Kimberly-Clark de Mexico SAB de CV

BMV:KIMBERA

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for your patience in holding. We now have your presenters in conference. [Operator Instructions]

It is now my pleasure to introduce today's first presenter, Mr. Pablo González. Please go ahead, sir.

[Pablo Roberto González Guajardo, executive]

Thank you. Good morning, everyone. I hope you and your families are healthy and safe, and we wish you all a great 2021.

Let me start by saying that we had another good quarter and overall a very strong year. We set out our priorities and guidelines early on to navigate through the challenging environment we have faced. We focused on executing them, and that allowed us to deliver strong top and bottom line growth to keep our margins healthy and among the best in the business sectors in which we participate.

During the quarter, we reinforced the various measures and actions to protect the health of our employees and their families, #1 priority. We maintained our contact with the authorities and communities to assist during the pandemic and mitigated the impacts.

Also, the actions we have taken to guarantee our continued operation as well as that of our suppliers to ensure all of our customers and consumers have access to our products have allowed us to continue to operate our facilities without any meaningful disruption.

On the sales front, despite private and B2B consumption still being affected by the COVID confinement and its impact on the economy, several categories performed well, particularly those related to personal hygiene, health and protection, and we continue capitalizing on new growth opportunities. Altogether, our top line grew for the 25th consecutive quarter, driven by a healthy balance, volume and price.

On the cost side, raw materials, other than fibers to be recycled, were flat or compared positively. And together with our increased productivity and very good results on the cost reduction program as well as expense containment, allowed us to deliver solid bottom line growth in spite of the peso depreciation. So we were able to produce another good quarter and very good year in the midst of a very challenging environment.

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

[Xavier Cortés Lascurain, executive]

Good morning. During the quarter, our sales were MXN 11.6 billion, a 7% increase versus the fourth quarter of 2019. Volume grew 3% and price and mix were 4%. The latter because we achieved better price realization, particularly from reduced promotional activity.

Consumer products grew 8%. Away from Home product sales were down 12%, reflecting the effects from the COVID-related restrictions, particularly in offices, hotels and restaurants. Finally, our exports business performed very well with overall sales growing 48%, and sales of converted products more than doubling versus last year.

Cost of goods sold increased 9%. Against last year, pulp, fluff, superabsorbent materials and resins compared favorably in dollars. Imported and domestic recyclable fibers and energy prices compared negatively.

Finally, the FX was higher, averaging 9% more. The cost reduction program, an important component of our business DNA, had once again very good results and yielded approximately MXN 350 million of savings in the quarter. These savings are at the cost of goods sold level and are generated by sourcing, materials improvement and process efficiencies all contributing in a meaningful way.

Gross profit increased 4.7%, and margin was 38.5% for the quarter. G&A expenses were up 1.6% and as a percentage of sales, were 90 basis points lower. We achieved better efficiencies in distribution expenses and continue to find ways to invest more efficiently behind our brands, balancing advertising with points of sales promotion.

Operating profit increased 7%, and the operating margin was 22.9%, in line with last year and representing a sequential improvement of 160 basis points. Net income for the quarter was MXN 1.6 billion, an 11.1% increase with earnings per share of $0.52. During the quarter, we generated MXN 3.1 billion of EBITDA, a 5.3% increase and EBITDA margin was 26.8%.

Cost of financing was MXN 423 million in the fourth quarter compared to MXN 398 million in the same period last year. Net interest expense was 10% higher from increased debt as earlier in the year we prefinanced late 2020 and 2021 maturities to take advantage of favorable market conditions. In the quarter, we had a MXN 3 million foreign exchange loss, which compares to MXN 15 million loss last year.

For the whole year, our sales were MXN 46.7 billion, a 7% increase. Our EBITDA was MXN 12.5 billion, a 14% increase and 27% of sales, and our net income was MXN 6.1 billion, an 18% increase and represented 13% of sales. All of these results were records for KCM. We have a very strong balance sheet, which reflects solid cash generation from EBITDA with MXN 10 billion of free cash flow generated in the year. Positive results from working capital management and, in general, the priority we set at the beginning of the year to protect cash.

Our total cash position was MXN 19 billion. Our net debt-to-EBITDA ratio was 1.1x with an EBITDA to net interest coverage of 8x.

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

[Pablo Roberto González Guajardo, executive]

Let me first make a few additional comments about the year that just ended. We have said all along, our #1 priority has been and will continue to be the health and well-being of all our personnel and their families. To that end, we established and executed strict health protocols and have provided extensive support both medical and emotional to our KCM employees.

Very unfortunately and despite the strict protocol supply, we very deeply regret the passing away of 25 of our colleagues due to COVID. We have worked with the authorities in several organizations during the pandemic and have supported the communities where we operate. All in all, our COVID-related expenses have been more than MXN 100 million.

Strong results translated into an earnings per share of MXN 1.97, an increase of 18% versus last year. Given this result, profit churn will again be over MXN 800 million. Our personnel are highly skilled and committed, delivered very good results and all will share in the benefits. This has always been the case at KCM, and we are very proud.

Finally, it's worth mentioning that we continue to advance our sustainability goals and our results have been recognized by being included in the S & P / BMV Total Mexico ESG Index, the FTSE4Good Index Series and both the Dow Jones MILA and Dow Jones Emerging Markets Indices. Only 5 Mexican companies achieved their required scores to be included in the latter. In the coming months, we will update our results as well as communicate our new goals.

2020, KCM delivered good results, and we will continue to strive to do what's best for our employees, consumers, shareholders, communities where we operate and, of course, Mexico.

Now let me turn to 2021. We will continue to operate in an unprecedented and uncertain environment. Moments like these with KCM's positioning, resiliency, adaptability, strategic model and very strong balance sheet allow us to not only successfully navigate through the challenges but also capitalize on the opportunities.

Mexico's economy is experiencing a sharp contraction and the impact on domestic consumption is evident. We believe we can continue to grow because we sell essential products that have very solid positions in defensive categories with strong and leading brands and a successful multi-brand and multi-tier strategy. We will face tough comparisons in the first half, but we'll achieve healthy top line growth for the year through a combination of volume, price and mix, and by taking advantage of our strong innovation pipeline and developing opportunities and technologies for which we will increase investments.

On the cost side, we expect pressure from pulp, superabsorbent materials, and more pronounced from resins. We have plans in place to mitigate this impact, which, together with our operating efficiencies, our cost reduction program and hopefully with relatively strong peso should allow us to also post bottom line growth and achieve healthy margins in 2021.

To this end, cost reduction program will continue to play an important role. The fact that many of these savings are technology-driven, together with our intention to continue actively looking for developing and investing behind new products and process technologies, gives us confidence that we should be able to keep delivering good results in this very important area.

Finally, consistent with our long track record of shareholder-friendly policies, on our February Board and shareholders' meetings, we will be proposing a dividend increase in real terms and that we resume our share buyback program.

Summary, we had another good year, and we believe we can continue to deliver good results for our stakeholders.

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

[Operator]

[Operator Instructions] Our first question comes from Bob Ford with Bank of America.

[Robert Ford, analyst]

Pablo, can you talk a little bit about how KCC maybe thinking about the structural changes in U.S. consumption? And any possible reconfiguration of U.S. capacity versus leveraging KCM a little bit more aggressively and over a longer period of time?

[Pablo Roberto González Guajardo, executive]

Sure, Bob. Great to hear from you. Look, we know that demand in the U.S. for certain products, particularly tissue products has continued to be very strong and both companies and retailers have not been able to restock appropriately. So demand is still, again, pretty strong. And we have been, of course, supporting KCC during this period and have been having conversations with them about the supply chain, let me call it, for North America to see how we can participate in the supply chain and together, become more efficient. So we're having those conversations, and they will continue throughout the year. In the meantime, we will continue to do all we can to support our partner.

[Robert Ford, analyst]

Understood. That makes great sense. And then, Xavier, could you explain the lower revenue number in U.S. GAAP? I just want to understand or be able to reconcile the differences in growth in the 2 accounting methodologies.

[Xavier Cortés Lascurain, executive]

It comes mostly from the FX used for translation book.

[Operator]

Our next question comes from Jens Spiess with Morgan Stanley.

[Jens Spiess, analyst]

Congrats on the results. So my question is on the 4% price/mix increase, you mentioned that was mainly due to better price realizations, but approximately how much was it price versus mix? And also, second question, if I may. The strong results in the consumer product category, the, I think, 8% revenue increase, how much of that was volumes and how much of that was price?

[Pablo Roberto González Guajardo, executive]

Sure. Thanks. And you're not coming across too clearly. So I hope we answer your questions. Otherwise, please let us know. With regards to price realization, I mean we did increase prices on some SKUs and/or channels and even in some tiers. So we did some selective pricing throughout the quarter. We reduced our promotional spend and achieved what we believe were promotional efficiencies, and that really drove the increase in pricing. Mix was pretty much flat versus last year. And when it comes to consumer products and the 8% increase, it's basically half and half between volume and pricing.

[Operator]

Our next question comes from Luis Yance with the Compass Group.

[Luis Yance, analyst]

Happy New Year and congratulations on the outstanding results for 2020. Just 2 questions on my side. One is on capital allocation, and you kind of mentioned some of the initiatives you have to present to the Board in terms of the dividend and in terms of the buyback, but how should we think about CapEx? I mean, CapEx was pretty low. Do you kind of go back this year to the usual $100 million? Are you still going to be conservative and despite the big volume increase, you don't really need much of that?

And how do we think about that balance between dividends and buybacks, especially given that you didn't only have a great year in terms of net income, you also have a very strong balance sheet to begin with at this point. So just to get a sense on that would be helpful.

[Xavier Cortés Lascurain, executive]

Luis, we are ramping up our CapEx program. And it's very likely that in the coming quarters, we'll see higher numbers than what we've had in the most recent ones. We have -- we invested ahead, as we've said before. We had the benefit these past 2 years that we had invested ahead in capacity particularly in major capacity in tissue. So we didn't know that -- we didn't need that, sorry, for the recent past. But in other categories and in other products, we will be investing more both in capacity as well as in product innovation. So that's it.

[Pablo Roberto González Guajardo, executive]

If I can add. We see, no doubt, good opportunities on technologies out there to improve our products, increase flexibility, gain efficiencies and reduce costs. So as Xavier said, we will be increasing our investments behind them this year. Now when it comes to dividend and share buybacks, again, we will be proposing to the board meeting and shareholder meeting in February, an increase for the dividend in real terms, that's still to be determined and then to be approved by both as well as resuming our share buyback program. So stay tuned, we will have more information on that once we have those meetings, and we get our plan approved.

[Luis Yance, analyst]

Great. And one last question, if I may. I mean you mentioned for 2021, you still expect some top line and bottom line growth, which is impressive given the tough comps you have from 2020. So if you could just give us some general sense, what's going to be the main driver? I'm assuming volumes are going to have a tough time given the high comps. Is it going to be mainly pricing? Is it going to be mainly mix? And then how do we think about that?

And in terms of your margins, you've always talked about kind of 25%, 27% as the appropriate margin. You're closer to the high end of that. Could you sustain that given your pricing initiatives and what you're seeing in terms of raw material trends?

[Pablo Roberto González Guajardo, executive]

Sure. We hope that we can achieve top line that's balanced as we did this quarter. That certainly would be very, very good. We'll see how the year develops. First half of the year, particularly in volumes, as you mentioned, will be a little bit tougher, given some of the comparisons we have, which were volume heavy in the first half of the year, given COVID and some categories that show a spike in volumes because of the pandemic. So first half will be a little bit more complicated when it comes to volume. But so far, our categories are growing in volume. They have certainly slowed down, but we are seeing growth in volume. And again, we will be very focused on price realization, both through selective price increases and promotional effectiveness. So we will certainly strive to achieve a balance for the year, again, for the year between volume and price.

And with respect to margins, again, we -- there will be, as we mentioned, some pressure, at least initially, on the cost side on pulps and resins. On pulp, it really comes because of strong demand in China. So spot tons are being diverted to that market and producers are trying to increase prices. There's a doubt out there as to whether these increases will hold and will be able to continue. Many believe this is temporary and will not last, but we'll see how this develops in the coming months.

Now even if we see some of those increases, it is important to note that we have contracts in place that, one, guarantee supply, and two, will help mitigate any increases, again, if the increases hold. So those contracts are very, very important to us right now. It is a contract market versus a spot market at this point, and we have -- we do have those contracts, which will help us.

And other than that, again, our plans to achieve greater price realization to operate more efficiently and to continue to reduce costs. We've been very successful in doing that over the last 5, 6 years. You know it's our culture, it's our DNA, and we'll continue to be very aggressive on that. And all of that is within our span of control and then further, let's see what happens with the exchange rate. I mean, at current levels, it would be a tailwind for the year, not in the first quarter, but for the year. So if we can execute and some of these things go our way, we believe we can sustain the margins that we've been able to post. I'm sorry for the long-winded answer, but I hope it gives you a better perspective as to where we stand.

[Operator]

Our next question comes from Ben Theurer with Barclays.

[Benjamin Theurer, analyst]

Congrats on the results. Actually, most of the questions just were answered. Just one follow-up, and you had in your prepared remarks, I mean, obviously, the macroeconomic environment is not precisely supportive and easy. So thinking of some of the cost pressure you've just elaborated on pulp, on resin, et cetera, how do you -- how confident are you about the ability to actually push through pricing in 2021, considering that the consumer is definitely stretched, and we're seeing difficult this year? Just to understand how you think of applying a pricing strategy throughout the year. Is it selective from certain brands? Is it across the board? Is it more back-end driven? So just to understand a little bit the dynamic over the year and what you're planning to do on pricing.

[Pablo Roberto González Guajardo, executive]

Sure. I mean, we really have to see how this evolves, as you say, how domestic consumption moves forward. I mean, there are some things that could certainly aid in that end, but the social program reaching more people, remittances. I mean, they were over MXN 40 million last year, and we expect them to continue to be strong this year. If the U.S. economy continues to plow ahead and if the new package that the Biden administration is proposing gets accepted and there's more support, then the U.S. economy might grow at higher levels, and that will certainly aid our export segment sector in Mexico, and that could certainly help the economy going forward.

So yes, it's a very tough environment, and we -- with the pandemic hitting us hard, but there are certain things that could help the economy move forward, and we hope that that's the case. So we'll monitor very closely how the domestic consumption is evolving. We'll monitor very closely how costs, as I just mentioned, evolve and act accordingly.

For now, what we're thinking about doing is, again, focusing very much on achieving price realization through selective pricing. So not across the board, but looking at different opportunities, channels, peers, SKUs, et cetera. And certainly, how we're investing our money between gross sales and net sales and trying to be much more efficient there promotionally and with discounts. And we hope that provides enough support and that help -- certainly gives us at least inflation or a little bit more, and we'll take it from there. We'll see how it evolves. And if costs continue to be an important headwind, we'll decide if we need to do something else. But right now, our strategy, again, is realization through selective pricing and greater efficiencies between gross sales and net sales.

[Operator]

Our next question comes from Pedro Fabregat with the Compass Group.

[Pedro Fabregat, analyst]

Congratulations on the results. One question -- follow-up question on cost savings. You mentioned that they -- I mean, they have been helping a lot to offset the FX pressure and the raw materials pressure. But do you have a specific target for this year? And how much of the previous cost savings and 2021 cost savings come at the gross profit level and how much do they come from the SG&A level?

[Pablo Roberto González Guajardo, executive]

Thanks for participating, for your question. We don't currently have a target for cost reduction program this year. As you know, we always target at least 5% of cost of goods sold. We've been able to achieve that over the past 5 years very successfully. And certainly, this was a very good year, a record year on our cost -- this 2020 on our cost reduction program, roughly MXN 1.7 billion. And some of that will run into 2021, and we're already working on additional actions during the year. So again, we hope we can have another strong cost savings year, and that will certainly help with -- ameliorate any cost pressures that we see.

Now most of it really comes at the cost level. There's a little bit that comes at the expense level, but the vast, vast majority of it comes at the cost level, and we expect that to continue going forward.

[Operator]

Our next question comes from Mohammed Ahmad with FG (sic) [ FGP ].

[Mohammed Ahmad, analyst]

It's FGP. My questions have been asked already. So I just wanted to say congratulations on a pretty good result and hope that 2021 is better for us all.

[Pablo Roberto González Guajardo, executive]

Thank you, Mohammed.

[Operator]

Our next question comes from Luis Willard with GBM.

[Luis Willard Alonso, analyst]

Guys, I guess I'm going to repeat the same as Mohammed just said. My question was already answered. So I want to I think -- just wishing you a good year.

[Pablo Roberto González Guajardo, executive]

Thanks, Luis. And to all of you again, our very, very, very best wishes for 2021.

[Operator]

Our next question comes from Nicolas Larrain with JPMorgan.

[Nicolas Larrain, analyst]

Apologies, if my line is a bit choppy. I just wanted to follow up a bit on these contracts, Pablo, you mentioned. Could you elaborate a bit more on what the duration of those? And also on the potential buybacks, please remind me if those shares are normally held in treasury or canceled at the end?

[Pablo Roberto González Guajardo, executive]

Sure, Nicolas. Well, on the contracts, again, on most of our raw materials, we've got contracts for the year that were negotiated, I would say, early fourth quarter to mid-fourth quarter. And most of them, I would say, in favorable conditions versus what we're currently seeing. So we're happy that given that, again, it's a contract market right now, not a spot market, that we have those contracts in place, and we'll be taking full advantage of them to help our results and certainly to have the supply we need going forward. And that's -- again, that's in pulp, that's in resins, that's in many other raw materials. So very, very glad to have those contracts in place and they last a year. And I think our purchasing unit did a great job in negotiating those.

When it comes to the shares that we buy back, those are canceled. They don't stay in treasury. Always at our shareholder meeting, we ask for -- we tell them how much we bought through the year, and we cancel those shares, and that will continue to be our policy.

[Operator]

Our next question comes from Rodrigo Alcantara with UBS.

[Rodrigo Alcantara, analyst]

I was actually -- if you could, please, Pablo, summarize your view here on the competitive landscape that you observed in 2020. Would you say that the company that Kimberly may have gained some market share in 2020. I was wondering if you can comment, please, about this -- about the competitive dynamics that you saw throughout 2020. That would be my question.

[Pablo Roberto González Guajardo, executive]

Sure, Rodrigo. As you know, our categories have always been very, very competitive. And overall, I think the -- having said that, overall, the market pricing and promotion dynamics that we saw in 2020 and that we're seeing early in 2021 are really not significantly different from prior years. We'll see how that -- how the year evolves based on how the economy goes and how domestic consumption goes. But again, so far, we're not seeing anything that's significantly different from prior years.

And when it comes to shares, we had a pretty good year. I mean, we improved shares in most of our categories and certainly the most important ones. So -- and we're confident that with the plans we have in place and the innovation and pipeline of innovation we've got going forward, we feel very -- we feel good about what we have, what we will be offering to the consumer and putting out there in the market. So we are happy with how that's evolving. So again, nothing significantly different from a competitive standpoint. Share is looking good, and we've got a good pipeline going forward. So we'll be monitoring how things evolve during the year and act accordingly.

[Operator]

[Operator Instructions] At this time, we have no further questioners in the queue. I'm sorry, we have one more. Our next question comes from Paul Trejo with Goldman Sachs.

[Paul Trejo, analyst]

Congrats on the results. Just one on the exports. Again, super strong growth, even though the FX was actually a headwind. So a lot of volume here. Can you just talk about the mix of products, rolls versus finished? And also how this sets up the outlook for just potentially growing relationship and integration with Kimber Corp?

[Pablo Roberto González Guajardo, executive]

Sure, Paul. Yes, our exports sector did very, very well, and it's a combination of strong higher growth sales, but even more importantly, finished product sales and that has to do with finished product that we sell in different countries in Latin America, but even more importantly, finished products that we've been selling to or partnered Kimberly-Clark Corporation to aid them in -- during this period, which, again, we saw very important demand in the U.S. market.

So we're working with them very closely, very diligently. And as we've been able to supply more product and with good quality and good costs, we've been able to grow that business with them. We actually doubled our business in finished product on the export side. And quite frankly, we -- and we believe, sorry, that we can double it again this year.

And as I mentioned earlier in the call, it's -- given the success that we're both having through this scenario, we will continue to analyze opportunities to work together and have KC de México become part of the supply chain of KC North America. And we will see how that develops, but we're very, very excited with the opportunities. And we're very glad we've been able to help through this period and look forward to continuing to work with our partner and continue to extend that relationship and increase our export sales to them going forward.

[Paul Trejo, analyst]

Just a quick follow-up. Is it fair to say that some of this potential investment the next few years has in mind the growing volumes of sales of exports and -- to Kimber Corp and other regions?

[Pablo Roberto González Guajardo, executive]

Well, we certainly hope so. Again, this, to some degree, it has started as just support to them during this period. As -- again, they've seen that we can work together very well and that it makes sense for both of us to do it given quality, given costs, et cetera. We hope we can have discussions on just overall capacity for North America and how can we be part of that and insert ourselves into the supply chain. Certainly, the intention, that's what we're starting to talk about and hopefully, that will evolve well, and it will be getting a winning solution for both Kimberly-Clark Corporation and Kimberly-Clark de México.

[Operator]

Our next question comes from a follow-up from Mohammed Ahmad.

[Mohammed Ahmad, analyst]

Sorry, just on that peaked my interest a little bit. What would be the rough breakdown of your export revenue between the 3 categories you mentioned, which is supplying into KCC, exporting finished products, whether countries and then the intermediate products?

[Pablo Roberto González Guajardo, executive]

I would say from our exports, Mohammed, probably still about -- let me here quickly check, but about 2/3 are still higher growth sales and the rest is finished products. But again, that will be changing here going forward because we expect higher growth sales to still be strong this coming year, but we expect to double finished product sales. So that -- those ratios will be changing for 2020 -- for 2021.

[Mohammed Ahmad, analyst]

Okay. And is the finished product primarily into U.S. or is it largely into Lat Am?

[Pablo Roberto González Guajardo, executive]

Sorry, I didn't quite catch that one, Mohammed. Can you say it again?

[Mohammed Ahmad, analyst]

The finished product sales, are they primarily...

[Pablo Roberto González Guajardo, executive]

You're not coming through Mohammed, for some reason. I'm sorry.

[Mohammed Ahmad, analyst]

That's okay, sorry. Bad connection.

[Pablo Roberto González Guajardo, executive]

Sorry about that, but you're breaking. So we can't hear you, but we'll be glad to take this offline. We're making the numbers here, Mohammed, as I was answering. Xavier pinned the numbers together. And it's close to what I was saying. It's a little bit over 1/3 the product sales. It's about 40% of the sales of export. That's finished product, and the rest is hand rolls. But again, we expect very, very strong growth in the product -- finished product side. So those ratios for 2021 will change in favor of finished product.

[Operator]

At this time, we have no other questioners in the queue.

[Pablo Roberto González Guajardo, executive]

So thank you all again for participating in the call. Glad to continue to talk to you, if you have any further questions in the coming days. And most important, again, we hope you and your families are healthy and safe. Stay healthy, stay safe, and we wish you all a great 2021. Thanks so much.

[Operator]

Thank you. Ladies and gentlemen, that concludes this morning's presentation. You may disconnect your phone lines, and thank you for joining us today.