Kimberly-Clark de México, S. A. B. de C. V. (KIMBERA) Earnings Call Transcript & Summary

Good day, everyone, and welcome to today's Kimberly-Clark de Mexico's 4Q '22 Earnings Conference Call. [Operator Instructions] Please note, this call may be recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Pablo Gonzalez, CEO.

Good morning, everyone. Thanks for participating on the call. Our very best wishes for all of you and your families in 2023. I'll start by making some brief comments on our results. We had a good fourth quarter and capped continued sequential improvement throughout the year. We posted strong sales growth driven by pricing but volumes improved sequentially behind consumer-led innovations and effective commercial execution. The record raw materials and commodities inflation continued to be headwind, but the combination of price greater efficiencies and a strong end of the year on our cost reduction efforts allowed us to significantly increase our profitability as well as our margins. We come a long way compared to the fourth quarter of last year and still has some room to improve. Our strategies and execution are rendering better results, we are poised to build on them. Let me pass it on to Xavier for a detailed review of the results.

Thank you. Good morning. During the quarter, our sales were MXN 12.8 billion, a 9.2% increase versus the fourth quarter of 2021. Net sales were boosted by consumer products and away from home, which grew 11.7% and 13.3%, respectively. Exports were down 14.3%. We will continue monitoring prices and volumes to find the best combination going forward. Cost of goods sold increased 1.4%. Against last year, every commodity and raw material category compared negatively, except for San and resins. Pulp imported and domestic recycled fibers compared negatively. On the personal care side, Slots also compared negatively, while some was slightly down and resins were lower. Finally, energy compared negatively. The FX was lower, averaging 6% less. Our cost reduction program once again had very good results and yielded approximately MXN 500 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 27.5% and margin was 34.7% for the quarter. SG&A expenses were 3.7% higher year-over-year and as a percentage of sales were 80 basis points lower. We continue to look for additional opportunities to streamline our operations while strengthening the investment behind our brands. Operating profit increased 54.1%, and the operating margin was 19.7%. We generated MXN 3 billion of EBITDA, a 41.5% increase. EBITDA margin was 23.1%, a 160 basis point sequential improvement and a 530 basis points improvement versus the fourth quarter of 2021, underscoring our focus towards margin cover. Cost of financing was MXN 419 million in the fourth quarter compared to MXN 420 million in the same period last year. Net interest expense was lower despite our incremental gross debt because we earned more on our cash investments. During the quarter, we had a MXN 26 million foreign exchange loss, which compares to a MXN 13 million gain last year. Net income for the quarter was MXN 1.4 billion with earnings per share of MXN 0.46. For the whole year, our sales were MXN 51.1 billion, an 8.9% increase and an all-time record. EBITDA was MXN 10.9 billion, a higher overall number despite the strong cost increases and was 21.4% of sales. Our margin increased sequentially every quarter, and we are on the right track and closer to our long-term target. Net income was MXN 4.9 billion and represented 9.7% of sales. We have record savings from the cost reduction program amounting to MXN 1.7 billion. During the year, we invested MXN 2.1 million in CapEx, in line with our program as we focus towards technology improvements, cost reductions and efficiencies and capacity additions. We maintained a very strong and healthy balance sheet. Our total cash position at the end of the year was MXN 16.9 billion. Our net debt-to-EBITDA ratio was 1.5x with an EBITDA to net interest coverage of 7x. Thanks. Back to Pablo.

Thanks, Xavier. The past couple of years have been challenging on many fronts, particularly the unprecedented cost environment. 2023 will not be an exception. Economies are expected to slow down, if not go into recession, and consumers will be stretched. For the most part, raw materials are expected to trend down, but many are at historically high levels, and the speed of the amount of the adjustment is not clear as the impact of China's reopening is uncertain, and suppliers act to protect their pricing. However, we expect domestic consumption to be resilient, particularly in our categories and raw material prices to come down as the year progresses. These together with a robust innovation pipeline and strong support behind our brands, 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 achieve good results in 2023 and reach our target margins by the end of the year. Finally, our February Board meeting on March shareholders' meeting, we will be proposing a dividend that will be in line with last year's. We are pleased, although never satisfied with our progress and excited with our opportunities. We're committed and will be relentless in achieving our goals. Thanks again for participating on the call, and now we'll take your questions. Thank you.

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

Congrats on the results. Just wanted to ask on the -- on costs, how they have evolved sequentially. What do you expect in coming quarters? We have seen pulp prices starting to decrease. And also in the U.S., recycled fibers, some of them decreasing quite substantially. So do you expect to see more tailwinds in that regard? And also, if you could maybe give some color on the CapEx you expect for 2023 for this year.

Sure, Jens. Thanks for the question. First, on the costs, as we mentioned, we expect of the year to end -- to start, sorry, with a pulp still on a very high note. They should correct as the year progresses, but the speed and amount of correction is still not very, very clear. But again, as the year progresses, pulp should certainly trend down. Fibers are starting to turn around, and hopefully, of the amount and the speed at which the turnaround will accelerate, but we are to see a little bit of turnaround in fibers, although again, we're starting the year at a very high level. Pulp will be higher than last year, significantly higher as there is less capacity there in the market, the more demand, where we see some improvement is in resins and superabsorbent materials already in the first quarter, and that should be stable throughout the year, at least that's how we see things currently. So again, key thing is how fast and when and by how much pulp starts to turn around here, hopefully in the second quarter and beyond. When it comes to our CapEx, it will be pretty much in line with this year's, which was higher than prior years because we're making important investments in capacity and innovation and in our footprint.

Okay. Perfect. And is that CapEx -- how much of that is approximately sustaining CapEx?

How much is that -- sorry, we didn't get that one, Jens.

How much is approximately sustaining CapEx of that amount?

As you know, the way we see CapEx usually is we -- it's not very much what we assigned directly to sustain because we usually take advantage of the profit of the -- what normally would be called sustained project to improve efficiencies, to add some capacity. So it's really hard to separate it. Most of it will have some will come with -- sorry about that. We'll come with some benefits in terms of flexibility, cost savings or capacity.

We'll take our next question from Sergio Matsumoto with Citi Group.

Yes. Pablo, and have happy New Year, and thank you for taking my question. My question is on the margin recovery that you're seeing and just having an eye on the 25% to 27% range, the medium-term. How do you feel about that? Is it like an easy because comparable? Or do you see potential obstacles? And what do you think of the time frame to achieve that?

Thanks, Sergio, and also have a terrific 2023. Look, as I mentioned, we expect the first quarter to be a challenge as some raw materials continue to be at historical highs. And -- but we expect them to start to come down, although we have not seen some important moves, particularly in pulp but they will trend down during the year. So as we move into the second and third quarters, as it stands now, we should see sequential improvement, and we believe that by the end of the year, we should reach our long-term target. Again, as things stand now, but it's very, very volatile, but we expect to reach our target by the end of the year.

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

Congratulations on the quarter. Pablo, how are you thinking about innovation and pricing over the coming year as well as competitor discipline and the consumers' ability to accept further price increases? And then I was also hoping you might be able to touch on exports given the contraction in the fourth quarter. And I'll just lay out a couple of more questions right away. Outside of the dollar debt or near-term supply contracts that you might have hedged, do you have any other long-term hedges on? And how are you thinking about the FX and given the strength of the gain the last couple of months? And then last year -- or the last question was you had a record year for cost savings. Can you discuss what's been mapped out so far for this year and maybe some general indications of where you're finding those incremental costs and expense opportunities?

Thank you, Bob. That's -- thanks for participating on the call, and that's quite a few questions let me take them one at a time. First, on innovation, very, very excited with our-- with our pipeline and innovation and what we've done in the fourth quarter, what we're doing this first quarter and for the next couple of years. Just to give you an example, in the fourth quarter, we introduced Contex zero, which is, we believe, the first flushable biodegradable anti in pretty much in the world. I know there's another effort going on in -- Great Britain on this, but this is the first one to market. And that's kind of innovation we're pushing forth. And in this quarter, we're improving our products in all of the tissue categories and all of the tissue tiers. So very excited about what that will bring in terms of opportunities for growing in the market. And then we will see important innovation in all of our categories throughout the year. And again, a very robust plan for the next coming years. In terms of pricing and discipline, I mean, we've -- as you know, over the past here, we limited a few increases and that, together with our price realization efforts compounded the effect and certainly helped our results. As we move forward, we will be very careful to monitor which categories are still facing intense cost pressures and what we need to do with them. And decide when and by how much we should move forward. But what we've seen so far is, for the most part, competitors lagging but following. So they lag in timing, but they eventually follow. And as that has happened in the couple of categories, we have lost a couple of share points, we've been able start to get that back. So pretty much in line to what happens when we lead and then they follow. And for pricing, again, we'll take a look at how the raw material environment continues to evolve and which categories are still under pressure and then what it is we need to do moving forward. But we do expect for this year to be -- show a more balanced growth between volume and pricing. On the export side, which is really what brought down our volumes for this quarter because we saw good performance on consumer products, good performance on a professional business even with sequential volume improvements. But exports was a headwind. And it was headwind not on the sale of parent rolls -- that went very well. It was really on our sales expert finished product to our partner as they've seen some of the categories over the past quarters decelerate a little bit on volume. We were required to provide less to them over this past quarters. And it seems it will be the case for first quarter. We are hoping that things will accelerate over there, and we'll be able to get a little bit more volume starting in the second and certainly in fourth quarter of this year. On the cost savings side, then I'll ask Xavier to comment on the FX. But on the cost savings side, we are -- we had a very -- another very good year. As you know, this is not just a process that we follow every year. It's just a part of our culture, and it's a relentless focus on our part to find savings to be more efficient and to be as frugal fit and agile as we can. And we're excited because at this point in time, we have identified a higher number or a better number in savings for this year versus where we were last year, again, at this point in time. Still, we have a lot of work to do to I'm sure we get to at least the number we achieved this year. But given the way we're starting, we feel pretty confident that we should be at least at MXN 1.5 billion, hopefully higher than that.

Bob, on the FX, we have some partial hedges that will only go for next 2 or 3 months, I think, with those and the pricing that we have of this pulp peso right now, our comp will be very positive on this at least first 2 quarters. Going forward, we'll have to -- we'll have to wait and see. You ask for a view, I really I don't think that we can answer much on that, except that hopefully, that hopes that it stays at a low level to where it is.

And Xavier, just to make sure I understood on your FX positions for the next couple of months. Is that something that's rolling? And when would you expect to start to cycle into mixed stronger than '19?

There's something we did Bob, in terms of hedging that will be a little bit higher than where the peso stance at this point, still a much, much better levels than where we were at this point last year. And by second quarter, we should be able to start seeing the -- reflecting the prices that you're seeing in the market currently. And the hills are only partial -- so we're definitely seeing a benefit.

We'll take our next question from Antonio Hernandez with Barclays.

Congrats on the results. My question is regarding in fact, of course, have quite a lot, and you mentioned that the UCLA more of a balance in terms of pricing and volumes for this year, but what are the trends in the PC that you've seen lately? Anything worth highlighting there?

Antonio, I'm going to try and answer the question as best I understood it because you're not coming out too clearly, but if I understand correctly, you want to understand a little bit better about the balance of volume and pricing. I can tell you for the fourth quarter, particularly on consumer products and our professional business, really the growth came from pricing still. But as you look at it sequentially, fourth quarter versus third quarter, we did see improvements in our volumes. So they were quite a bit in better shape by the fourth quarter. Coming into the year, we expect the CapEx to be a little bit more balanced. We will be very careful in analyzing where we keep further pricing and the cost pressures that we're seeing. There are certain categories where we will really focus on just being a little bit more aggressive in terms of volume and getting back some of the share that we lost as we pushed pricing forward. And understanding that consumers will be stretched this year as inflation continues to fight their budget. We will be, again, managing a strategy that will try and balance a better balance both volume and pricing going forward. I hope that answers the question.

Thanks for that. I just wanted to nominate more about elasticity. Are there certain categories will market share losses that you're giving back took place or the different categories, what's worth highlighting there in terms of elasticity and competitive pressure that you're giving back in terms of categories, what are you seeing?

Right. Look, in terms of the categories where we will share when I take a look at our different categories, we're really talking about 3 or 4 where we saw some slight decreases in share. Most of our categories are either up or increasing for the year. So that's a really, really good sign particularly after a year where we needed to push pricing a little harder. On the categories where we've seen some share decline, again, we led price increases, but we've seen competitors follow. And as they've done that now with our innovations and commercial execution, we're starting to see our shares come back. So it's a dynamic that usually happens when we put price into the market. And -- but we will not answer very closely this year, what's best for each category and then decide how to move forward as hopefully some of the volatile we're seeing in raw materials subsides.

We'll take our next question from Roy Wheeler with GBM.

So I just wanted to pick your brain Pablo and Xavier about what do you think about capital allocation in the coming years I mean you talked about increasing activity and some CapEx-related tuition but a lot down a bit more on dividends, I mean the last couple of years have been rough in terms of the environment, but free cash flow has been very great. So how do you think about your policy, I don't know, say, in the coming couple of years?

As you know, we have the dividends we have to pay from retained earnings. That's the reason why the last couple of years, we have not increased the dividend. That we will be paying this year will come from previous year's retained earnings. We will be using most of our bullets to make sure that we keep it pretty much in line, very close to what we paid last year. Going forward, it's going to depend if things continue to improve, we will definitely consider increasing it again and maybe and hopefully, taking again the share buyback program. But again, it all comes down to net earnings, not necessarily cash. And so it's a little bit independent of CapEx and that cash we will have to--we will have, and we need to work to make sure that we have those that net income and those earnings to increase it and get back to that.

[Operator Instructions] We'll take our next question from Ulises Argote from JPMorgan.

Pablo, Xavier, congrats on the results and sequential improvement and all the best for the year. I just had one follow-up on Jensen's earlier question around expectations there on the price of pulp. So there is a lot of news there on some capacity coming in the year et cetera. I just wanted to know if this is considering your base case? And maybe we could see better trends there if the capacity does come in line at the expected rate. I know there have been some delays there. So I just wanted to see what's kind of being baked in your base?

Thanks, Ulises for the question. And yes, absolutely, as that capacity comes in, that allow put a little bit of pressure on pricing on pulp. Unfortunately, as you mentioned, that has been delayed somewhat. But as it comes into the market, it moves affect. And that's why with experts rolling in for right now is the ship turn and it should gain some speed in second and third quarters of this year. That's the current expectation. And then in the coming years, with that capacity that cost should be pretty much flat going forward. So it's a matter of when it happens and how fast it happens. So far, we've kind of seen any goods. I think we'll start to see in the coming quarters and get capacity comes in that should be very, very helpful for the market.

It appears that we have no further questions at this time. I will now turn the program back over to Pablo Gonzalez for any additional or closing remarks.

Not much more to say just again, thanks so much for participating on the call and our best wishes for you and your families in 2023. Look forward to being in contact with you. Thanks so much.

That concludes today's teleconference. Thank you for your participation. You may now disconnect.