Kimberly-Clark Corporation

Good day, everyone, and welcome to today's Kimberly Clark Day Mexico 3Q 2024 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 a question at any time by pressing the star and 1 on your telephone keypad. You may withdraw yourself from the queue by pressing star and 2. Please note, this call is being recorded, and I will be standing by if you need any assistance. It is now my pleasure to turn the conference over to CEO, Mr. Pablo Gonzalez.

Hello, everyone. Thanks for participating on the call. As usual, I'll make some preliminary remarks and then pass it on to Javier to provide some details on the third quarter results. Our sales accelerated and our margins remained strong. Let me first provide some perspective on the top line. Both our consumer products and professional businesses managed to boast growth despite a soft market and a very aggressive promotional environment. Volumes in consumer products were slightly down given that, as we mentioned in last quarter's call, we decided to decrease our promotional activities and increased prices on our tissue businesses to offset raw material costs. Also, during the quarter, retailers and consumers reduced their inventories as is always the case after the summer promotional season. Prices were up 2% and those sales increased 1%. Road for the Quarter was supported by exports and parent role sales. With the former, we continued to expand our relationship with our partner, Kimmerich Clark Corporation, as well as establish a base for increased sales of other personal care products, particularly in the U.S. On the latter, Operating our tissue machines at full capacity and exporting what our converted products do not consume has always been a way for us to maintain operating efficiencies and boost growth in times of lower domestic market dynamics. Our model and strategy clearly worked during the quarter. With respect to margins, achieving an EBITDA margin on the high side of our range despite increased costs, the substantial peso depreciation and a less favorable sales mix shows KCM's strength and resiliency. I'll share some thoughts on our perspectives going forward once Javier covers the details of the quarter's results.

Good morning. During the third quarter, our sales were 13.2 billion pesos, a 3.8% increase versus the previous year. Total volume was up 1.8%, And price and mix contributed 2%. Consumer products grew 0.6%. Aware from home, 2.4%. And exports, 25%. Exports of hard-rolled sales increased 42.2%. While exports of finished products grew 7.7%. Cost of goods sold increased 5%. Against last year, recycled fibers Superabsorbent materials and fluff were favorable, while pulp and resins compared negatively. Energy was lower. The FX was considerably higher after an abrupt 16% devaluation, averaging 11% more, a 2 pesos depreciation. Our cost reduction program had very good results and yielded approximately 400 million pesos of savings in the quarter. We continue investing behind cost savings and production efficiencies and finding more cost efficient materials and sourcing. Gross profit increased 2.4% and margin was 29.6% for the quarter. SG&A expenses were 4.6% higher year over year and as a percentage of sales were up 14 basis points. Distribution expenses are still up year on year although the investments to improve our footprint and streamline our logistics operations have started to yield positive results and we are improving sequentially. Operating profit increased 0.7% and the operating margin was 22.5%. We generated 3.5 billion pesos of EBITDA, a 1% increase. EBITDA margin was 26.3%. 80 basis points lower versus the third quarter of 2023. This margin is in the high end of our long-term range, despite the significant FX pressure and pulp price headwinds. Cost of financing was 200 million pesos in the third quarter, compared to 440 million in the same period last year. Net interest expense was lower since we have less net debt. During the quarter, we had a 4 million peso FX gain, which compares to a 4 million loss last year. Net income for the quarter was 1.8 billion pesos, with earnings per share of 59 cents, a 9.2% increase. For the first nine months of the year, net sales grew 3%, EBITDA was up 12%, and net income increased 19%. EBITDA margin was 27.8% during the same period. We maintain a very strong and healthy balance sheet. Our total cash position as of September 30 was 16.7 billion pesos. Our net debt to EBITDA ratio was 0.7 times, with an EBITDA to net interest coverage of 12 times. All of our debt is denominated in Mexican pesos. During the quarter, we bought back approximately 600 million pesos of shares. We will be buying approximately 400 million pesos during the fourth quarter, in line with our authorized amount of 1 billion pesos. Thank you.

Going forward, despite indications that the economy of private consumption will not pick up during the fourth quarter, we expect ourselves to improve sequentially driven by increased volumes. And as we get into 2025, we will be ramping up our innovations and increasing our investments behind our brands to support stronger growth. With respect to the bottom line, bulk prices have started to come down as China remains on the sidelines. New capacity has come onto the market, and inventories have increased. We should see that fully reflected in our cost during the first quarter of 2025. In addition, we are investing to increase our paper manufacturing flexibility to utilize the most cost-effective pulp mix, and this should also start materializing early next year. When it comes to the exchange rate, the current rate would be 11% higher than last year during the fourth quarter, and approximately 15% for the first half of next year. So most likely it will continue to be a headwind. All in all, Our margins will still be very healthy and exceptional within our industry, regardless of the comparatively much more difficult context. And we have plans for even more aggressive cost reduction initiatives, as well as price mix improvements as we get into next year to continue to support them. Before going to your questions, and given it's our last call of 2024, let me wish you all a terrific end to the year and a great 2025. With that, we'll turn it over for your questions.

Thank you. And at this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. And we will pause for a moment to allow questions to queue. And we will take our first question from Ben Thur with Barclays.

Good morning, Pablo, Javier. Thank you very much for taking my question. Two ones. So, number one, as you look into, obviously, the market dynamics and the FX impact and how that has impacted your share price, which has come down quite meaningful, you've done a couple of share buybacks already from the above, right, around about $30 million on a year-to-date basis. How do you think about just like capital allocation in the first place and to potentially accelerate these buybacks? What's left within your program and how much could you potentially increase that also in light of the leverage being well below one time? So that would be my first question.

Sure. Thanks for the question, Ben. As you know, our Cash flow continues to be very strong, and we expect that to be the case going forward. Our earnings are still very strong. So we expect both to increase significantly our dividend next year and our buyback program for next year. For this year, as Javier mentioned, we have 400 million pesos left in the program, and we will be buying back shares in that amount during the fourth quarter. But we do expect our program to be quite a bit stronger for next year.

Okay, perfect. And then as you look into just like the market dynamics, consumer dynamics, I think you said you expect a little bit of an improvement on the volume side into 4Q. Is that a volume improvement just given of maybe what the softness was in the third quarter on volume? Or how should we think about this also on a year-over-year basis just to kind of get a little bit of a sense of like – What's driving that expectation for improvement in volumes into 4Q? Sure.

It's a couple of things, Ben. One, as you mentioned, it's a ramp up from the third quarter, which is always slower given the promotional season and the heavy promotional season during the summer in which both retailers and consumers stock up. and then they have to get through the stocking of that inventory. So we always see a ramp up in the fourth quarter. But in addition to that, many of the activities we are putting into the market into this quarter, we're already seeing improvements, and we expect that to continue throughout the quarter. Thank you.

Thank you. And we will take our next question from Robert Ford with Bank of America. Please go ahead.

Thank you so much, and good morning, everybody. Pablo, it appears as if you've been trying to pass through some pricing coming out of the summer promotional season, and I was hoping you might be able to maybe comment on that activity as well as how you're seeing competitive positioning and private label trends.

Sure, Bob. Thanks for the question and for being on the call. As you know, and as we mentioned in last quarter's call and this call, we passed on pricing on our tissue businesses early on the second quarter, right before the summer promotional season. Our competitors lagged throughout the whole season. Hard to tell what will happen now as we got out of it. There might be some subsequent pricing coming into the market. We are all facing the same problems. headwinds, so there's no doubt that there's some need out there to try and pass on pricing to absorb some of the FX costs and the raw material costs that we've experienced. In our case, we will take advantage of any pricing opportunity that comes ahead. We will not be doing anything across the board. but more likely given our analytical capabilities, we're taking a look at where we can do it, be it product, regions, categories, et cetera. But we will be pushing prices forth going forward. And having said that, we'll be cognizant, of course, of market and consumer reactions and adjust as necessary. But we will be moving forward with that. In terms of private label, I mean, interesting that they participated in the summer promotional season which is something we hadn't seen in the past or they participated a little bit more strongly their prices are coming back are normalizing if you will in this quarter so very cognizant of that and as you know very keen on strengthening our multi-tier strategy which has been our strategy to gain as much volume and share in the market and also to keep competitors at bay. So we'll be working, we are working already very hard to strengthen that proposition in terms of innovations, in terms of the right pricing and ramped up execution behind our activities. So just moving forward, again, we expect volume increases and we expect to strengthen our positions in the market.

That's super helpful. And then Pablo, the confessor appears to be leaning toward regulating your relationship with the big kind of modern trade clients. Um, filings that we've read suggest that they're inspired by the Australian framework. Now, how do you think, you know, a regulatory framework, if it were, you know, in line with an Australia or some of the European models, how might that impact, um, your relationship with the modern trade in your opinion? Um,

Wouldn't know, Bob. I'm going to say that we don't expect any further regulation regarding more foreign trade in Mexico, at least none that we have heard of. So this will continue to be just an open and very competitive environment. And what we've done in the past and we will continue to do in the future is just win in such an environment. That is... That is our culture, and that is our execution capabilities have allowed us to do that, and that's how we're thinking about it, just winning out there in the market with the consumer.

That makes sense. Thank you so much. Thank you.

Thank you. Thank you. And we will take our next question from Antonio Hernandez with Oxenburg.

Good morning. Thanks for taking my question. Regarding the cost initiative that you mentioned, I mean, you've already achieved that $1 billion in cost savings benchmark year to date. Anything else that you could provide light on regarding the fourth quarter and also next year, everything regarding that cost reduction program? Thanks.

Sure, Antonio. As we've said many times, and you know this, I mean, cost reduction is just a part of our culture. And we continue to execute very efficiently behind it. And we expect another strong quarter, the fourth quarter. We're going to probably be close to where we were last year, maybe slightly lower than that, 1.6, 1 point somewhere in that range. And for next year, as I mentioned, given the The context we are facing, we're just redoubling our efforts. And I don't have a number right now, but I'm pretty confident that we will be able to surpass this year's number next year.

Okay. Thanks for that. And just a quick follow-up on financing costs going forward. I mean, given the leveraging trend that you're, keeping and cash flow generation? Is this something that you're expecting as well in terms of financing costs?

Yes, we will continue to have a strong cash flow generation and very likely, it's going to depend a lot on what happens next year with dividends, as Pablo was mentioning earlier. We will increase dividends and buybacks, but it's very likely that we will continue to strengthen our balance sheet, and that should impact our finance costs positively. Antonio, let me just add something to what Pablo was mentioning on the cost reduction initiatives. we have to keep in mind that the number that we get every year is on top of what we got the previous years. It's not that in one year we get a little bit less than the previous one, our costs are going up. It may be just a slow deceleration of how much we are reducing the costs, but every peso that we get there is on top of what we got the previous years.

Exactly. It's cumulative. Okay. Perfect. Thanks a lot. Have a nice day. Thanks. Thank you. Thank you.

Thank you. And we will take our next question from Renata Cabral with Citigroup. Please go ahead.

Hi, everyone. Good morning. Good morning. Pablo Javier. Thank you so much for taking my question. I have two here. One in terms of exports. We saw a good improvement this quarter. Just if you can have some color about the perspectives for the fourth quarter would be helpful. And the second one would be a follow-up in capital allocation in terms of expanding capacity or investments in new categories. Is there something you can share with us? I would appreciate it. Thank you.

Thank you, Renata. Yes, first on exports. Our sales of finished product, as we mentioned, have continued to be strong behind our relationship with Kimmerich Law Corporation on the one hand, but also we're starting to establish a base of sales of personal care products, particularly in the U.S., still small but growing, and we expect that to continue to grow going forward. So experts of finished products are We'll grow at a slightly lower rate in the fourth quarter, given comparisons, but it continues to perform very, very strongly. When it comes to parent growth, again, in the third quarter, given that our volumes, particularly in tissue and consumer products, were slightly down versus last year, we were able to export the capacity into the U.S. particularly, and that's why we had such a strong growth. As we increase our volumes following in the next quarters internally or domestically, then we expect the sale of parent rolls to be slower than it was in the third quarter. So again, that's always how it works, depending on if we're able to get the volumes in here, then we have less paper to sell outside of Mexico, and we expect that to be the case in the coming quarters.

I'll take that one. As for capital allocation and requirements for CAPEX and or expansions, what I can tell you is around $120 million, which is what we will be investing this year in CAPEX, it's A figure around that should take care of our needs in the coming years for capacity, product improvements, and efficiencies. So that's what we should be investing around that number. Regarding entry into other categories, as you know, we're actively looking at opportunities Hard to tell at this moment if we go into something, if that would require capital. But beyond that, we will definitely have more free cash to give back to investors.

And let me just add a little bit on the new categories. As Javier has mentioned, we've been starting different categories and I can say we're getting closer, and I'm pretty sure that sometime in 2025 we'll be able to let you know of our participation in additional categories within consumer products.

Thanks so much for the call.

Thank you.

Thank you. And we will take our next question from Eugena Cavalhero with Morgan Stanley.

Hi, everyone. Good morning and thank you for the call. I have two questions. First, Javier, if I can ask you to repeat the price and volume mix growth overall and by category, that would be very helpful. And second, I wanted to see if you could open a bit more and give us more details on how you're seeing competition in each of your main categories in Mexico. Thank you.

For our price and mix for top line, total volume was up 1.8% and price and mix was up 2%.

That's total, and that's how you get to the 3.8% sales, which I hope answers your question. If not, we'll come back to that. When it comes to competition, I mean, you know who the competitors are, and it's always been a very dynamic and competitive market. We aren't currently seeing any new entrants. but a highly competitive market. But again, we are all having the same headwinds in terms of the exchange rate and some of the raw material costs. So we'll see how the pricing evolves. And on our end, we'll keep looking for opportunities to increase prices, but are particularly focused on increasing our volumes in the coming quarters. Given our activities, we're seeing now these already nice pickups, so we expect that to continue, and we expect to strengthen our positions in the market in the coming quarters. Does that answer your question, Eugenia, or do you have anything that you want to follow up with?

Yes. If you could also disclose the price, mix, and volume for the consumer products and away from home, that would be very helpful, Javier. Thank you.

Yeah, we can do that. Sales in consumer products were 0.6% higher, and that's behind a minus 1.4% in volume and a 2% increase in price mix. And away from home, sales were up 2.4%, with volumes up 3.9% and price mix minus 1.5%. That's perfect.

Thank you so much.

Thank you.

Thank you. And once again, if you would like to ask a question, please press the star and 1 on your telephone keypad now. And we will take our next question from Juan Guzman with Scotiabank.

Hi, good morning, Pablo, Javier, Salvador, and all the team there. Thanks for the space for questions. I have just one here. That's a follow-up, actually, on competition. After you took some price actions in your tissue segment during the second quarter, what have you observed regarding competitors? You already mentioned that competitors lack, but are you seeing if they are falling now? Does rationality continue in the market? And additionally, how have your market shares performed in recent months? That'll be it. Thanks.

Thanks, Juan. Yeah. I mean, we've seen prices come up after the... We don't want to call it the end, but as the summer promotional season subsides, we certainly have seen prices come up. So we'll see how those continue to move going forward because they're coming back to pre... promotional season levels. So we expect those to continue to climb during this quarter as, again, as we all react to the effects and to the raw material costs. But at this point, what we're seeing is just prices coming off the very deep promotional season. And we, again, increased prices before the promotional season and were less aggressive than our competitors during the season. And that's the main reason why our volumes were down. And now we're starting to see our volumes come back up. So, of course, when you talk about share, given that we were not aggressive as they were during the promotional season, we lost a little bit of share in some of our categories during the season. But, again, we're starting to see those come back again. And we expect those to strengthen given what we're seeing right now in terms of our activities and our innovation and the reaction of consumers to both. So a very positive scenario going forward in terms of the strength of our shares and our brands in the market.

That's pretty clear. Thank you very much. Thank you, Juan.

Thank you. And we will take our next question from Jorge Esguerdo with BTG Factual. Please go ahead.

Hi. Good morning, Pablo and Javier. Thank you for the space for questions. I have a quick question regarding logistics. When do you expect to see the major benefits from the investments made to increase the penetration of your own fleet? That would be very helpful. Thank you very much.

Sure, Jorge. Thanks for the question. I mean, we will see some benefits this quarter, but the whole program, if you will, will materialize really starting early next year. And that's because one, as we mentioned, we increased our fleet and we're putting it to use more efficiently. However, it hasn't been easy to get all of the operators, the truck operators that we need in the country. It's an issue that every logistics operator is dealing with. So we're putting plans together to be able to attract more of those operators and we expect to have the full force ready by next year. And that's when we will be able to take full advantage of the program that we've put in place. So you'll see something in the fourth quarter, but we will see the whole advantage of it into next year. And we expect it to be substantial, not only in terms of cost, but also in terms of allowing us to provide a much better service to our clients. So we're very upbeat about that, and we'll continue to invest to strengthen our own fleet so that we can continue to lower our costs and provide better services to our clients.

Thank you very much. Very clear. Thank you.

Thank you. And we will take our next question from David Cruz at Ball. Please go ahead.

Hello, Pablo. Good morning. My question is, What is your expectation in the level of the price of cellular fiber for the remainder of the year and for 2025?

Thanks for the question, David. As we mentioned, poll prices have already started to come down. So, sequentially, they'll be lower in the fourth quarter versus the third quarter. Now, what will those levels be? It's hard to say because we see the prices coming down in the market. but we still haven't seen those reflected in our numbers. And that's because there's always a lag given the contracts that we have. And because although, as I mentioned, China remains on the sidelines, new capacity on the market, inventories have increased, and that's why prices are starting to come down. But of course, there's efforts by the poll producers to have those lower prices coming to the market as slowly as possible. So we're We're pressuring as everyone who uses pulp is pressuring to see those prices reflected early on. But we'll see something in the fourth quarter, but most likely we'll see the whole impact next year. Now, what will the impact be next year? It really depends on demand and then depends on how quickly we can have this show up in the results. But let me quickly, we can follow up on that, David, because we'll put some numbers together and follow up with you. I mean, most likely first and second quarter we'll still see versus last year some increases, but much more minor than we are seeing right now because we'll see sequentially important decreases. But second quarter, third quarter, certainly third quarter and fourth quarter of next year, we're seeing prices lower in the double digits versus where they currently are.

On average, they should be lower next year, the way we're seeing it. And sequentially from now, we should also see them coming down.

Thank you very much. That was very helpful.

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

Thank you. Well, thanks everyone again for participating on the call and for your questions. Let me just again reiterate that we expect sales to increase sequentially driven by volumes. And we are upbeat for 2025 in terms of what we can achieve on the top line. And on the bottom line, we will continue to have very healthy margins and really exceptional within our industry. Yes, this quarter's margin was lower than prior quarters because we were at record levels. but we're still at the high end of our range. And we expect that to continue throughout the fourth quarter and certainly into next year, notwithstanding the headwinds that we're facing. So we are upbeat with what we'll deliver in the fourth quarter and particularly for 2025. And we will certainly be updating you on that and working very hard to make sure that that happens. So again, thanks for participating. And once more, let me wish you all a terrific end to the year and a great 2025. Thank you all.

Thank you. This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.