Kimberly-Clark Corporation

Good day, everyone, and welcome to the Kimberly's first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. You may register to ask questions at any time by pressing the star and 1 on your touch-tone phone. You may withdraw yourself from the queue by pressing star 2. Please note this call may be recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to CEO Pablo Gonzalez. Please go ahead.

Thank you, Nikki. Hello, everyone, and thanks for participating on the call. As usual, I'll make some preliminary remarks and pass it on to Javier to provide details of the first quarter results. Let me start by saying we had another good quarter. Our sales were a new record for the company. Both consumer products and away from home grew double digits, and volumes were slightly higher than last year and improved sequentially. On the profitability side, our progress towards our target margins continues, and despite some additional cost pressures due to new contracts taking effect at the beginning of the year, we managed to improve sequentially and boast strong growth. All in all, a strong start to the year. Javier. Thank you. Good morning, everyone.

Sorry. Hello again, everyone.

I don't know if you were able to hear me. During the quarter, our sales were 13.5 billion pesos, a 7.8% increase versus the first quarter of 2022, and a new record. Net sales were boosted by consumer products and away from home, which grew 12.3% and 23.1% respectively. Exports were down 31.1%. Sequentially, sales grew 6%, supported by volume growth, while price mix was flat. We will continue monitoring prices and volumes to find the best combination going forward. Cost of goods sold decreased 0.1%. Against last year, every commodity and raw material category compared negatively except for sand and resins. Energy also compared negatively, while gas went down. The FX was lower, averaging 8% less. Our cost reduction program once again had very good results and yielded approximately 400 million pesos 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 efficiency. Gross profit increased 25%, and margin was 36.3% for the quarter. H&A expenses were 10.8% higher year over year, and as a percentage of sales were up 40 basis points. We continued to look for additional opportunities to streamline our operations while strengthening the investment behind our brands. Operating profit increased 38.7%, and the operating margin was 20.5%. We generated 3.3 billion pesos of EBITDA, a 29.8% increase. EBITDA margin was 24.1%, a 100 basis point sequential improvement, and a 410 basis point improvement versus the first quarter of 2022, underscoring our focus towards margin recovery. Cost of financing was 415 million pesos in the first quarter, compared to 419 million pesos 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 21 million pesos foreign exchange loss, which compares to a 4 million pesos loss last year. Net income for the quarter was 1.6 billion pesos, with earnings per share of 52 cents. We maintained a very strong and healthy balance sheet. Our total cash position as of March 31st was 17.9 billion pesos. Our net debt to EBITDA ratio was 1.3 times, with an EBITDA to net interest coverage of seven times. Thank you. A few brief comments on the outlook before we open it up for Q&A. Let me start by saying that the economy in general and domestic consumption more specifically continue to show resiliency. So far, we see no meaningful changes in the dynamics of our categories. In addition, we believe our strong innovation pipeline, together with more effective investment behind the brands, will strengthen our market position. On the cost side, we see bulk unrecycled fiber prices coming down from historically high levels. The speed and amount of the adjustment is still not clear, but we expect the benefits to show up in our results as we move into the end of this quarter and certainly by the second half of the year. Fluff, on the other hand, is significantly higher than last year. Superabsorbed materials and resins will continue to be favorable. A better cost scenario, together with 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 reach our target margins by the end of the year. On a final note, our shareholders approved a dividend of 1 peso 62 cents, payable in four installments during the year, which currently amounts to a 4% yield. This is consistent with our continuous commitment to deploy our earnings in a shareholder-focused manner. Summary, we are pleased with our progress and excited with the opportunities we see going forward. And as always, we are committed and will be relentless in achieving our goals. With that, let me open it up for Q&A.

At this time, if you would like to ask a question, please press the star and 1 on your touch-down phone. you may withdraw your question by pressing star two. Once again, to ask a question, please press the star and one on your touch-tone phone. We'll take our first question from Antonio Hernandez with Barclays. Please go ahead, your line is open.

Hi, good morning. Thanks for the special question, and congrats on the results. My question is regarding pricing, and it was flattened sequentially due to the possibility of results. This decision to be maybe a little bit more cautious on the pricing side, how much is it because of the consumer environment or because of the competitive landscape? Maybe as retailers are pushing private label penetration and, of course, other CPG companies, how is this pricing decision being driven and what do you expect for the year? Thanks.

Thanks, Antonio. Thanks for the question. You didn't come out too clearly, so I'll try and answer, and if I miss something, please let me know. But as we mentioned for the quarter, our volumes were slightly higher versus last year. Consumer products, roughly 1%, and away from home, 3%. The rest of the growth comes from our pricing, which is really pricing we've been carrying over from 2022, and we're seeing the effects right now. Going forward, we are currently implementing single-digit increases in our tissue business, which is the one that has seen the most pressure from raw materials. And we will evaluate further opportunities in pricing in terms of the timing and the amount of the participating categories, depending on how the raw materials behave. So for now, just a little bit of further pricing of tissue, nothing more. And as we've said, the At the start of the year, we're looking to find a better balance for growth between volume and price. So we'll be very careful monitoring how the market's behaving and where we have opportunities, we'll take them. We're going to be a little bit more cautious with going forward with pricing and focus on balancing it with volume. And let me just add, just to be sure that we're clear, The carryover of the price increases from last year will, of course, phase down throughout the year, but on average, on the year, will still have a positive impact on sales. Absolutely.

Okay. Thanks for that, Conor. And what about the competitive landscape are you seeing in terms of sales? Competitors also delaying some price increases. What do you share with your overall team in the competitive environment?

First, when it comes to pricing, this last round of pricing on tissue, we've seen all of the competitors also move forward. And in terms of the competitive dynamics, we see no significant changes in the first quarter of this year versus the end of last year. So pretty stable, both in pricing and competitive dynamics. We are entering, you know, the most aggressive promotional period during the summer. We don't expect it to be different from prior years. Of course, that remains to be seen. So far, again, in tissue, competition also moving their prices. Everywhere else, a little bit more stability.

Perfect. Thanks a lot, and again, congrats on the results. Thank you. Thank you, Antonio.

We'll take our next question from Luis Yance with Compass. Please go ahead.

Hi, Pablo, Javier. Thanks for taking my questions, and congrats on the results. Two questions from my side. I mean, the first one would be on margins, you know, very nice improvement. We continue to see quarter over quarter. in terms of margin expansion. So help us understand the potential evolution of margins. If the current conditions that we're witnessing on Forex, you know, the Mexican peso being strong, pulp and oil, you know, kind of coming down, et cetera, if that were to kind of stay where they are, is it fair to assume that most of the benefit we haven't yet seen it in Because it seems to be that while the 25%, 26% margin is a reasonable normal life margin, the star seems to be aligned so that actually you could go even higher than this, at least for a couple quarters only. Am I right on those assumptions, or what's your thought process around that? Well, first, thanks for the question and for participating on the call. Look, if stars align, yeah, our margins will continue to increase, but there's so many variables that have a role into the margins that credit starts at them. At least at this point, given the cost scenario we're seeing, we expect our margins to continue to improve and, again, to be by the end of the year within our target range of 25%, 27%. If, indeed, as you say, stars align, and we certainly hope that's the case, range or not. But again, hard to tell right now because there's, again, many variables, a lot of volatility. Some things seem to be going our way. We still have some headwinds with flaws with our expert business, et cetera. So we are very positive on what we see going forward, but hard to tell if we can take it up a notch. what happens with the different variables. And what we've mentioned is that we can be on the lower side of that range by the end of the year. So if things continue to improve, the range is a little bit wider, 200 basis points. Great. That's a great caller. And in particular, you know, when we see poll prices around the world, you know, they've been coming down. I guess there's different indexes, different countries that have certain losses. but there seems to be a way for us to get a sense on the oil-related inputs that you have. Is oil prices a good proxy, or are you seeing a bit of divergence in terms of perhaps oil prices have been coming down, but perhaps the components that you use are not coming down, are actually going up? You could help us understand what's the oil-related inputs and whether oil, I guess Brent, is a good proxy to get a sense on on potential tailwinds or headwinds for your cost structure? There's some correlation, but it's very far from perfect. So most of these raw materials have their own dynamics, their own markets, and oil is only one of their cost components. So hard to use it as a proxy. Okay, thanks. And my last question on your cost reduction program, you know, great to see that you're still finding ways to do this and then the $400 million you reported. I mean, that's about 3% of sales. I understand that a lot of those savings, I guess, are reinvested in the business through different initiatives, but could you give us a sense how much of those savings typically, not this quarter, but just in general terms, how much of those savings typically flow to the business? or is it hard to determine that, or I guess most of it is reinvested, but maybe you typically keep, I don't know, 50 basis points, 100 basis points as true margin improvement, just to get a sense of that would be great. That's a good question. I don't think I have a precise answer to that. I think that varies. As you mentioned it, Some of it goes back into improving the product at the different levels and different tiers, and some goes down to margin. How much, I really could not tell, and I would say this varies throughout the different times. So I think that's as much as I can say. Okay, great. Thanks a lot for the caller, and congrats, guys, on the results. Good job. Thank you, Luis. Thank you.

We will take our next question from Bernardo Maldico with Compass Group. Please go ahead.

Hi, . Thank you for taking my question, and congrats on the results. All of my questions have been asked, but maybe just in terms of the raw material environment, maybe just looking at the first days of April, what do you see in terms of raw material behavior in infrastructure versus last month? or maybe how different was it in March versus the beginning of the year, just to understand what has been the evolution in terms of the raw material environment we have. Thanks so much.

Thanks for the question, Bernardo. Sorry, again, you didn't come out too clearly, so again, I'll answer, and if I'm missing anything, please let me know, but if I understand correctly, your question has to do with how do we see raw materials going forward. Again, on the bulk and recycled fibers, we start to see them come down. From historical levels, that's very important to say, the pace and velocity, if you will, at which this will happen is still not clear. Many of us and most of the industry have contracts. And so then you start playing with the contract and the spot volume and then renegotiating some of the prices in the contract. So plus you have inventories that have built up. So exactly how fast that will show up in the results is not clear. But finally, we see the trend of this price is coming down, which is very, very important, as you know, for a business. And it's been a year and a half or even two years where we just saw important increases. So it's nice to see this start to to really operate as it has usually done in the past with cycles, and hopefully this cycle will be strong to the downside. On the flop side, the prices are pretty much stable, maybe coming down a little bit, but again, from very high levels, because many of the producers of pulp have... produced less fluff to keep the market tighter and protect those prices and margins, understanding that probably protecting pulp at this point will be harder, so they're moving production over to pulp, keeping production of fluff a little tighter. Again, in that sense, keeping prices a little higher. And on the polypropylene, this really has to do with polypropylene and some of the derivatives. And so far, those have behaved favorably, and they will come up a little bit in the second quarter of this year, but still D will look below last year, and we expect them to be fairly stable for the rest of the year at this point. But as you know, these things can change fairly quickly. But at this point, we are certainly seeing a better trend. a more positive cost scenario evolving here at the end of this quarter and through the second half of the year. And of course, that would be very, very good news for us, but we'll see how it pans out.

Thank you so much. That is very, very cool. Thank you.

Thank you, Bernardo.

So we'll take our next question from Jens Spies with Morgan Stanley. Please go ahead.

Yes, thank you for taking my call, and congrats again on the strong results. I mean, some of my questions were already answered. I also think that you might be overshooting your margins by the second half of this year. So, yeah, it's looking pretty good there. I just want to maybe ask on the exports, which have been decreasing year over year, and understand what is decreasing there. If it's finished product, if it's jumbo rolls, and what do you envision going forward?

Thank you. Absolutely. Thanks, James. On the export side, I mean, our parent role sales to the U.S. did grow in the quarter, so that continues to be a positive, particularly on the sales side. Export to finished product is really where we have the headwind because at this time last year, in the first quarter last year, We had very, very strong sales of different products, particularly diapers and some whites to our partner, particularly in the U.S., some to Latin America, but mostly to the U.S., and this year we didn't have those sales. I mean, just if you see the finished product part of this, our sales were down roughly 65%, so a significant reduction and a significant drag both on the top line and on the bottom line. Now, The reason for that, as we've mentioned before, is our partner, given conditions in the U.S., is being a little bit more cautious in how they want to manage their inventories. We're very close contact to them, and when needed, we're ready to support them. But given the market conditions right now, they're being a little bit more careful with, again, handling their inventories and moving forward. Now, export to finished products will continue to be a drag in the second quarter of this year. not as big as it was in the first quarter, but it will continue to be a drag, and we're expecting it to stabilize and be flat to slight growth in the second half of the year, given the progress we have in place.

Okay, perfect. Very clear. Thank you. Congrats.

Thank you. Thank you, James.

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

Hi, good afternoon. Thanks for taking my question. Two quick ones, if I may share. First one, as you have already said on this, just curious if you can help us here quantify the carryover that you mentioned at the beginning of the call. It should be like 4% or 5% carryover effect for price next year. And the second one would be more like a mid to long-term basis. We have seen bottlers trying to launch their multi-category distribution platforms, et cetera. My question would be is that at some point, would it make sense for you to put your products in those categories, to work with them in the distribution side, if that could generate some savings for you? Any comments about that would be helpful. Thank you very much.

Thanks, Rodrigo. Well, first on the pricing, again, for the first quarter of this year versus last year, our volumes were just slightly pricing from the prior year carrying over into this year. Now, if you look at it sequentially, again, our volumes were quite a bit stronger than the fourth quarter. So, consumer products, about 8% savings away from all. Total company, about 6% sequentially. That has to do with, as we just explained, the drop in the experts' business. But strong volumes sequentially, and then we have the pricing that's carrying over from last year, and that's how we're putting together the results. Again, going forward, we're putting a lot of focus on balancing this between volume and pricing. We are moving up tissue because of the pressures we've seen on that business. Hopefully, as hope and fibers come down, as we mentioned, there's less pressure on the businesses, but we still have some margin to recover. So that's the only pricing we've passed at this point. And going into the year, again, we have to be very careful and understand the consumer context. as well as the raw material context. And depending how that evolves, we'll decide if we need to do anything else and where we need to do it and what we need to do it when it comes to pricing. I hope that answers the first question. The second one... Sorry?

No, yeah, that was true. Thank you.

Yeah, the... the question correctly, you're thinking of whether we, what are we thinking of in terms of expansion and other categories where we could use our supply chain and leverage our strength to get into other categories and have some more options within our portfolio. And we are certainly looking both at categories that could be adjacent to some of what we do, but a couple others that might not be as It's clear cut in terms of adjacency going forward, but where we see that there's categories that are growing, that where margins are attractive, and very important, where we see we can add value to both consumers and clients. So we'll continue to analyze those categories, and at some point we'll figure out whether we want to move on them or not, but nothing that we can report yet at this time. We'll just continue to analyze that. On the one hand, and on the other hand, we'll continue to analyze what we can do with our technology, because we've got some very good technology that might be applicable for certain supply chains, and we're also exploring that aggressively. So those are the two areas that we're exploring going forward, but very, very early stages.

Yeah, that's interesting. Thanks a lot for that. Just wanted to hear your thoughts on that. Thank you very much.

Thank you, Rodrigo.

And as a reminder, it is star and one on your touchtone phone if you would like to ask a question. We'll take our next question from Elisa Bayon with Bank of America. Please go ahead.

Thank you. Hi, Pablo Javier in Salvador. So just a couple of themes from my end. First is, can you provide some additional color on consumer behavior And within that, which categories or price tiers are you seeing the strongest trends, and are you seeing any signs of downtrading or mixed changes? And then the next question I have is just that you had mentioned looking for additional opportunities to streamline operations. So can you provide some more detail on the sources and magnitude of these opportunities? Thank you.

Absolutely. Thanks so much for the questions. I mean, first, in terms of... of the market or category dynamics. Again, we see no significant changes from the prior quarter. It's a pretty stable and pretty common competitors and the clients out there. So no big changes. In terms of the question of down trading, we haven't seen anything that's material when it comes to down trading. There might be a little bit in some categories, but again, nothing that's material. What we're maybe seeing a little bit more is just consumers stretching the use of the product a little further where they can do so. And that's pretty much, I think, the way they're coping with we have. Now, indeed, as you know, we were to see some slowdown, which, again, hasn't happened right now. The consumer has been very resilient. But if it were to happen, again, our strategy of multi-tier, multi-channel, multi-brand will come, as many years it has, will come really in handy to try and catch those We've talked about our new footprint for bathroom tissue, which is currently being implemented, and we expect very interesting things on that end because, of course, we'll have more capacity, better quality, and improved products and more production, not only flexibility, but production will be closer to demand. And as we did that with bathroom tissue, we're taking a look at all of our businesses to figure out how we can further streamline them. This is a never-ending process. There's always opportunities. So we will continue to analyze every single line of business to figure out how we can do, if not similar things, things that will allow all of our lines of business to be more productive and more nothing new. It's something we always do, and it's part of our culture. It's part of our cost reduction program, and we'll continue to look and hopefully find good opportunities on that end.

Well, thank you.

Thank you.

And we show no further questions at this time. I will turn the call back to Mr. Gonzalez for closing remarks.

Well, again, just thanks so much for participating on the call. We're glad to take your calls after this meeting if you have any additional questions. I hope you have a great day and a great weekend, and thanks so much.

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