Kimberly-Clark de Mexico SAB de CV

BMV:KIMBERA

Earnings Call Analysis

Stellar Annual Results and Positive Outlook

In a year marked by robust performance and strategic wins, the company ended the fourth quarter on a high note, with sales rising 10%, excluding export of tissue parent rolls. Consumer Products business achieved high single-digit growth, Professional segment realized double-digit growth, and finished product exports more than doubled, albeit from a low base. This upward trajectory resulted in record annual sales of MXN 53.3 billion, a 4.4% increase. This propelled net income to MXN 7 billion, 13.2% of sales, representing year-over-year earnings per share growth to MXN 2.28. With a bolstered EBITDA reaching MXN 13.9 billion and a cost reduction program delivering MXN 1.75 billion in savings, the company demonstrates a solid financial health. Cost of financing dropped, and there's a proposal for a double-digit dividend increase on the table, anticipating strength in domestic consumption supported by job growth and spending in an impending election year.

Kimberly-Clark de Mexico Concludes 2023 with Robust Growth and Escalating Profits

Kimberly-Clark de Mexico reported a promising close to the year with a fourth quarter showcasing a 4.5% surge in net sales, amounting to MXN 13.4 billion. This uplift was primarily fueled by a 6% increase in volume, despite a 2% decline in price/mix. The Consumer Products and Away from Home sectors led with increases of 6.9% and 10.7% respectively, contributing to the company's dynamic performance. However, the quarter did face headwinds from a 13.1% contraction in exports, primarily due to a prior-period high in hard roll sales.

Cost-Reduction Triumphs Amidst Rising SG&A Expenses

Significant progress in cost reduction, with savings of approximately MXN 450 million, predominantly at the cost of goods sold (COGS) level, helped offset the 19% surge in Selling, General and Administrative (SG&A) expenses. The savings stem from efficient sourcing, materials enhancement, and process improvements. This strategic cost management was pivotal in delivering a gross profit leap of 22.9%, solidifying an impressive 40.8% gross margin for the quarter. The meticulous attention to expense control was further reflected in the reduced cost of financing, down from MXN 419 million to MXN 333 million, due in part to lower net debt levels.

Operational Efficiency Translates to Earnings Momentum

The operational prowess of Kimberly-Clark de Mexico translated into a robust 25.8% increment in operating profit, underpinning an elevated operating margin of 23.8%. The Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) surged by 25.5%, hitting MXN 3.7 billion, indicating a strong 27.7% margin. This robust financial health was mirrored in the year-end revelations, with net sales clinching an all-time high of MXN 53.3 billion, a 4.4% yearly growth, and EBITDA peaking at MXN 13.9 billion. The earnings per share (EPS) for the year also saw a commendable 35.7% ascent to MXN 2.28.

Anticipating Sustained Growth Amidst a Resilient Economy

Company projections remain positive, buoyed by a resilient economy and strong domestic consumption. Anticipated job growth, wage hikes, and social programs are projected to catalyze category growth. The company's innovation pipeline and strategic brand investment are expected to bolster market positions. Although sequential cost inflation is predicted, raw materials costs in the first half are expected to be favorable. These factors, combined with continuous optimization of operations and rigorous cost reduction measures, set the stage for the company to realize another robust year ahead.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, everyone, and welcome to today's Kimberly-Clark de Mexico's 4Q '23 Earnings Conference Call.

[Operator Instructions] Please note, this call is being recorded, and I will be standing by if you should need any assistance.

It is now my pleasure to turn the conference over to Pablo Gonzalez.

[Pablo Roberto González Guajardo, executive]

Thank you so much. Thanks for participating on the call. Our very best wishes for you and your families in 2024. But as usual, I'll make some preliminary remarks and pass it on to Xavier to provide details on the fourth quarter results as well as for the whole year. We had a good quarter and it capped a very good year.

Let me start by providing some perspective on our fourth quarter sales. Excluding export of tissue parent rolls, our sales grew 10%. The Consumer Products business grew high single digit, driven by healthy volume growth. Professional posted double-digit growth and our exports of finished products were more than double those of last year, albeit from a low base. All in all, our consumer and professional businesses continued to perform very well with healthy volume and strong shares.

Tissue parent rolls exports on the contrary decreased substantially and were roughly half those of last year. This was due to increased internal tissue consumption and significantly lower prices due to excess capacity in the Far East and the lower exchange rate. This hard roll sales decrease impacted our top line by almost MXN 600 million and 550 basis points.

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, better raw material prices, and continued progress on our cost reduction efforts. For the year, we achieved record top line and bottom line together with strong margins. Going forward, we expect our overall sales to grow and our bottom line to stay strong.

Let me pass it on to Xavier to provide details on the quarter.

[Xavier Cortés Lascurain, executive]

Thank you, Pablo. Good morning. During the quarter, our sales were MXN 13.4 billion, a 4.5% increase versus the fourth quarter of 2022. Total volume was up 6% and price/mix was down 2%. Net sales were boosted by Consumer Products and Away from Home, which grew 6.9% and 10.7%, respectively. Year-over-year, Consumer Products volume grew 5.4% and price/mix was up 1.5%.

Exports were down 13.1% due to strong hard roll sales in Q4 2022. Converted product exports more than doubled. Cost of goods sold decreased 5%. Against last year, virgin and recycled fibers, SAM and resins were favorable, while fluff compared negatively. The FX was lower, averaging 11% 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 22.9% and margin was 40.8% for the quarter. SG&A expenses were 19% higher year-over-year, and as a percentage of sales, were up 207 basis points. Variable compensation accruals and distribution expenses are up, and we have strengthened the investment behind our brands. We are investing to improve our footprint and streamline our logistics operations.

Operating profit increased 25.8% and the operating margin was 23.8%. We generated MXN 3.7 billion of EBITDA, a 25.5% increase. EBITDA margin was 27.7%, a 60 basis point sequential improvement and a 460-basis point differential versus the fourth quarter of 2022, underscoring our focus towards margin recovery.

Cost of financing was MXN 333 million in the fourth quarter compared to MXN 419 million in the same period last year. Net interest expense was lower since we have less net debt. During the quarter, we had a MXN 26 million foreign exchange loss, the same as last year. Net income for the quarter was MXN 1.9 billion with earnings per share of $0.63, a 35.7% increase. For the whole year, our sales were MXN 53.3 billion, a 4.4% increase and an all-time record. EBITDA was MXN 13.9 billion, also an all-time record and was 26.1% of sales.

Our margin increased sequentially every quarter. Net income was MXN 7 billion and represented 13.2% of sales. We had record savings from the cost reduction program amounting to MXN 1.75 billion and earnings per share for the year were MXN 2.28.

During the year, we invested MXN 1.7 billion in CapEx in line with our program as we focus towards the normal improvements, cost reductions and efficiencies as well as capacity additions. We maintained a very strong and healthy balance sheet. Our total cash position at the end of the year was MXN 19 billion. Our net debt-to-EBITDA ratio was 0.9x, with an net -- EBITDA to net interest coverage of 9x.

Thank you. Back to Pablo.

[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 job growth, wage increases, remittances and handouts through social programs, together with higher spending in an election year, to help sustain this trend and continue to 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, we expect sequential increases but raw materials will still compare favorably in the first half of the year. Continued growth in our most important businesses, a relatively stable cost scenario, together with the investment we are making to optimize our footprint and strengthen execution as well as our consistent and effective focus on cost reductions should allow us to achieve another strong year. We're excited with the opportunities we see going forward. And as always, we're committed and we'll be relentless in achieving our goals.

Finally, our February Board and shareholders' meetings, we will be proposing a double-digit dividend increase to recoup some ground since in 2021 and 2022, we were not able to increase the dividend in real terms. With that, let me open the floor to questions.

[Operator]

[Operator Instructions] And we'll take our first question from Jens Spiess with Morgan Stanley.

[Jens Spiess, analyst]

Pablo, Xavier, thank you, congrats on the very strong results. I just wanted to ask on the exports. How do you see them going forward? Will -- have things normalized? Do you see improvements sequentially? What can we expect there? Also I missed the number you mentioned about volumes and mix growth, if you could please repeat that? And also, any color on recycled fiber prices would be great.

[Pablo Roberto González Guajardo, executive]

Sure, Jens. Thanks for being on the call. First, on the export side, again, there's 2 sides to this. One, the partner has to do with the experts of finished product, grew nicely in the fourth quarter from a lower base but it grew nicely, and we expect that business to continue to grow and to contribute to growth overall in 2024, every -- in every quarter in 2024. So that part of this business is going well.

On the sale of the parent rolls, we expect that one to continue to be a drag. As we will sequentially be increasing our volumes. But again, pricing is down because of a lot of imports from Asia into the U.S. given the low shipping rates and the overcapacity they have in Asia, plus the depreciation of the dollar versus the peso. So that will continue to be a drag going forward but hopefully, less so than it's been in 2023.

When it comes to the breakdown between volume and prices, again, for the total -- for the quarter, where our sales were 4.5%, volume was up 6.3% and price and mix was down 1.8%. For Consumer Products, specifically, where sales were up 6.9%, volume was up 5.4% and price and mix was up 1.5%. Away From Home, if you also want that, data sales were up 10.7%. Volume was up 6.7% and price and mix was up 4%.

Then finally, on recycled fibers, we are seeing in recycled fibers and in fluff overall, some pressure to the oxide. So we expect sequentially to see some price increases. But again, raw materials will still be lower than last year, at least for the first half of the year. And then there's a lot of volatility in the market. So we'll see what happens for the second half. So sequential increases but still lower than last year.

[Operator]

We'll take our next question from Bob Ford with Bank of America.

[Robert Ford, analyst]

Congratulations on the quarter and all the best in the new year. Pablo, can you give a little update on dynamics in less penetrated categories like the facial tissue, wet wipes as well as some of the new application opportunities in nonwoven products. And if I remember correctly, you have some debt maturing later this year. And I was wondering how you're thinking about amortization versus maybe buybacks in addition to the big step-up in dividend you're proposing?

[Pablo Roberto González Guajardo, executive]

Sure. Thanks for your questions Bob and likewise all the best for you in 2024. Look, on penetration of some of the smaller categories, we had a terrific year on facial tissue with double-digit growth. Wipes continues to grow very nicely. Kitchen towels also with double-digit growth. So we're seeing some of the categories with lower penetration continue to gain share in the market and continue to be -- to grow in preference by consumers. So we expect that those businesses to continue to perform well in the coming years and over time become a more important part of our business and a very profitable part of our business. So we'll keep on innovating on them and pushing them hard to make that happen as quickly as possible.

On the nonwoven side, we continue to take a look at what else we can do with the technology, not only in terms of using it to continue to improve our products very aggressively. We have some great plans on that this year but also to see what else can we do with the technology. Plans are evolving nicely, but nothing to -- nothing that I can share more specifically at this point. But again, things continue to look promising.

[Robert Ford, analyst]

If I understand correctly, And just before Xavier...

[Pablo Roberto González Guajardo, executive]

Yes, go ahead.

[Robert Ford, analyst]

Just -- I want to get some clarification. It sounds as if there are some opportunities to improve existing products by adding nonwoven components. I just wanted to make sure I understood it correctly.

[Pablo Roberto González Guajardo, executive]

Absolutely. Because we continue to improve our technology, and we're bringing softness. We're bringing strength and we're bringing other qualities to our products. And as we've done so in the premium segments, we'll probably start to trickle those down. So we can expect quite a bit of improvements in our technology and in our products this year.

[Robert Ford, analyst]

It's exciting.

[Xavier Cortés Lascurain, executive]

Hello, Bob, on the debt, you're right, we have a maturity early this year, it's in April. It's a U.S. [indiscernible] bond with $250 million, which -- with the hedges that we did at a time, it's going to be about MXN 3.5 billion. If you recall, we refinanced that with the [indiscernible] we placed last year. So we don't have the need to go to the markets for this. This has been already refinanced, as I said, as our maturities for next year and even part of 2020.

As to your question of financing this versus the dividend. I think it's very independent. We will be proposing a dividend -- a dollar digit increasing the dividend to the Board and the shareholders meeting, and we should have the funds both from what we have already from last year's earnings and cash generation and what we expect the year to pay the dividend without the need for an additional funding.

[Operator]

We'll take our next question from Rodrigo Alcantara with UBS.

[Rodrigo Alcantara, analyst]

Pablo, Xavier, can you hear me? Sorry.

[Pablo Roberto González Guajardo, executive]

Yes, clearly.

[Rodrigo Alcantara, analyst]

Yes. Two questions here, if I may. The first one on Consumer Products. Quite impressive the growth of 5.4% in volumes, right? Just [indiscernible], if you can comment here on what does this imply in terms of market share gains, both in terms of volume share gains and perhaps some value share gains? And what would -- I mean, if you can help me understand here on the commercial and pricing strategy that have allowed you to grow this way. Fair to say that it's considered the price increase of 1%, perhaps going to be more promotional or investments in your brands? Just to understand what is driving this volume growth would be very helpful. Also very quickly on the CapEx, if you also -- for 2024, I expect any capacity additions for this year or will it be pretty much maintenance CapEx?

[Pablo Roberto González Guajardo, executive]

Sure, Rodrigo. First on the volume and value shares. What I can say is that the 5.4% volume increase for the quarter meant that we gained share in our most important categories, and that was also true for the whole 2023. Again, behind renovations and behind our commercial execution our volumes are increasing and our shares are increasing as well.

In terms of volume and price mix strategy, as you know, we pursued a strategy of increasing prices as we saw raw materials increase during 2022, early 2023. We have, to the most part, lapped those price increases. So going forward as happened this past quarter, we expect a more balanced growth between volume and pricing going forward.

Pricing has 2 components, of course, we'll look at any additional pricing that we need to implement in the market given some of the cost pressures that we might face. But on the other hand, also, we are very diligent in our revenue growth management program and again to look at every investment we make to make sure we get the most out of it and that we maximize and optimize the use of our resources and that also has an overall impact on pricing as we manage that way. So that's -- those are the 2 components.

[Xavier Cortés Lascurain, executive]

Rodrigo, for the CapEx, CapEx should be at around again between $120 million. It will be a mix, a combination. It will include efficiencies, innovation, strong capacity, not primary tissue capacity but definitely converting capacity and personal care products capacity as well as additional tissue converting footprint and rationalizations.

[Operator]

We'll take our next question from Ben Theurer with Barclays.

[Benjamin Theurer, analyst]

Yes. Pablo, Xavier, congrats on the results. The -- 2 quick ones I had. So one, you've obviously talked about the consumer environment and the strength into 2024. So as we think about it and the dynamics usually an election years is always a little more front-end loaded and not so much back-end loaded. So if you would have to kind of give us a split on your expectations. Fair to assume that the first half is going to make up for most like an easier part of what the year is? And how do you feel about just post-election if there's like in prior years, some sort of a hangover risk or so? That would be my first question.

[Pablo Roberto González Guajardo, executive]

Sure, Ben. I mean, hard to tell because, yes, you're right, on the one hand, there's certainly going to be more spending in the first half of the year given that it's an election year. But overall, when you take a look at what's happening with the economy in terms of job growth, wage increases, remittances continue to play an important part, handouts through social programs, direct -- and foreign direct investment given nearshoring. I mean I think we overall expect a strong year throughout. There might be a little bit more on the -- again, on the spending for election early on but I think some of the other factors might have a bigger impact in the second half of the year. So we expect the economy to perform relatively strong throughout the year as has been the case actually in the past couple of years.

In our case, comparisons are a little higher for the first half of the year than for the second half. So we'll see how it all balances out. But again, in the end, we expect to post another strong year in terms of growth and in sales and bottom line.

[Benjamin Theurer, analyst]

Okay. Perfect. And then just on that, actually, my follow-up question is like the growth you expect top versus bottom line. Do you see potential of margin expansion begun with like that current level of already over 27% on EBITDA? Are there anything -- are there things that can be saved upon? Or do you see tailwinds on FX cost wise, just to help you keep that margin at these levels or maybe even expand like in prior years and very much in the past, you used to have sometimes higher periods of margins. So is '24 potentially one of those years?

[Pablo Roberto González Guajardo, executive]

Well, hopefully, I mean, we've got some tailwinds, as you mentioned, the exchange rate being one. Costs that are at least the first half of the year will still be lower than last year. We need to figure out exactly how we move on pricing. And hopefully, we can keep our volumes strong and that also brings quite a bit of a benefit.

On the other hand, again, sequentially, we will see some cost increases. So we've got some tailwinds, I think, more than headwinds but it's a little volatile. What I can tell you is that we expect our margins to remain strong and if some of the scenarios that we're looking into do materialize, there is the opportunity that our margins can continue to strengthen, yes.

[Xavier Cortés Lascurain, executive]

And let me add my usual caveat of the FX.

[Benjamin Theurer, analyst]

The white card, right?

[Xavier Cortés Lascurain, executive]

Yes.

[Operator]

We'll take our next question from Renata Cabral with Citibank.

[Renata Fonseca Cabral Sturani, analyst]

I have 2. Regarding the productivity program that you are taking and have already posed on great results. Could you maybe give some color on what exactly you could possibly do in 2024 for further improvements and the timing that we could see the benefits in the result? And my second question is related to possible trade downs in the consumption in 2024. We saw that in 2023, that has not happened overall to your portfolio just to see your overall view for this for 2024.

[Xavier Cortés Lascurain, executive]

Renata, welcome to our calls. As you know, our cost reduction programs, mostly, the improvements come from either access to new materials, new processes, product improvements. Most of it comes from new technologies. So as far as we continue looking behind implementing those new technologies and we invest in implementing them because a lot of this comes from CapEx. We believe there's always going to be opportunities for most -- for more savings initiatives.

For this year, we don't have a number yet but we've been very consistent for the past 7, 8 years in achieving somewhere around 5% of COGS in savings. Of course, some of this is reinvested into product improvement. But we should be in that ballpark. Again, we don't have a number yet, and we are working hard to achieve it. And I think that's as much as I can tell you.

[Pablo Roberto González Guajardo, executive]

Let me add a little bit on that echoing what Xavier has said. I mean, just remember that in our case, it's really not a cost reduction program. It's a culture. And Kimberly-Clark always wanted to be very, very lean, very agile, very frugal. So it's our culture always to look for productivity improvements and cost reductions.

This past year, we saw great benefits from our footprint reoptimization in bathroom tissue, and those will carry into 2024. We will be doing some of the same in some other of our tissue businesses. And again, it's a constant. It's not that we have just a program, it's a constant that we're looking to optimize how we operate them. Although we don't have a specific number for the year yet, as Xavier said, we have, for many years, achieved over 5% of costs. And we have a list initially between costs that will come through from '23 to '24 and other initiatives that we have.

I'm going to say that at least we have identified already about MXN 900 million to MXN 1,000 million for the year. So again, we'll have another strong year when it comes to productivity and cost reductions.

[Xavier Cortés Lascurain, executive]

And your second question of the down trading you're right, we have basically seen no doubt trading in general, and this has been the case even in these past few years where we increased prices significantly going forward, hard to forecast but that's not something that we have on our cards at this moment.

[Operator]

We'll take our next question from Ulises Argote with JPMorgan.

[Operator Instructions]

[Ulises Argote Bolio, analyst]

Congrats on the strong results. Just to follow up there on the FX and Xavier's kind of caveat there. So anything around hedges that we should be over for this year? Do you see maybe some opportunity there to do any hedge at the current levels? Or are you thinking about that for the year?

[Xavier Cortés Lascurain, executive]

At this moment -- Ulises, at this moment we do not have hedges for the FX. As you know, we're always taking a look at those and see there's a good moment to enter if there's ever a good moment to enter because as you know, it's very expensive to catch the peso [ versus ] dollar. It's about $0.11, $0.12 per month. So going on your [indiscernible] costs due about MXN 1.25. Over the long term, we've always thought that it's not very efficient but as I said, that's something that we always keep on the radar, and we take a look at if we do something, you'll know in due time.

[Operator]

[Operator Instructions] And It appears that we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

[Pablo Roberto González Guajardo, executive]

Thanks and thank you all for participating in the call. Thanks for your questions. And again, very, very best wishes to you and your families in 2024. We hope you all have a terrific year. Look forward to talking to you next quarter. Thank you.

[Operator]

That concludes today's teleconference. Thank you for your participation. You may now disconnect, and have a wonderful day.