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 México 4Q '24 Earnings Conference Call. [Operator Instructions] Please note, this call is being recorded and I will be standing by if you should need any assistance. And it's now my pleasure to turn the conference over to you, Mr. Pablo Gonzalez.

Thank you, Shelby. Hello, everyone. Thanks for participating on the call. We hope that your year is off to a great start and our very best wishes for you and your families in 2025. This time around, we'll go straight to results, and then I'll make some brief comments about our expectations going forward. Xavier?

Thanks. Good morning. During the quarter, we were able to deliver strong margins in spite of the significant FX impact and cost pressures. Our sales were MXN 13.8 billion, a 3% increase versus the fourth quarter of 2023. Total volume was up 0.5% and price and mix was also up 2.5%. Net sales were boosted by Consumer Products and exports, which grew 3.1% and 7.1%, respectively. Year-over-year, Consumer Products volume grew 2.4% and price/mix was up 0.7%. Exports volume was down 15.1%, while price/mix was up 22.2%. Sequentially, sales were up 4.7%, with Consumer Products increasing 7.8%, mainly volume-driven and away-from-home, 5.9%. In the quarter, cost of goods sold increased 5.8%. Against last year, SAM was favorable, while virgin fibers, presents and fluff compared negatively. Energy was down. The FX was higher, averaging 14% more. 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 decreased 1.1% and margin was 39.1% for the quarter. During the quarter, we took a onetime charge related to our footprint improvement process as we closed one manufacturing facility, relocating equipment to generate efficiencies. SG&A expenses were 7.5% higher year-over-year and as a percentage of sales, were up 80 basis points. Excluding the onetime charge, operating expenses grew 3%. Operating profit decreased 7.3% and the operating margin was 21.4%. We generated MXN 3.5 billion of EBITDA, a 5.6% decrease. EBITDA margin was 25.4%, a 90 basis point sequential decrease and a 230 basis points reduction versus the fourth quarter of 2023, while FX was 6% higher sequentially, and as mentioned, 14% more versus last year. Excluding the onetime charge, EBITDA was down 3.7% and the margin was 25.9%. Cost of financing was MXN 350 million in the fourth quarter compared to MXN 333 million in the same period last year. During the quarter, we had a MXN 18 million FX gain versus a MXN 26 million loss last year. Net income for the quarter was MXN 1.8 billion, with earnings per share of MXN 0.59, a 6% decrease. For the whole year, our sales were MXN 54.8 billion, a 2.8% increase and an all-time record. EBITDA was MXN 14.9 billion, also an all-time record and was 27.2% of sales. Our margin increased 110 basis points versus last year. Net income, an all-time record as well was MXN 7.8 billion and represented 14.3% of sales. We had very important savings from the cost reduction program amounting to MXN 1.7 billion. Some examples of projects that generated savings in the year are modifications to a non-wovens machine to be able to produce equivalent fabrics using less materials as well as the addition of fiber treatment equipment to increase our ability to substitute pulp and fibers with cheaper alternatives. During the year, we invested MXN 2.5 billion in CapEx, in line with our program as we focus towards technology improvements, cost reductions and efficiencies as well as capacity additions. Debt repayment was MXN 3.3 billion, and we purchased close to 32 million shares, 1% of shares outstanding. We maintain a very strong and healthy balance sheet. Our total cash position at the end of the year was MXN 15.6 billion. Our net debt-to-EBITDA ratio was 0.8x with an EBITDA to net interest coverage of 12x. Just a final comment for turning the mic back to Pablo. As you know, we usually don't hedge the peso as the carry is very expensive. This time, however, we locked in the FX for approximately half of our dollar purchases for the first 6 months at around MXN 20.7 in view of the volatility that could rise. Thank you.

Thanks, Xavier. So overall, we had another good year, another record year, particularly in profit and margins, supported by a very strong first half and a more difficult but still positive second half. All in all, we achieved what we set out to do. As we get into 2025, I don't need to tell you that we face an uncertain and challenging economic context. The growth trajectory and the exchange rate will be important drivers of our actions. Current economic indicators point to a slowing economy and private consumption. So it's critical that we accelerate our innovations, increase the investment behind our brands, take advantage of the significant growth opportunities we've identified and efficiently execute our commercial programs. We are clear on what we need to do and totally focused on execution. With respect to costs at present, the exchange rate is roughly 20% higher than last year and will be a headwind, particularly for the first half. We expect lower dollar-denominated prices for most raw materials, except softwood pulp, which will be helpful. In addition, we will carry out selective price increases and are confident we'll achieve record savings for the year. Let me briefly talk about these 2 action items. When it comes to prices, during the quarter, we will increase prices in various categories and channels, and it should be fully reflected by the second quarter. It will not be across the board, but rather based on the consumer and competitive landscape and supported by our data analytics capabilities. This increases together with the carryover from last year, as well as promotional adjustments and other activities will yield approximately 4% on average for the year. This is the base case. We'll be closely monitoring the exchange rate as well as competitive dynamics and will adjust as necessary. On the other hand, supported by KCM's continuos active and aggressive cost-reduction culture, we expect to have savings for the year ranging from MXN 1.8 billion to MXN 2 billion. We are well on our way to identifying and implementing the different projects that will allow us to reach this target, and are very confident we'll achieve record savings for the year. To give you some idea, let me briefly comment on a couple of areas: manufacturing footprint optimization, as already mentioned, during the last quarter, we took a onetime charge related to the closure of a manufacturing facility, which we had originally purchased. We moved the equipment to consolidate production in other facilities, and by doing so and taking other steps to improve our efficiencies, we expect savings to exceed MXN 250 million annually. On the supply chain front, we expect savings of roughly MXN 400 million driven by the optimization of where we buy geographies and diversification, what we buy, cheaper and more efficient grades and how we use raw materials. We see additional opportunities on the distribution front, and we'll seek to take advantage of the same to support service to our clients and streamline our distribution. With our actions and notwithstanding the current exchange rate pressures, for the year, and let me stress that, for the year, we expect to again deliver an EBITDA margin that is within our target range. Further, as we speak with you today, we continue to project a medium-term base growth rate in the mid-single digits, consistent with our trajectory. Our average growth rate for the last 3-, 5- and 10-year periods, has been 5.4%, 4.7% and 6.8%, respectively. The base growth rate will be supported by our core categories and our strong and accelerated innovation pipeline. With respect to innovation, just this past quarter, we launched significant improvements to the #1 diaper brand in Mexico, Kleen-Bebé and in [indiscernible], as well as new premium baby wipes and several new liquids sold and shampoo presentations, among others. For 2025, we will launch product improvements in every category in which we participate, and in the coming years, we will bring to market technologies and products that we have no doubt will increase consumer preference for our brands. Obviously, I can't be any more specific about it, but we are very excited with our plans. Now in addition to such base growth rates in the coming years, we expect to add a few hundred basis points by achieving double-digit growth rates and increasing the participation in total sales of categories with higher potential like wipes, kitchen towels, facial tissue, incontinence, wipers and others, as well as through adjacencies or entries into new categories and geographies. We have plans in place to support the former, and in our April call, we'll be able to share with you exciting news or expansion into an important category. When it comes to costs, as we've said many times, achieving efficiencies, reducing costs and operating in an effective mean and frugal manner are all part of our culture. For the years ahead, we have some important initiatives to continue to improve our productivity and cost structure. In summary, in the coming years, following consumer trends and needs as well as customers' requirements taking advantage of new and advanced technologies and productivity opportunities, KCM will accelerate its evolution to increase its growth target and rate and strengthen its cost position and margins. Finally, at our February Board and shareholders' meetings, we will be proposing a high single-digit dividend increase, and we will ramp up our stock buyback program in an important way. With that, let me open up the floor for questions.

[Operator Instructions] And we'll take our first question from Thiago [indiscernible] with Citi.

I wanted to discuss a bit the consumer segment's performance this quarter. We saw a very solid performance here driven mainly on volumes, right? So I'm hoping we could discuss a bit here and help us understand what drove specifically this volume performance? And maybe if we could get a bit into -- how is competition looking like price positioning. There's always an interesting discussion towards private label. So whatever interesting piece of information you can give us would be very helpful. And looking again specifically to this segment, what could we expect for 2025, right? You guys already gave a pretty broad and fantastic overview of what you're seeing into 2025, but maybe specifically on consumer segment and competition.

Thanks for the question, Thiago, and I appreciate you being on the call. As you mentioned, we had good performance on the volume side on our Consumer Products business, growing 2.4% in the fourth quarter versus last year. And a very significant improvement sequentially because volume was up 7.3% sequentially. We had mentioned that in the third quarter, during second and third quarter of last year, we have taken certain actions to reduce our promotional activity and volumes were impacted because of it, but we saw a very nice rebound during the fourth quarter that we expect to continue into 2025. And the -- supporting these volume increases, of course, are very important innovations that we've introduced into the market in the second half of the year. And as I mentioned, we are -- we have a very strong plan for this year. We're going to be making improvements in new launches in every single category in which we participate. So we expect that to continue to support our volumes going forward. Now when it comes to the market, I would say no big changes from what we've been mentioning. I mean it's always been -- there's always been very competitive categories. And with the market not growing as much as everyone would like, we're all doing our best, I guess, to innovate and try to gain some share. So we expect competition to continue as it always has in these categories in terms of 2025 when it comes to private label -- also nothing new there. As you know, there's been some push behind private label lately. Not new. We've been through this before. I mean, private label has been a participant for many, many years. And it's certainly an important participant at this stage. But again, our plan is to innovate and execute every competitor out there, then we have very important plans to do so, and we'll be focused on executing them very efficiently to stay a step ahead.

We'll take our next question from Alejandro Fuchs with Itaú.

I want to ask [indiscernible] and I appreciate all of the detailed color that you both provide on the call. The first one was on the comment Pablo, about potentially entering new geographies. I thought this was very interesting one too maybe pick your brain to see what made you decide to start looking at maybe inorganic growth and so on. And any category and specific that you are thinking has more potential? And the second one maybe for Xavier in terms of hedges, very interesting also to see the company hedging 6 months in advance. Do you think this should be something that we could expect maybe going forward as a new policy on the cost side for the company?

Thanks, Alejandro. Thanks for your question. Look, as we met in the call, our base growth rate has roughly been between 5% and 6% over the last 3, 5 and 10 years. And that's on average, of course, you've got some years that are a little higher than others. And we expect that base rate, again, on average through the years to continue to support our growth based on our core categories. But we are -- we've mentioned that we've been in a process of identifying one. How we increase the growth rate of categories with higher potential within Mexico. I mentioned some of them, and they're growing at double digits. But as they continue to grow double digits year after year, they're starting to have a higher impact on total sales, and we could -- we expect that to continue as we go into the future. But we also have been discussing that we've been analyzing the possibility of entering new categories and entering new geographies with products, not necessarily geographies where we don't currently participate but geographies where we have a limited exposure. And given our now broader portfolio where we can start to bring to those markets more categories going forward. So we're working on both. One, some of our products that we currently sell in Mexico and that where our partner doesn't participate, we're going to start expanding into new geographies. It's going to take some time for those sales to really have an impact on our overall sales, but we believe the next 3 to 4 years, they'll have a greater impact, and we're already moving ahead aggressively with that. And then as we've also said, we have been analyzing getting into either adjacent categories or categories where we see great growth potential going forward. And we've been doing strong detailed analysis on this, and there's a few categories where we're interested in participating. One, where we're quite a bit more advanced than the others when it comes to having the commercial proposal ready to go ahead. And again, at this point, unfortunately, I can't describe which that is because we're right in the midst of getting ready to launch. But I'm positive that by April, we'll be able to give you a very clear understanding of what category it is and why it is we're entering and what we expect to achieve going forward. So it's -- again, we have a strong base rate of growth but we want to increase that as we move forward in the next 3, 4, 5 years so that we have KCM with a higher potential of growth going forward. It's taking a little bit because, again, we've been very, very cautious, and we're analyzing every possibility with great detail, but we're starting to get there, and you'll see some news again in the coming quarter.

On the FX hedges, remember that given the significant interest rate differential in pesos versus dollars, buying dollars forward is always very expensive. We're talking [ $0.10, $0.11 ] each month that you buy forward. So doing hedges on a longer-term basis and on a more consistent basis, our -- in our view is something that doesn't pay off over the long term. We will continue looking at it opportunistically as we've done in the past. But even when you do it opportunistically, it's always hard to get it right. So for the most part, the answer is no. But I don't want to say we will not look at it when in moments like this, we expect volatility or when we think there's an opportunity.

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

Just a quick one on the previous answer that you provided on already expanding to new categories or maybe adjacent categories and geographies. I just wanted to get a sense if there's anything that would be out of range. Anything that may be -- right now, you can apply much light, but at least is there anything that you want to be maybe exploring just to rule out some possibilities.

Thanks for the question, Antonio. I'm not sure exactly what you mean by out of range. But let me just tell you that I mean, categories in which we are currently thinking of expanding, of course, are supported by our knowledge of the consumer, our relationships with the trade and our technological capabilities. Those are key factors for us to consider entering a new category. And of course, we're looking at categories that have a high growth potential or are currently growing or have a high growth potential and where we can come in and add value. If we can do all of those things, then we consider them otherwise, they're off the table. So that's probably what I can say so far about our process -- and again, you'll get to hear more next quarter.

Okay. And just to follow up -- not looking forward on upcoming news. Just a quick follow-up regarding the away-from-home segment. Any more color that you could provide on that?

Yes, that's a great question because it was a little slower in the fourth quarter. Again, we were stable because volume was up, which was nice. The price and mix was slightly down. And when you take a look at it sequentially, volume was up 6%. So nice volume uptick, but there was a little bit of pricing mix that was lower than last year. And that really had to do more than with mix and pricing because specific couple of categories where we got a little bit more aggressive to make sure our product was out there and our share was sustained. We put more product of those categories, particularly napkins into the market and that affected our mix a little bit. But more or [ not], the overall perspective on the business, we believe it's a business that will perform well going forward as we see a couple of things happening. One, when we talk to hotel chains, when we talk to restaurants, when we talk to what we call [ Orica ], I mean, business is going well. The occupation of hotels is strong and they expect it to stay strong for the coming year and certainly into 2026, given the World Cup and some of the things that might be happening. Restaurants I mean you can attest for yourself, but we see them back and people going out and going out to entertainment venues. So that's on the one hand. We see that side of the business strong. And on the other hand, we also expect more and more people to continue to return to the offices as more companies start to require them to come back to the office more days, and that will also be a benefit for the professional business. So overall, healthy fundamentals for the business going forward. So we expect the business to perform well in the coming year and ahead of that.

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

And congratulations on the quarter, Pablo, I think it's very impressive in the context of the FX inputs and lack of pricing that you're facing or did face. Yes. I was curious, how are you thinking about the role you're playing in the North American kind of supply chain [ ACC ] and the volatility created by tariffs? And how are you both approaching that as you kind of go forward? And then with respect to consumer value perceptions, you're fielding some phenomenal values at or below price or private label price points. How -- where are the constructions of those value propositions like in those brand tiers? And what are you doing to kind of really strengthen those because you're holding on to market share phenomenally well. And I just want to better understand the tactics that you're employing. And I understand what Xavier is saying is incredibly expensive to hedge yourselves with backs. What's the alternative like in physical? I know it's bulky, but I'm just kind of curious in terms of the potential for you to go a little bit longer in terms of some of the raw materials.

Thanks, Bob. Thanks for the question. One, let me just thank you again because I do agree that the way we were able to offset the input pressures and the exchange rate. I mean, kudos to the team. I think they did a great job and it's being able to maintain our margins where they stand given the context, I think it was -- we were happy with the result, and we know we got a tough challenge this year, particularly in the first half, given the exchange rate comparison. I mean it will most likely be during the first half, 20% higher than last year. So it'll be even tougher this year. But again, for the year, we do expect to continue to deliver the margins based on what we do very well, which is making sure we take advantage of every price and mix opportunity and reducing our costs as much as possible. And as I mentioned, we see some great, great opportunities not only this year, but going forward to increase productivity and reduce costs. So we're very excited about that. But I agree, I think the team did a great job. When it comes to supply chain, North America. As we've talked about, Bob, we continue to look at that very, very closely. Our partner is going through a reorganization and they're taking a look at their whole footprint. And we are working very, very closely with them. This year, we are going to be supplying quite a bit of product to them and very interesting new products that we've qualified with them as they see the need for additional capacity given their sales or just opportunities in terms of cost, quality and/or different kind of products. So we're right in there with them, and we'll continue to look for opportunities to think of North America supply chain as a whole versus just part of it. And we expect some very good things to come out of that in the coming years. But it's work in progress and it's continuous. When it comes to the tiers. Yes, I mean, we've -- you know we have this multi-tier, multi-brand and multi-channel strategy that has always served us well versus our competitors and certainly versus private label. So in every category, we've got pricing that is equivalent to private label, but then we have products over private label or under private label. And the key thing, as I mentioned, has always been to innovation, I mean, just making sure we can offer the best performing product at the right cost in every tier. And easier said than done, but we've done this very well in the past. And we're very excited with what we see going forward in terms of technologies and what we can bring to the market and how we can trickled down innovations from the premium tiers down to the value and even the economy tiers. I mean when you take a look at our economy tiers, they are very, very good products. Some of them even better than some value or even premium tier products in other parts of the world. And that will continue to be our tactic. I mean if we want to continue to win in this very competitive market, we need to out innovate everyone and not just do it in one tier or in one category. We need to do it in all categories, in all tiers. And we're working very aggressively on that. And again, with very good plans. And that's the way to go. We'll just continue to innovate very, very aggressively and hope to stay one step ahead.

On the increasing inventory to hedge. It's -- we've done it sometimes. But as you said, it's bulky and we have to take care of our working capital. What I'd probably say and I should have said that on my answer to Alejandro is that we have to remember that we have a natural hedge, which is that everyone that competes against us is facing a very similar cost structure and a very similar exposure to the FX. So in case of a significant movement in the peso versus dollar parity, we would probably need to move faster in prices and chances are that the competition would need to do that as well because not only they're starting -- they're having the same cost structure also they're starting with much lower margins. So.

So that's theoretically under a lot more pressure than you were and-- I understand that. Very encouraging. And again, congratulations for, I think, a great performance in a very adverse circumstance.

Thank you, Bob. Really appreciate it.

We'll take our next question from Joseph Giordano with JPMorgan.

Actually, I have those 2 simple questions. So the first one goes into this category and geography diversification. So your company is historically focused mostly on organic growth, like a very small M&As back in the day. So my question to you here is if this particular geographic diversification includes any potential M&A plans here, particularly to accelerate this process. The second one goes with the cash back story to shareholders, right? So most investing best at the company to get the dividends and the share buyback. So you already mentioned that the idea is to propose dividend growth over -- on the high single-digit territory. And so here, like on the buyback side, the wording was material acceleration. So here, I would like to understand if it's material acceleration could be like double-digit growth or probably like doubling the activity here, but those are my 2 questions.

Thank you, Joseph. Yes, again, very quickly on the geography and categories. Nothing we can share at this point when it comes to M&A. Again, we're looking at the different opportunities, but at this point, nothing that we can announce when it comes to M&A.

But we're analyzing -- we do are analyzing opportunities in M&A. And in terms of the buybacks, remember that buybacks and dividends have to come out of retained earnings. So it's going to be a balance on -- depending on how much we increase the dividend, how much we have left for buybacks. It's definitely going to be a double-digit increase versus previous year and a significant double-digit, it's not double. I don't think the numbers will -- I don't think we have enough retained earnings for doubling it. But again, it's going to be very significant.

We'll take our next question from Juan Guzmán with Scotia Bank.

Thanks for the space for question and for the initial remarks, everything was pretty clear, especially on the hedging front, which we see as a positive development in the current context. So a quick one here because most of the questions I had have already been answered. Should we expect some more of these restructuring expenses during 2025? I want to understand how are you thinking about that -- and -- or do you think you have already invested what was needed to reorganize your logistics? And in general, what are you foreseeing in terms of SG&A expenses for this year?

When it comes to the restructuring expense, Juan, again, we continue to analyze all of the opportunities to optimize our footprint and our operations overall. And most likely towards the end of the year, we will see another restructuring expense because we see another great opportunity to add productivity, add capacity to innovate faster as we integrate further our operations, but it most likely be closer to the end of the year because it will take us a while to get there. But again, the savings will be significant.

In terms of the SG&A, and the [ hold up ] first one. In terms of the SG&A, I think that if you look at the numbers of our past quarters, excluding this onetime, we've been pretty consistent in terms of SG&A as a percentage of sales at around 70% in the low 70s, we should be around there. We have some opportunities particularly on the distribution front. But those were going to be able to untap. We're going to be able to untap during the next quarter. So no significant changes there.

[Operator Instructions] We'll take our next question from Jorge Izquierdo with BTG Pactual.

My question is on Consumer Products. You mentioned top line was mainly driven by volume growth. And I was wondering if you could share more details by category performance. Any comments you could share would be helpful.

Thanks for the question, Jorge. Yes, you mentioned, Consumer Products in volume was strong. We -- as you know, we don't disclose by category, again, given the competitive nature of our markets. But what I will tell you is that in our core categories, we're seeing volume uptick. And as I mentioned, there are certain categories with higher growth potential where we're seeing a high single-digit rates of growth in volume because you had a little bit of product. So overall, our volumes in the market are not as strong as we would like to be, but the resilient volumes continue to grow, and we're taking advantage of that.

We'll take our next question from Pallavi Nagia with HSBC Bank.

Congratulations on the results. Thank you for your note on expansion plans that you've pointed out. Is there any CapEx guidance that you can give us for the year? And my next question is on if you could provide us any color on your liability management plan.

Pallavi, on the -- CapEx should remain in the coming years in the $100 million to $120 million per year on average. That's what we have identified that we require for efficiencies for product improvement, for process improvements and for the capacity additions that we may need. The second one...

When it comes to liability management plans, I hope this will answer your question. But I mean, we have a very detailed list of the risks that we see for the company currently and going forward. and plans to address them, and we share those with our Audit Committee and with the Board. And again, we know what they are. We have very detailed plans, and we're moving forward to make sure that we're okay in each and every one of them.

Is there any plans to -- how you plan to address the maturity on the USD debt that's coming in March?

Okay. Yes. Right now, unless we do some activity on M&A that requires some cash outlays. The way we're seeing it is that we will be paying off the maturity that we have this year with our cash position and with the generation for the year. And we're going to wait and see when we can refinance not only this year but hopefully some of the coming ones at better rates than what we have today.

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

Thank you, Shelby, and thanks, everyone, for attending the call. And again, our very, very best wishes for you and your families in 2025. I look forward to talking to you in April. Have a great year. Thank you.

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