Kimberly-Clark de Mexico SAB de CV

BMV:KIMBERA

Earnings Call Analysis

Kimberly-Clark de Mexico Q3 2023 Performance

In Q3 2023, Kimberly-Clark de Mexico faced mixed results. While the Consumer Products business and Professional segment grew in mid-single digits with sales overall increasing by more than 5%, exports, specifically tissue parent rolls, halved due to Asian competition and poor exchange rates, impacting the top line negatively by MXN 800 million. Despite the decrease in exports resulting in a slight year-over-year sales drop of 0.9%, the company posted a significant bottom-line increase with margins improving due to higher volumes, efficiencies, raw material price reductions, and cost-saving measures, amounting to MXN 450 million. Operating profit surged by 30.6%, and net income saw a 34.2% rise to MXN 1.7 billion. Going forward, the company anticipates improved sales and sustained strong margins.

Solid Performance with Margin Improvements

Kimberly-Clark de Mexico had an eventful third quarter of 2023 with a mixed performance in different segments. Overall sales grew more than 5% excluding exports tissue parent rolls. The Consumer Products and Professional segments continued to show robust performance with mid-single-digit growth, mainly driven by volume growth. Despite healthy volume expansion and significant growth in finished product exports, a substantial drop in tissue parent roll exports, influenced by Asian market competition and currency differences, limited total sales [...].

Exports and Cost Management

Sales stood at MXN 12.7 billion, a 0.9% decrease, while key growth areas like Consumer Products and Away From Home sectors grew 5.3% and 6.5%, respectively. The company faced a 35.4% decline in exports, attributed to an exceptional quarter for hard roll sales in Q3 2022. Despite this, converted product exports saw impressive double-digit growth. The company's strategy to manage costs paid off, as the cost of goods sold decreased by 11% thanks to favorable conditions in raw materials and significant savings from the cost reduction program, which achieved MXN 450 million in savings for [...].

Profitability and Financial Strength

Kimberly-Clark de Mexico increased its gross profit by 20%, with a gross margin of 40.2%, and saw a 30.6% increase in operating profit, closing the quarter with a 23.2% operating margin. The company's EBITDA grew by a hefty 24.5%, boasting an EBITDA margin of 27.1% which is a marked 560 basis point improvement over the same period last year. On top of operating performance, the company reported a 34.2% increase in net income, translating to earnings per share of $0.54. A strong balance sheet and a very healthy MXN 10 billion of free cash flow over the last 12 months underscored the [...].

Dividend and Cost Outlook

The company hinted at a potential increase in real terms for next year's dividend, tied to robust retained earnings expected for the year. Management is cautiously optimistic about the cost environment, with recent decreases in fiber, pulp, and resin costs, but reminds that these are from historically high levels. They expect cost stability in the near future and will use a mix of contracts and spot buying to optimally navigate the purchasing environment. This strategic flexibility in procurement is pivotal for managing future costs effectively [...].

Strategic Focus on Finished Products

From a strategic perspective, the company prefers selling finished products over tissue parent rolls, although the latter acts as a safety valve to utilize capacity that cannot be converted due to demand constraints. Selling finished products aligns with the company's aim of improving margins and sales. The executive team emphasized the importance of fully utilizing their production capacity and optimizing sales channels to maintain a balanced and profitable product portfolio [...].

Consistent Margin Expansion

The company successfully expanded its gross margins due to a confluence of factors, including higher volumes, increased prices, raw materials costs reductions, and favorable currency exchange rates. The strong margin performance was attributed to the synergistic contribution of these factors, which are expected to continue positively influencing margins in the future. This quarter's success has set a positive tone for upcoming quarters, with the hope of replicating this combination of drivers for consistent margin expansion [...].

Earnings Call Transcript 2023-Q3

[Operator]

Good day, everyone, and welcome to today's Kimberly-Clark de Mexico's Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this call is being 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 Gonzalez, Chief Executive Officer.

[Pablo Roberto González Guajardo, executive]

Thanks, Chelsea. Hello, everyone. 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 providing some perspective on our sales. Excluding exports tissue parent rolls, our sales grew more than 5%. Consumer Products business grew mid-single digits, driven by healthy volume growth, while price contributed less as we lapped important price increases. Professional posted strong growth, although much lower than in prior quarters as we also lapped price increases. All in all, our consumer and professional businesses continue to perform well, albeit at lower growth rates because of less price contribution, but with healthy volume and strong shares.

On top of that, our exports of finished product also grew significantly. Tissue parent rolls on the contrary decreased substantially, and we're roughly half those of last year. This was due to increased supply from Asian producers, significantly lower prices and the exchange rate differential.

This had hard roll sales decrease impacted our top line by more than MXN 800 million and 640 basis points and caused our total sales to be slightly below last year. On the bottom line, we again posted important increases, and we continue to improve margins. This results from a combination of higher volume and efficiencies, raw material price decreases materializing and continued progress on our cost reduction efforts.

Going forward, we expect our overall sales to improve and our bottom line to stay strong. Let me pass it on to Javier to provide details on the quarter.

[Xavier Cortés Lascurain, executive]

Good morning. During the quarter, our sales were MXN 12.7 billion, a 0.9% decrease versus the third quarter of 2022. Net sales were boosted by Consumer Products and Away From Home, which grew 5.3% and 6.5%, respectively. Exports were down 35.4% due to an exceptional quarter of hard roll sales in Q3 2022 in combination with the factors mentioned by Pablo.

Converted product exports showed important improvements and grew double digits. Year-over-year, Consumer Products had a more balanced growth with volume up 3.2% and price/mix 2.1%. We will continue monitoring prices and volumes to find the best combination going forward. Cost of goods sold decreased 11% against last year, Virgin fibers, imported recycled fibers, SAM and resins were favorable, fluff and energy compared negatively.

The FX was lower, averaging 16% less. Our cost reduction program once again had very good results and yielded approximately MXN 450 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 20% and margin was 40.2% for the quarter.

SG&A expenses were 7.8% higher year-over-year and as a percentage of sales were up 130 basis points. We continue to look forward -- we'll continue to look for additional opportunities to streamline our logistics operations while strengthening the investment behind our brand and provisioning for higher variable compensation.

Operating profit increased 30.6%, and the operating margin was 23.2%. We generated MXN 3.4 billion of EBITDA, a 24.5% increase. EBITDA margin was 27.1%, a 150 basis point sequential improvement and a 560 basis point differential versus the third quarter of 2022, underscoring our focus towards margin recovery.

During the last 12 months, we generated MXN 10 billion of free cash flow. Cost of financing was MXN 414 million in the third quarter compared to MXN 425 million in the same period of last year. Net interest expense was lower since we have less net debt. During the quarter, we had a $4 million FX loss, which compares to a $2 million loss last year. Net income for the quarter was MXN 1.7 billion with earnings per share of $0.54, a 34.2% increase. We maintained a very strong and healthy balance sheet. Our total cash position as of September 30 was MXN 18.4 billion.

Our net debt-to-EBITDA ratio was 0.9x, with an EBITDA to net interest coverage of 8x. Thank you.

[Pablo Roberto González Guajardo, executive]

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 continue to show resiliency. We expect the trend to continue and support growth in 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, recycled fiber, superabsorbent materials and resins will continue to be favorable. Fluff, on the other hand, will stay significantly higher than last year. Continued growth in our most important businesses, a better cost scenario together with the investments we're making to optimize our footprint and strengthen 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 are committed and we'll be relentless in achieving our goals. With that, let me open the floor for questions.

[Operator]

[Operator Instructions]

At this time, if you would like to ask a And our first question will come from Ben Theurer with Barclays.

[Benjamin Theurer, analyst]

I have actually 2 questions. So one, you just shared some more details on the price volume on a year-over-year basis. But I was wondering if you could give us a little more color as to the pricing dynamic third quarter versus second quarter, particularly in light of the very strong gross margin expansion, that was almost 200 basis points just sequentially.

So was there something on the pricing side sequentially? Or was it all costs? That would be my first question.

[Pablo Roberto González Guajardo, executive]

Yes, Ben, thanks for your question. Our prices sequentially were a little behind or a little lower than second quarter. So for example, in Consumer Products, it was minus 1.3%. Total for the company, given the impact of exports was minus 2.2%. So sequentially, we did see prices a little bit lower third quarter versus second quarter.

[Benjamin Theurer, analyst]

Okay. And that actually then brings me nicely into the second question. So as we move into the fourth quarter and then into 2024, how should we think about the sequential price movement? Is there going to be some sort of the recovery to be expected in the fourth quarter, which on top of what you've just said the favorable cost environment will help you on the margin side?

Or do you think there's need to be a little more cautious on the pricing side to maintain the volumes and as margin expense nonetheless, you don't have to be as aggressive on pricing. Help us frame that balance, please?

[Pablo Roberto González Guajardo, executive]

Sure, Ben. Well, first of all, as we mentioned, it's very important to understand that we've already lapped the price increases, the very aggressive price increases that we posted prior year and early this year. Third quarter, a little bit of what we saw was somewhat slightly more promotional activity given inventories that were in the channel.

As you know, second quarter is sometimes the strongest because all of our retailers, all of our clients prepare for the promotional season, so they load up on inventory then comes the third quarter promotional season. And it's not unusual that some of that inventory stays with them. So there's a little bit more promotional activity as the summer promotional season comes to an end.

Going forward, we expect, again, volume to be the main contributor prices to stay at a little over last year, but pretty much in line with what just happened in the third quarter. And going forward, for 2024, we expect volumes to continue to be healthy as the consumer, again, is showing to be resilient. And we will be defining what we want to do in pricing, most likely moving forth with some of it in the first quarter to be fully implemented by the second quarter of next year.

[Operator]

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

[Jens Spiess, analyst]

I just wanted to know if you could provide some more color on the export situation. Do you expect it to remain a headwind next quarter? Or will the comparables be much easier going forward? And Also, if you could give some color on FX. Have you made any hedges whatsoever on your cost side. And let's say, hypothetically, if the FX goes to, I don't know, '20, '21, would you be able to increase prices relatively quickly? Or how is the situation looking?

[Pablo Roberto González Guajardo, executive]

Thanks for the questions, Jens. On the expert side, I mean it's 2 tales. One, if you remember in the second quarter, both are experts of finished product and our experts of parent rolls were both lower than last year. We saw the first, so the exports of finished product rebound nicely in the third quarter, and we expect that to continue through the fourth quarter and into 2024.

We are supplying more to our partner, and it seems on a more consistent basis going forward. So that part of the business will pick up nicely again, fourth quarter and into 2024. When it comes to parent roll sales, they will continue to be a headwind in the fourth quarter, not as big of a headwind as they were in the third quarter. I mean it was really a big, big impact. They were more than half below last year. So it was really a big, big impact in the third quarter. They will still be down in the fourth quarter, but not by as much. And as we get into next year. I think our volumes will be pretty much on par with what we were able to do first half of this year, but pricing will probably be still a little bit lower given all the imports that we're seeing from Asia into the U.S.

So, I would suspect that parent rolls will be a headwind for some quarters to come. But again, much, much less than they were in the third quarter of this year.

[Xavier Cortés Lascurain, executive]

Jens, on FX I assume your question on hedges is on costs. But before that, let me just to make sure everyone is in line, say that we have all of the balance sheet hedged, so there's no exposure there. And on costs and purchases, we have no hedges at this moment as we've mentioned in the past, every peso that moves has an impact of approximately 150 basis points on our margin, good -- the peso move swiftly? Could we be able to pass that on prices that's going to depend on a lot of factors.

But if that puts pressure on everyone, we could -- would definitely consider that.

[Pablo Roberto González Guajardo, executive]

And let me just add there very quickly that given our analysis, even if the peso was somewhere in the '19 range, we would still be seeing some improvements on our cost side. If it were to be above that, then as Xavier said, we will need to analyze the situation, but most likely would move faster with pricing into the market.

[Jens Spiess, analyst]

Okay. So the '19 having still a benefit is assuming all else equal in terms of pulp, recycled fibers, resins and et cetera?

[Pablo Roberto González Guajardo, executive]

Yes, just as we're seeing them right now.

[Operator]

Our next question will come from Pedro Fabregat with Compass.

[Pedro Fabregat, analyst]

Just one quick question following up on Jens' question. In terms of the level of inventories that you guys have for fiber or derivatives. What would you expect in terms of margins for the fourth quarter and 2024?

[Xavier Cortés Lascurain, executive]

Well, as you know, we don't give guidance on sales or margins. What I can tell you is as we just mentioned during the call that we believe, given the -- how some of the cost -- some of -- how we expect some of the raw materials to behave in the coming quarters, that being pulp, recycled fiber, super assorted materials and resins to continue to be favorable and just fluff would be significantly higher than last year.

Then we would expect our trend on costs to continue through the fourth quarter and into 2024. Early to say still what we see for all of 2024 because, as you know, things are pretty volatile. But so far, here for the near term, we continue to see a positive picture on our cost side.

[Pedro Fabregat, analyst]

And just one follow-up question on that answer. Does it make sense for you to increase the level of inventories, especially on fluff to defend somewhat the margins or it doesn't make sense?

[Pablo Roberto González Guajardo, executive]

Well, we've -- what we expect on flow, it will be higher than last year in the fourth but sequentially, it should be a little bit better in the fourth quarter versus third quarter. So on the contrary, we're trying to have a very lean inventories and fluffs so that we can take advantage of any prices coming down.

But we're always taking a look at that to figure out whether it makes sense to have a little bit more inventories if we believe prices will go up or stay very, very lean on inventories when we believe that prices might be stable or come down. It's more of the latter at this point than the former, again, because prices are -- reduction in material prices has materialized and fluff will be coming down from high levels, still higher than last year, but it will come down sequentially.

So we're trying to maintain our inventories as lean as possible to take advantage of any price decrease out in the market.

[Operator]

Our next question will come from Bob Ford with Bank of America.

[Robert Ford, analyst]

Congratulations on the results. Are you seeing any Asian imports in Mexico or just in the U.S.? And are you happy with your current market shares and industry pricing behavior? And how are sales across channels, especially the modern versus the traditional trade? And how do you expect the current COFECE investigation to impact asymmetries across clients and channels?

[Pablo Roberto González Guajardo, executive]

I hope I answer all of the questions, Bob, because that was quite a few of them. First, I think you asked about imports from Asia into Mexico, we're seeing some of it, but mostly to the U.S. And again, what usually happens is on the second quarter, we used most of our capacity to produce finished product in Mexico, again, as sales pick up during that quarter in preparation, for the summer promotional season. So we that means we walk away from the U.S. market to some extent.

And in this case, as logistics costs have come down, and there's quite a bit of capacity in Asia given that China has not popped as everyone expected after the COVID reopening. Some of that capacity is finding its way into the U.S. and into markets that we participate in, but that we retracted a little bit from in the second quarter.

So as we started to come back in the third quarter, of course, there was some purchasing that had been done for some of our -- by some of our clients of products in Asia and that made it a little bit harder to put a product into the U.S. It's leveling off. It's looking a little bit better here in October and going forward. So -- but again, most of the product going into the U.S., a little bit maybe coming into Mexico, but the majority really going into the U.S.

In terms of just the dynamics out there, I mean, we are seeing, as I mentioned, or we saw a little bit more promotional activity to get rid of some of the inventories that were a hangover from the promotional season during the summer, but nothing too significant. And let's see how fourth quarter behaves. We expect a more -- a continued rational approach. When it comes to being happy or satisfied with our shares, I mean, we're gaining share in the most important categories. But as we've said, we're never satisfied, and we have a very, very aggressive innovation pipeline, and we'll continue to act and support our brands aggressively out there and hope to continue to improve our shares in the coming quarters.

When it comes to the different channels. I think all of the channels are pretty much holding their ground. I think they're all doing a good job and all of them focusing on their strength. And it's a very competitive market, but so far, we see growth in all of them. And going forward, we expect that to continue again because most of them are focused on their strengths and they're executing well. And then when it comes to COFECE, unfortunately, cannot offer any comments on that matter, Bob, I hope you can understand that.

[Robert Ford, analyst]

I do.

[Pablo Roberto González Guajardo, executive]

Did I answer all of the questions?

[Robert Ford, analyst]

Except the last one. I mean, I think that was the best question.

[Operator]

[Operator Instructions] And our next question will come from Rodrigo Alcantara with UBS.

[Rodrigo Alcantara, analyst]

Sorry, 2 quick ones here, if I may. The first one would be if any -- any idea, how should we think about the dividend for next year? I know it's too early, right to say, but just given the strong rebound in net income, what could be a fair assumption for next year? And the second question would be, I mean, for Pablo -- Xavier, I mean it looks like all the stars are getting aligned right now for the tax environment. Looks like, I mean, the only one that it's given you still some troubles with fluff, right, as you said, on energy. Just curious here on -- I mean when looking about industry reports, kind of like a point pulp prices coming down significantly, like rates of 30%, 35% in dollar terms. Just curious if this is -- I mean, close to what you're essentially seeing the ground that you're experiencing there in your negotiation with suppliers or there are some other considerations there to be longer-term contracts or something that could make this picture different to the numbers that I see on pulp prices, for instance. Those would be my 2 questions.

[Pablo Roberto González Guajardo, executive]

Sure. First, on the dividend, as you know, and you mentioned this early, early to say, but just -- it's important to remind everyone that, in our case, I mean, the payment of dividends is linked to retained earnings, which will be strong this year. So maybe what I can say, again, reminding everyone that it's early, it's that we will probably move forward with a dividend that will mean an increase in real terms versus the dividend of last year. But again, that's something we will take a look in January, February so that we can take to the Board and then to the shareholders meeting. But we're excited with where we see that going.

Two, when it comes to costs, I mean, yes, the cost of fibers and pulp and some resins have come down. Let's just remember that they're coming down from historical highs. So, we saw an incredible uptick of about 15 to 18 months, and now we've seen those prices come down significantly from those high levels. What will happen going forward, really hard to tell. I mean, what we see most recently here in the market is that prices are stabilizing. There are some efforts by some industry participants to increase prices, particularly in China with little to no true impact so far, but there's no doubt that they will continue to try to move that forward. But at this point, probably stability is what I can say about the costs now.

What it means -- what that means going forward. As you know, there's -- we use a mix of contracts and spot buying in the market. So we'll be very diligent and try to negotiate with our suppliers as we always do the best prices available in the market and we'll determine how much we put in contracts and how much we leave out for spot markets depending on how we feel this can behave going forward. So we're right in the process of some of those negotiations, and we'll see how that turns out for 2024.

[Rodrigo Alcantara, analyst]

Okay. That's helpful. And I know that you don't hedge right for pulp or I don't know actually there is hedging. But are you able to perhaps [ 6 at 6 ] prices for that, like long term with its suppliers and something that can be done on the contracts?

[Pablo Roberto González Guajardo, executive]

There's a whole bunch of options. I mean, you can negotiate a contract with a fixed price. Sometimes we negotiate contracts where there's a fixed formula. So -- and it adjusts every quarter. So depending what's happening in the market, it reflects some of the increases or decreases, maybe not all of them. But again, it's a combination of what you negotiate and again, what you put into contracts and what you leave as a spot buying. And it really depends on how we believe prices will behave to the extent we believe that prices will continue to go lower, then we leave a little bit more spot margin for us to purchase some of them out there. So again, early for 2024, the process of analyzing it and negotiating and we expect for the short term and into 2024, stability in prices as we see them right now.

[Operator]

Our next question will come from Luis Willard with GBM.

[Luis Willard Alonso, analyst]

Good morning. Thanks for the space for questions. So just a quick one, Pablo and a follow-up on exports. I mean, as you stated, it's a two-tale story, volume from rolls coming down, but perhaps compensated with better margins from sales of finished products. So delving into 2024 and from a strategic point of view, how do you say both things? I mean, perhaps it makes a bit more sense from a profitability point of view, having more care of finished products, but I don't know what are your thoughts there?

[Pablo Roberto González Guajardo, executive]

Sure, Luis. I mean, it's always better for us to sell finished product than just tissue parent rolls. But remember, it's really a -- what we sell in parent rolls is just the capacity we have that we cannot convert into a finished product because of demand. So it's a safety evolve, if you will, that we can always put this tissue parent rolls in the U.S. and get some for it. And of course, with all of the advantages that it brings with using all of our capacity, so all of the advantages and costs. But no doubt, the more we can put in finished product, the better our sales and the better our margins.

[Operator]

Our next question will come from Juan Guzman with Deutsche Bank.

[Juan José Guzmán Calderón, analyst]

Pablo, Xavier, Salvador and the whole team there, congrats on the quarter results. Some of my questions have already been answered. So I just have a follow-up on the cost performance. And I'm sorry, if these have already been asked before. To understand this better in terms of contribution, what would you say were the main drivers for gross margin expansion between pricing and commodity costs during the quarter. And in which magnitude? In the past quarter, you mentioned that most of the gains came from the pricing side. So I'd like to understand how this performed in Q3 and where we could expect going forward?

[Pablo Roberto González Guajardo, executive]

Thanks for the question. I mean it's -- again, it's a combination on the one you have higher volumes, which, of course, are a help in terms of efficiencies. We also have higher prices. And then you have the raw materials coming down and then FX comparing favorably versus last year. So it's really the 4 components that came together, and that's why we were able to post strong increases and strong margins for the quarter. We expect volumes to continue to add to this going forward. We will monitor prices to see what it is we need to do on that front, and we expect both raw materials and FX, of course, to continue to be positive going forward.

So hopefully, we can have the whole formula contribute in the coming quarters as it did in this third quarter.

[Operator]

And at this time, there are no further questions in the queue.

[Pablo Roberto González Guajardo, executive]

Well, thank you all for participating in the call. Glad to take any further questions that you might have. If you can just let us know. Give us a call, and I'm glad to get them on the line with you. And hope you all have a tremendous end to the year and look forward to talking to you early in 2024. Thanks so much.

[Operator]

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

[Pablo Roberto González Guajardo, executive]

Thank you, Chelsea.