capital allocation. Clearly, we are seeing a very strong year for you guys in terms of earnings. So, I’m guessing, as I think for the combination of strong earnings to my sense and probably you can confirm on that in terms of working capital needs perhaps that have been under a bit of pressure because of the higher input cost, perhaps we’ll start seeing a bigger relief going into the second half, the combination of those two things. It looks like a very powerful combination in terms of cash flow generation. And given your debt levels and very, very manageable levels, just wondering how should we think about distribution to shareholders? Is that something that you could advance a little bit this year, or as usual, you’ll probably wait until April next year and then filter it through via dividends, or what’s been your thinking behind that and whether the addition, the working capital release is something that we also expect there?

[Xavier Cortés, CFO]

We’ll definitely do something next year. As you stated, this is something that we usually decide at the beginning of the year. If things continue to improve, we’ll very likely propose some improve -- increase to the dividend to the Board and then to the shareholders’ meeting. But that’s something that will be decided earlier next year.

[Pablo González, CEO]

The only thing that I will add, Luis, is as you know, our policy has been to grow our dividend at least with the rate of inflation. And given the difficult scenarios we faced over the past couple of years because of the cost increases, we fell a little bit behind on that proposal. So we -- if things continue to go as they are, we would certainly be expecting to propose some catch up, when it comes to the dividend and Xavier is saying, at our February Board meeting, in February or March shareholders meeting, so for next year. So hopefully some catch up there that would be very good for our shareholders.

[Operator]

Our next question will come from Bob Ford with Bank of America. Your line is open. Bob, please make sure that you’re unmuted on your end.

[Bob Ford, Bank of America]

Yes. Sorry about that. Good morning, Pablo, Xavier, Salvador. Pablo, could you discuss volumes and price trends in paper towels, facial tissue, wet wipes, and maybe some of the functional products? And could you also discuss what you’re seeing in the traditional channel? There seemed to be some high profile efforts to consolidate wholesale, and I was curious how you’re thinking about how that might impact consumer tissue categories, if at all? Thank you.

[Pablo González, CEO]

Thanks, Bob. Thanks for being on the call. Yes, I mean, particularly on tissue, again, we faced very significant cost increases, particularly in the second half of last year. Well, most of it, at least three quarters, but very heavy on the second half of last year. So, as you know, we priced -- we passed on quite a few price increases to offset some of those costs. And those were reflected in the market, both by us and competitors, and continue to be still something that’s helping us even throughout this year. We passed our latest price increase on tissues late first quarter, early second quarter.

So, the dynamic there is still working in terms of pricing holding up and volumes are being pretty steady and our shares actually improving as, not only us, but everyone else, given the cost pressure has passed prices onto the market. We’ll see how that evolves going forward. We’re watching it very, very carefully, but stronger pricing still in the market on the tissue side than on the personal care side where we started passing prices earlier on because of the cost pressures.

When it comes to wholesale, still very dynamic market. As we’ve mentioned before, over some past years, modern trade was gaining ground on wholesale. We believe now wholesale is being a little bit more aggressive and holding its ground. And we see nice growth overall in these segments. And yes, some dynamics that are happening between some of the participants, we’ll see how that impacts the channel going forward. But if anything, I think they’re trying to just gain greater scale, become more productive, and again, be more competitive versus modern trade. So, I think overall wholesale will be able to hold its ground better going forward versus modern trade. I hope that answers your question, Bob.

[Bob Ford, Bank of America]

That’s super helpful, Pablo. And just one follow-up. And that is given how strong [indiscernible] growth has been growth has been, how are these less penetrated categories growing? Are they, I’m just curious if they’re above or below your overall averages in the consumer division. And we’re also just in terms of trying to understand the mix across price points. How -- are you seeing any shift between value tiers and premium tiers in your core categories?

[Pablo González, CEO]

Let me start by the latter and then I’ll come back to the former, Bob. We are seeing no significant shifts, in terms of tiers in our categories so far, so which is a -- it’s a good indication.

Now, in terms of penetration, as you know, penetration of facial tissue, kitchen towels and some other categories, it’s still pretty low in Mexico. And the opportunity there is very, very important, both in terms of penetration, in terms of frequency of use, and certainly eventually in terms of mix performance. As we’ve said before, the key thing there is for the economy to hopefully grow at a consistent and somewhat high rate over a period of time so that the broaden -- the middle class can strengthen and be broader. And what we’ve seen in other markets is that when that happens, then penetration certainly accelerates. And again, frequency of use and mix improvement also happen.

So, we believe there’s a great opportunity for that to happen in Mexico going forward, with all of the dynamics we’re seeing, particularly nearshoring, but not just nearshoring. I mean, all of the geopolitical tensions are creating a lot of movement. And we see even a lot of companies from China setting up shop in Mexico to be able to supply the U.S. market. And we also see North America consolidating such.

So, to the extent, we can capitalize on all of that, we see a great opportunity for the Mexican economy to grow at a higher rate consistently over the coming years, and that’ll, again, be very good for the economy, particularly for the middle class. And that would be terrific for some of these categories to increase in, again, in their penetration and everything else mentioned. Then, by the way, it would also be very, very beneficial for even the penetrated categories, because then we might see quite a bit of mix improvement, which would be very, very helpful, both in bathroom tissue and diapers, just to give a couple of examples.

So, a good path going forward, hopefully we take as a country great advantage of it and that would be very, very beneficial for all.

[Operator]

Our next question comes from Antonio Hernández with Barclays. Your line is open.

[Antonio Hernández, Barclays]

Hi. Good morning. Thanks for taking my question. Congrats on the results. My question is regarding the competitive environment and what you’re seeing along with other players slowdown of course, in terms of raw materials and cost inflation. So in which categories do you expect more competitive pressure or maybe have you seen already that taking place throughout the last couple of months? Thanks.

[Pablo González, CEO]

Thanks. Look, so far, as I’ve mentioned, we see no material changes in the dynamics of our categories. I mean, we’re coming out of the, as you know, very heavily promoted summer season and maybe a little bit more aggressiveness here or there, but nothing material. Overall, pretty similar to what we’ve seen in past years. As we come out of this promotional season, we will see how everyone acts and how the market reacts. But so far, again, no meaningful changes, either in consumer products or professional business. A little bit on the parent roll sales, where we are seeing some parent rolls coming in from Asia, both into Mexico and the U.S. at lower prices. But that’s really the only area so far where we see an important change in terms of the dynamics.

[Antonio Hernández, Barclays]

Okay. And in terms of exports, maybe you could provide a little bit more light there, what should we expect going forward? Thanks.

[Pablo González, CEO]

Yes, absolutely. I mean, exports, what we have right there is a combination of two things. One, lower or less sales to our partners, Kimberly-Clark Corporation on finished product, particularly because there has been some destocking going on in the U.S. market and they want to take care of their inventories. So, we saw less orders from them so far this year versus very important orders in the first half of last year. So, the comparison is hurting us in an important way. And also the sales of parent rolls have been a little slower than before. One, because we are using more of our capacity here in Mexico as we grow our volumes; and two, as I mentioned, because there is more parent rolls coming in from Asia into the market. So that’s one part of it, less orders per say. The other is, of course, the exchange rate, which has had a little bit of an impact on the sales.

Going forward, I mean, the exchange rate will continue to be a factor, but we expect one, orders to be a little bit more flattish in the coming quarters and comparisons will be a little bit easier, because we started to see orders come down in third and particularly fourth quarter of last year. So, the comps will be a little easier. So, not really that the export business will be contributing heavily to our growth but it shouldn’t be in the second half of the year the laggard it’s been and pulling our growth under. So, it will be a little bit more flat going forward here in the rest of the -- in the second half of the year.

[Antonio Hernández, Barclays]

Perfect. Thanks for the color, and have a nice day.

[Operator]

Our next question will come from Rodrigo Alcántara with UBS. Your line is open.

[Rodrigo Alcántara, UBS]

Hi. Thanks for taking my question. Just -- maybe a question would be to Xavier, the expected strength of the Mexican peso, perhaps to increase, I think you have a couple of future shares [ph] covering your U.S. dollar, right? It’s not that much but just curious if you maybe be more willing to increase your hedge or to be hedged under the U.S. dollar to take advantage of the current levels of the Mexican peso, that would be my question for you, Xavier.

And the other one, just to follow up on your previous comments on the export. So, would it be fair to assume that second half, assuming that nothing happens on the comp on the export side, just on comparison based considerations, we should see top line growth consolidated accelerated, given the momentum that you -- we have seen in the consumer away from home. Is that fair to say? Those would be my two questions. Thank you.

[Xavier Cortés, CFO]

On the FX, as you pointed out, well correctly, we did have some hedges throughout the first half of the year. We basically have nothing going forward. I really cannot answer if we’re going to do something. That’s something we talk about every day and at this moment I really can’t answer that. I don’t think we will. If we do something, we will let you know about that -- at some point.

[Pablo González, CEO]

Yes. I mean, we expect the peso to continue to be strong. So, we are carefully analyzing it and trying to figure out what our next move should be. And when it comes to sales, I mean, as I mentioned for what you’ve seen in the latest quarters is a stronger push or a strong growth in sales, particularly behind our pricing and realization efforts.

Finally, this quarter, we started to see a balance in consumer products but still with some pricing. As we move forward, we will lap that pricing, so that will not be as helpful as it has been in the past quarters, but we should see volume growth. So we expect both in consumer and away from home to continue to grow at a good rate. And then we need to see exactly how exports evolve, which again we expect them to still be negative in the third quarter, maybe a little higher on the fourth quarter, overall flat for the second half. So, we’ll see how the whole mix comes out. Now, very important, when I say all of this, really with the -- again, the consumer has been very, very resilient and we expect and hope that continues through the second half of the year, right?

[Rodrigo Alcántara, UBS]

Yes, yes, for sure. Yes, I appreciate the comments also on FX side. Thank you very much.

[Operator]

And our next question will come from Juan Guzman with Scotiabank. Your line is open.

[Juan Guzman, Scotiabank]

Just a couple of follow-ups here. First, I don’t know if you have this number in hand, but I’d like to understand how did FX, raw materials and your cost efficiencies contributed to this impressive 600 basis points gross margin expansion in net terms, or at least if you could give us an idea of which factors were the more relevant in terms of magnitude. And the second question will be, if you could please share some details on how was your market share performance -- performance in your key consumer categories during the quarter? And also if you have seen competitors behaving rationally during the period? That’ll be it. Thanks.

[Xavier Cortés, CFO]

On the FX, it was partial. As I mentioned before and we’ve mentioned earlier, we did have some hedges on the first part of the year. So, not all of the benefits of the super pesos, they call it, have trickled down into our cost. As for the cost efficiencies, we have 450 million pesos of savings in the quarter. Of course, not all of them are -- go all the way down to the profits, because some of that is reinvested into the improvements of our products, but that was the gross figure.

[Pablo González, CEO]

And, of course, the fact that again, we still have some pricing in the market and our volumes started to grow was certainly very, very helpful. So, when you put it all together, it’s pricing and volumes, a little bit of FX, a little bit of raw materials, and certainly our cost efficiencies, as Xavier just mentioned that the combination of all of them really helped us improve our margins, as you say, versus last year so importantly.

When it comes again to competitive dynamics and shares, again, we see no meaningful changes in competitive dynamics in our categories so far. And our shares in our biggest categories, we’ve regained some share here in this year. And given our innovation pipeline and our push behind those innovations, we believe we have a good chance to continue to grow those shares for the second half of the year.

[Operator]

Our next question will come from Jeronimo De Guzman with INCA Investments. Your line is open.

[Jeronimo De Guzman, INCA Investments]

I wanted to follow-up on pricing a little bit, because I wanted to understand, this year you did put through some pricing, it seems like maybe in tissue, just wanted to confirm that. And then, looking forward, I did want to kind of try to understand, I know you’re mentioning maybe the competition is still rational, but in given kind of the sharp decline that we’re seeing in these input costs, what has been the experience in the past? Have you seen kind of the competition reduce pricing to react to this, or have you seen pricing kind of remain stable in these kinds of situations?

[Pablo González, CEO]

Sure. One, yes, we did pass along a little bit more pricing on the tissue side, again, late first quarter, early second quarter of this year. And that’s the only pricing we’ve passed on. We haven’t done anything really on the personal care side. And as we always do, we’ll continue to analyze for opportunities for price realization, and that could be price increases, but also ourselves being more efficient in terms of, how we utilize our resources to push our brands and products at the shelf. So, that’ll continue to be a focus of us, certainly.

And then when it comes to category dynamics. Again, I don’t know that we can talk about rationality. All I’m saying is that we really see no material changes. Now, past instances when we’ve seen cycles, prices tend to stay in the market for some time, and then depending on whether the categories are growing or not, then we see competitors become a little bit more aggressive in their stance. If categories continue to grow, prices tends to stay in there. If category growth falters a little bit, that’s when you start to see some movement.

Now that’s historical, but we got to be careful with the fact that the impact that we’ve all went through in the past couple of years was very, very significant. Again, the cost increases we saw over a 16- or 18-month period where historically we had never seen anything like that in terms of the speed at which they happened and the incredible amount at which they happened, taking all of our raw materials to historical high levels. So, given that the impact was so big, we all have some catch-up to do. You’re seeing it in our results and we’re catching up. So, I think we all have some catch-up to do. And also we are all thinking, hey, this was tough and we need to have a solid footing going forward, because, you never know. These things are cyclical and it can come back at some point. So, hopefully that’ll help everyone behave a little bit more rational, but we’ll only know it when it happens. It is impossible to predict.

[Jeronimo De Guzman, INCA Investments]

And then, I did want to ask about OpEx, because what we have seen is that you’ve had higher increases in operating expenses over the last couple quarters. So, wanted to kind of better understand what’s driving it and how much is these brand investments that you mentioned, and kind of how you’re seeing that line item going forward?

[Pablo González, CEO]

That’s, really two things happening there. One, as you just mentioned, a stronger push behind our brands and particularly behind the innovation at our brands, we’re going to be pushing into the market and we’ve been and will continue to push into the market innovation in pretty much every single tier in both, bathroom tissue, diapers, femcare. We just introduced new products in adult care. So, a lot happening and we’re supporting our brands and our launches, and that’s part of it. And the other part is, as we see results improving materially, we are making the necessary provisions for variable compensation going forward. So, those are really the two main factors behind it.

When you take a look at everything else, as we’ve always done, we’re keeping everything very, very tight, and we’ll continue to look for opportunities to bring those line items down.

[Jeronimo De Guzman, INCA Investments]

Okay, makes sense. I also wanted to ask just one more question because I wasn’t sure what you were mentioning when there was a question about the traditional and wholesale channel. You mentioned some dynamics with some participants that could impact the channel. I wanted to better understand, what is that?

[Pablo González, CEO]

What we’ve been seeing over the past years is some of the wholesalers buying smaller outfits, and that continues to happen, for one. And then on the other hand, we also see retail -- wholesalers expanding to have their own stores to compete more effectively versus modern trade and investing very heavily behind productivity efforts, again, to be able to -- to be more effective out there in the market. So a lot moving, quite a few dynamics in the wholesale channel, but again, all of them to gain greater scale, greater efficiencies, and compete more effectively. So, I think it’s a good thing for the channel.

[Operator]

Thank you. And at this time, there are no further questions in the queue. So, I would like to turn the call back over to management for any additional or closing remarks.

[Pablo González, CEO]

Well, nothing really, just, thanks again for participating on the call. We really do appreciate it. And we’re here to answer any additional questions you might have at any time. And I hope you have a terrific summer. Look forward to talking to you again. Thank you.

[Operator]

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