Kimberly-Clark Corporation

New Mexico 2Q25 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 should need any assistance. It is now my pleasure to turn the conference over to Mr. Pablo Gonzalez, CEO. Please go ahead.

Thank you. Hello, everyone. Hope you're having a good summer. Thanks for participating on the call. We'll go straight to results, and then we'll make some comments about the quarter and our expectations going forward, as well as update you on some important initiatives underway. So, Javier. Thanks, Pablo. Good morning, everyone. During the quarter, our sales were 14.1 billion pesos, basically flat versus last year, 1.7% higher than the first quarter and an all-time quarterly record by a couple of million. Total volume was down 3.3% and price mix was up 3.3%. Consumer products and away from home decreased 2.2% and 7.8% respectively. Exports were up 24.5%, with double-digit increases in both converted products and hardware sales. Cost of goods sold increased 7.2%. Against last year, salmon resins were favorable, virgin fibers were mixed, while recycled fibers and fluff compared negatively. The FX was significantly higher, averaging 17.3% higher. Our cost reduction program once again had very good results and yielded approximately 500 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 efficiencies. Cross-profit decreased 9.7%, and margin was 38.2% for the quarter. Mix was negatively affected by an increase in lower margin hardware sales. SG&A expenses were 3.6% lower year over year, and as a percentage of sales were down 60 basis points. Operating profit decreased 13.9% and the operating margin was 21.7%. We generated 3.6 billion pesos of EBITDA, an 11.5% decrease. As we had anticipated, even with the significant test of depreciation, we were able to maintain our EBITDA margin within our long-term range at 25.4%. Cost of financing was 352 million pesos in the second quarter, compared to 356 million pesos in the same period last year. Net interest expense was slightly higher, at 373 million pesos versus 319 million pesos last year. During the quarter, we had a 21 million pesos foreign exchange gain, which compares to a 37 million pesos loss last year. Net income for the quarter was 1.9 billion pesos with earnings per share of 62 cents. We maintain a very strong and healthy balance sheet. Cash position as of June 30 was 11 billion pesos. We have no debt maturing for the rest of the year and maturities for the coming years are comfortable. Net debt to EBITDA ratio is 1 and EBITDA to net interest coverage is 10 times. Over the last 12 months, we have repurchased close to 50 million shares, more than 1.5% of the shares outstanding, which brings the total payouts to shareholders to 7.5%, including the cash dividend. Thank you. As expected and mentioned in a prior call, the first quarter trend continued during the second quarter and resulted in top line basically flat versus last year, albeit a quarterly record, lower bottom line margin, but improving sequentially, and EBITDA still within our target range, despite significant uncertainty, consumption deceleration, raw material cost increases, and very negative exchange rate. Once again, this reflects the strength and resiliency of KCM. On the top line, we compared to a very strong second quarter of last year, and we faced a challenging environment, with leading indicators signaling a slowdown of the economy and private consumption. A key indicator for us is that volume growth in some of our most important categories is muted, and even in higher growth ones, it spins lower. In addition, we continue to see clients aggressively manage their inventories, given the economic conditions and uncertainty. Plus, and this is very important, we intentionally reduced our support during the heavy summer promotional season. The strategic decision had an important negative effect on our volumes, but it's intended to protect the value of our brands as well as reduce the negative pricing effects, and it means that both consumers and clients did not stock up on our products, which should translate into healthier volumes and prices during the second half of the year. This, together with our accelerated innovation plan, and I'll have more on that in a moment, increased investment behind our brands and execution behind the opportunities we've identified should translate in growth accelerating in the coming quarters. With respect to costs, the higher exchange rate plus the fact that the anticipated relief in bulk prices did not materialize, particularly in softwood pulp and cloth, which were at record levels, had a meaningful impact. Given soft demand from China, we're finally seeing prices come down, but slowly. Going forward, we expect dollar-denominated costs on tissue-run materials, that is pulp and recycled fibers, to have a more modest impact. And we expect a mixed picture in personal care, higher fluff with lower resins and superabsorbent materials. Having said that, it's clear that the lack of certainty and many different moving parts could change the outlook. Accordingly, we've carried out selective price increases, have put in place actions to support a richer mix, and are well on their way to achieving record savings for the year. Now let me turn to innovation and provide an update on the launch of the pet business. During 2025, we will introduce product improvements in every category in which we participate. So far, we've introduced important innovations in the diaper, wipes, and incontinence categories, among others. And in the coming quarters, we'll continue to strengthen our offerings to consumers in bathroom tissue, incontinence pads, and feminine care. We'll be in a position to share more details on this in future calls. Also, continue to make progress to bring to market technologies and products that will increase consumer preference for our brands in the coming years. Finally, as we've discussed with you, in the medium term, we expect to accelerate our growth rate by achieving double-digit growth rates in categories with higher growth potential, like wipes, kitchen towels, facial tissue, and wipers, among others, as well as through adjacencies and entries into new categories. With respect to adjacencies, the recent integration of 4E Global into the KCM operation is creating opportunities to strengthen our position and capabilities in the soap and toiletries categories, as well as to participate in shampoos and other liquid-based product categories. As we move ahead with our plans, we expect sales to accelerate in these categories during the second half of the year, and particularly during 2026 and 2027, as we bring our pipeline of innovations to market. And when it comes to our entry into the pet food business, we are in the process of gaining distribution behind our brands, and have started the commercial and marketing efforts to support them. We have received excellent feedback from consumers, And we'll embark on an aggressive sampling program to get more consumers to try our superior products and start to position and grow our brands. We're in the first mile of a marathon. We are excited with the consumers' very positive reaction to our products. We'll keep you updated on our products. With that, let's turn to your questions.

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. Once again, that is star 1 to ask a question. We'll take our first question from Alejandro Fuque with CTAO. Please go ahead.

Thank you. Good morning. Thank you for the questions. I have just one brief one on the top line. Maybe Pablo wanted to see if you can. elaborate a little bit more into the volume pressure. I know you mentioned some macro slowdown and consumption slowdown that we have seen across the board. Next week, I want to see if maybe we can also talk to you if you think this is also maybe competition. What are some of your competitors doing? And also, maybe you said that second half should be a little bit better with more growth. but also we continue to see the slowdown today, and cons are a little more difficult for Kenya in the second half. So that would be the drivers of growth in the second half of the year. Thank you. Thanks for the question, Alejandro, and for participating in the call. Yes, as you know, the Mexican private consumption and the economy as a whole has continued to slow down. and we are certainly feeling it in our categories. As I mentioned, it's a key indicator for us that volume growth in our biggest categories is muted. So, we're seeing, for example, in diapers, bathroom tissue growth flat or ahead of last year. In higher growth categories, we are seeing them going higher cliff, but still not at the rates they were doing so. So there's no doubt that the consumer is stretched and they're trying to make ends meet and really trying to stretch the budget. So we continue to see that. And the thing is that that's the sellout in our categories, but then you have the sell-in. And we're seeing a big difference between the selling and the sellout because we see our clients being very, very aggressive in the way they're managing their inventories. So that whole, those two things are certainly having an important impact in volumes overall in sellout, but then even a higher impact in our case in selling as clients work through their inventories given all of the uncertainty now. Going forward, we currently see no big support for the domestic consumption to increase significantly in the coming course. The reason why we're a little bit more bullish on our end is because one, as I mentioned, we did not participate as aggressively as we have done in the past in the summer promotional season. And we did that to protect the pricing and the value of our brands. What that means then going forward is that you don't have clients as inventory as they have been in past years and consumers as inventory in our products as they were in past years. And I'm mentioning clients. not just client, because what happened in past years and still continues to do so with these promotions, that those who do the promotions, bringing a lot of product to their inventories before they go ahead and put the promotion in place, and then they sell that product both to consumers but also to other clients. They do sell this product to the wholesale channel. So what would end up happening in past years is that during the third quarter, many clients were inventory and many consumers were inventory, plus the price with the value. So now that we didn't do that, we're expecting going forward that our inventories are a little bit healthier out there, both with clients and consumers, and we expect that to translate into volumes increasing going forward. That's one. And certainly the other is all of our push we have behind our innovations. We are continuing to work on a multi-tier, multi-channel strategy that you know very, very well, and we will be strengthening that strategy so that we strengthen our differentiation at every level. We are adjusting towns, presentations, and events. the corresponding prices to make our products even more accessible to, as I said, stretched consumers. And also, we're fine-tuning and strengthening our private-level strategy where it makes business sense. So, again, we're thinking in a healthier position, plus the actions we're taking in innovation and strategy-wise, we believe over the coming quarters, it won't be quick, but over the coming quarters, we expect our volumes to start to pick up. Thank you very much. Thank you.

Our next question comes from Robert Ford with Bank of America. Your line is open.

Hey, thank you so much, and good morning, everybody. Are your exports to the U.S. impacted by the incremental Trump tariffs, or are they shielded by the USMCA?

So far, shielded by the USMCA bond.

Fantastic. And I'm just curious, how are the tariffs on China kind of impacting KCC sourcing out of China? And how are you thinking about the export opportunity into the U.S.?

Yeah, thanks for the question, Bob. There's, of course, a lot of uncertainty as to where all this will end. But there's no doubt that there's going to be higher tariffs on China and many other countries. And we believe that, relatively speaking, Mexico will be in a much better position versus all those countries to continue to integrate further with the U.S. Our partner is looking at this very, very closely, and we're having very productive conversations with them to understand where the opportunities are. so that we can increase our exports of finished products to them. I think we'll see this certainly come to bear in the fourth quarter and through next year. And it's not only with KCC. We're doing this with quite a few other players that they believe are going to be impacted with what's happening, and we're certainly trying to take advantage of that, since we believe we're not only well positioned right now, but as I say, We're confident we'll continue to be better positioned than the rest. So we're exploring all the opportunities. As you know, it takes a little bit of time. But we do believe that many of this will bear fruit in the coming quarters and certainly into 2026. So it's a good opportunity for us all.

It's great to hear. And with respect to the discipline that you showed in the summer promotional campaigns,

Did competition show similar discipline, or was it the classic, it's almost like a game theory problem, right?

I'm not sure. I'm just curious what you're seeing in terms of the competitive environment.

I think competitors pretty much approached the summer promotional season as they've done in the past. So when the promotions did go into effect for those four or five days when they do them, we were certainly at a big disadvantage. But again, we believe that for the long run, this is the right thing to do. It hurt us during the quarter, but it positioned us very, very well going forward. And we'll continue to be very, very diligent in how we approach this to protect the value of our brands and to bring the best value possible to consumers and clients.

One last question, if I could, please. And that is, you touched on entering the shampoo category. I was just curious if you could, you know, do you plan to extend Skood on to the shampoo category? Are you thinking about a different branding campaign? I'm just trying to understand the addressable market, the positioning of the product, and maybe the margin profile.

Sure. We'll be able to share more in the coming quarters, Bob, because we're going through the whole analysis. What I can tell you right now is that we already participate in the shampoo category, particularly when it comes to certainly toddlers and kids. But also in adults, we have some specific brands that we sell to different clients, and they sell pretty well. So we're just taking a look at the market. We're taking a look at the participants and figuring out what would be our best strategy to participate in that market so that we can do it in a way that we can grow, but grow profitably. Otherwise, it's something that we have no interest in. So we've made inroads so far with a couple of clients, and we're finding a way, but I don't think you'll see, let me just put it this way, I don't think you'll see a national brand and a big, big push behind a national brand. It's really niche and the way we're playing with certain clients, with certain brands that they're supporting very aggressively. But, again, we'll be able to share more on this and some other very interesting and important initiatives for us in the coming quarters. Thank you so much. Thank you, Bob.

Our next question comes from Antonio Hernandez with Activer. Please go ahead.

Hi, good morning. Thanks for taking the question. Could you provide a little bit more light on how we're safe turning during the quarter? I mean, is it a soft start and then you can be stronger with it all the way? And maybe you could provide more light also in terms of questioning away from home within this perspective. Thanks. Sure. Just, Antonio, to make sure I got your question because you didn't come out very clear, but you're asking about during the quarter how we progress, right? Exactly. How are you seeing this start of the first quarter? Okay. I'm going to say that it was, again, given economic conditions, we didn't see, in our case, very big differences April, May, or June. Again, our competitors who were more aggressive during the particularly June promotional season probably saw a difference. In our case, we managed it differently. It was pretty consistent, and we're seeing the same thing with the start of July. So, again, unfortunately, at this point, we see no big catalysts for domestic consumption to really accelerate. Hopefully, that changes in the near term, but there haven't been any catalysts for that to change. So, it's really more about us... putting a strategy that allows us to get closer to the consumer, to our clients, and gaining some shares so that we can get growth in the second half of the year. Now, when it comes to professional, yeah, we saw an important decrease in sales in our professional business this quarter, and it was mainly driven by volume. Our price mix was slightly positive. And it really has to do with the same – economic conditions that we're seeing, and as we talk to our distributors and we talk to our end clients, particularly outside of Mexico City, both hotels, restaurants, et cetera, they're seeing a sharp, sharp slowdown versus last year. I mean, double-digit slowdowns when it comes to tourism in Cancun and many other places. And it's just much, much lower than it was. And when you put that together with the distribution system we have for that business, which is through distributors, and distributors in this case tend to have quite a bit more days of inventory than, say, in the consumer product side. So they just haven't. have been needed to bring down those inventories. So again, it's a combination of a slower economy and our distributors needing to bring down inventories because of the uncertainty and the slower economy. And we'll see if that picks up here in the coming quarters, but everyone I've talked to so far says that Mexico City particularly seems to be doing well, but outside of Mexico City, things seem to be quite a bit slower when it comes to services, and that's certainly hitting us on that business. So doing the same as we're doing in consumer products, making sure we have the right products for this moment in time, that we're working with the distributors to get those products to market, and that we're talking to clients to make sure we understand their needs and we can get those products to them as quickly as we can. But certainly it's low market at this point.

Thanks. I appreciate the call. Have a nice weekend.

Thank you. I'll talk to you soon.

Our next question comes from Ryan Lavin with Barclays. Your line is open.

Hey, this is Ryan on for Ben. Thanks for taking my question. So focusing on consumer behavior a little bit here, are you guys seeing any trade down amid the price increases you took during the quarter and lower remittances coming into the country as well? And going on that a little bit, with the value proposition for KCM, what do you think in third quarter, fourth quarter, as you talk about potential volume increases, is going to have customers choosing your products over competitors, especially with the larger price gap now?

Thanks, Ryan. Thanks for the question. A very important one. Yeah, no doubt we are in the market. We're no doubt seeing consumers trade down. And I'm... being very cautious in saying in the market, because in our case, we have a richer mix, because we've supported many of our upper-tier products, and they've performed very, very well. So you've got an economy, a market for consumers that have a little bit more to spend, continue to do so, but the majority of the population is stretched, and they're certainly trending or trading down to lower-priced products. Products and over-count products. So what are we doing about it? And we have been doing it, and we have very important plans in the second half of the year to strengthen this. Again, we're working on our multi-tier strategy, making sure that we have the right prices for every tier and the right product for every tier. As you know, we have products in the economy tier also, and the value of premium. And most of the times when people are trading down They trade down from one of our brands in value to one of our brands in economy because we lead in value economy and premium. But we need to continue to strengthen that proposition because there's certainly more competition out there. So we are strengthening that proposition and we're seeing in many instances some very good results. The other thing we're doing, and this is not just for the economy products, but for all of our portfolios, we're We're making sure at this moment in time we have the right counts, the right presentations, and the right prices out there to make sure products, again, notwithstanding the tier, are even more accessible to consumers. And we're putting in place quite a few things in the coming quarters to that respect. And finally, as I said, we're fine-tuning and strengthening our private label strategy where it makes business sense. We've always said that we analyze this and wherever we see an opportunity that we believe makes sense, we pursue it and we continue to fine-tune that strategy and you'll probably see us be more aggressive on it in the coming quarters. So I would say those are the key areas behind our push for higher growth in the coming quarters. It won't be, again, it won't be fast because it's low out there, but we continue to believe that we're well positioned and with the actions that I've just described, we'll be even better positioned to take advantage of or to serve our clients and our consumers and certainly in the coming quarters and into 2026 be to a much, much better place.

That's perfect. Thank you.

Our next question comes from with JP Morgan. Your line is open.

Thank you for taking my question. Pablo, I just want you to make sure I understand because you mentioned that second half should see better volume and even growing volumes.

But when I hear more of your comments and your deeper thoughts into the dynamics and specific categories, et cetera, the only lever that I can hear from your speech is the fact that you are probably with less inventory at the different channels that will allow for the sellout, sorry, for the selling to be more, let's say, more robust into the second half.

not really that the consumer is actually willing to buy more.

So in that sense, the second half outlook on top line, is it really not a game changer, but an inflection point? And if it is the case, what should we expect for margins?

Because there you do have some levers, right? Better effects, as you mentioned about input costs coming down. In that sense, with the combination of top line plus cost, Do you feel more comfortable to end up the year in the higher range of the guidance? Thank you so much.

Thanks, Ferdinand. Thanks for the question. Let's see if I can provide a little bit more clarity. Let me put it this way. When we think of top line in the short term, we've got a couple of headwinds. One is, as we've mentioned, the economics lowdown. And two, the inventory reduction we're seeing from our clients. and we're still experiencing that, but again, we believe we're in a better position, so we'll be healthier, certainly, through this than many other competitors. So those two things are headwinds. Now, when we think of tailwinds, as you mentioned, we certainly, I think the strategy we put in place, protected volumes, protected prices, very importantly, prices also, so that should certainly help. And as I was just mentioning to Ryan, very importantly, the adjustments we're making in this second half to our portfolio and strategies, which we are confident will be able to aid our volume growth. So putting back those strategies and portfolio in place doesn't happen overnight. So July might be a little bit slower, but we're certain that by the end of this quarter, we'll see a very different picture. And certainly by fourth quarter, Some of these things we've done already, and they're showing great, great progress, and we are confident that many of the other adjustments we're making will also provide us with an advantage and bring volume to our site. So it might still be a little slower starting the third quarter, but certainly picking up throughout, and we believe we'll be in a much better position in the fourth quarter. certainly in 2026. So that's on the top line, and I hope that provides a little bit more clarity. On the bottom line, which you mentioned, also some headwinds and some tailwinds, and let me go through that very quickly. On the headwind side, a couple of raw materials still pressuring our costs, but we believe the impact will be more moderate than it's been this past quarter, which has been pretty aggressive between The increase in prices, for example, in bulk and fluff plus the exchange rate. So going forward, that's all starting to change. As we said, recycled fibers might provide a little bit of a more moderate impact. Fluff will continue to impact, but superabsorbent materials, resins will be a positive. So we're starting to see a different picture. raw materials that have a more moderate impact, those that are still higher, and some that are coming down. So that's one headwind. The other one is that, of course, we've got some inventories in our balance sheet, given the prices that are that we've seen in the past couple of quarters, our inventories are higher, not in volume, just in price because of how prices went up. So we have to go through that inventory, but we'll do that here in the coming month, month and a half, and get through that. So those are the headwinds. And then the tailwinds, very important, as I mentioned, some relations have certainly turned around. The exchange rate will be in a much, much better place during the second half of the year. And our savings plan continues to bring about great savings. And we're working hard to bring even more in this year and working into 2026 and 2027 already. So headwinds and tailwinds in both cases, top line and bottom line. But as we move through the second half of the year, we're very, very confident that the tailwinds will be much stronger than the headwinds. and our results will continue to improve. Hope that provides clarity.

Perfect. So, thinking about the margin guidance, ending in the lower end or in the higher end or in the middle, as you see it today, where do you feel more profitable on margins?

It's uncertain with all of the things happening for them, but you've seen that we've been able, even with all of the pressure, we've been able to keep our margins strong. And again, if this tailwinds, particularly towards the end of the year into 2026, go our way, our margins should continue to improve. Excellent. Very helpful. Thank you, Pablo. Thank you.

Our next question comes from Juan Desmet with Scotiabank. Your line is open.

Hi, good morning, Pablo, Javier, Salvador, and all that's in there.

Thanks for the straightforward questions and congrats on the results. Quick one here as a follow-up to your previous answer. Regarding expenses, we have seen some improvements in operating leverage along the year.

Also, the NAS percentage of sales is still a bit above your state card levels. So my question here is,

How sustainable do you see these gains and how much room do you see for further improvements over the next quarters? And aside from the positive effect of a higher top line growth in the future, what measures are you taking on this front?

Thank you very much. Hello, Juan. I'll take the first one in terms of SG&A. Yes, as you noted, this quarter and the first quarter of the year, we made significant efforts to curtail some of our expenses due to the situation we're facing. Some of these, and for the most part, we will continue to have going forward, although we will also ramp up our investment behind the brands. So I would probably say that going forward, we will pretty much be in line with what we've seen on average on the path to course one opportunity and one area where we've reduced expenses and this one will provide will continue to provide benefits going forward but again it's going to take time is distribution expenses that's uh that's uh what's happened and what we believe uh uh where we'll be uh in the near term Longer term, going forward, I mean, we're living in a very different environment, and even though we've always been a very lean and efficient company, we're working very hard and have exciting plans to make sure we stay as lean and efficient as possible, and that hopefully in the future will mean that even the current scenario we can improve upon. Because, again, it's a different competitive environment. It's a different economic environment. That's the way we see it, and we're approaching it in the sense that we need to continue to evolve with it and transform ourselves and make sure we are the most efficient and leanest company out there. And we've got plans for that to continue to be the case going forward. Got it. That's pretty good.

Thank you very much. As a reminder, to ask a question, that is star one. We'll take our next question from Renata Cabral with Fifth Third Bank. Please go ahead.

Hi. Hi, everyone. Hi, Pablo, Javier, Salvador. Thank you so much for taking my question. My question is a follow-up regarding SG&A. We know that other industries are are more labor intensive, but there is the discussion of gradual reduction of labor hours in discussions in Mexico. Just to understand, how do you see this impacting the company if there is any ongoing simulator or initiative to mitigate this impact if the law passes in the future? Thank you.

Hello, Renata. The analysis that we've done so far points to two things. Number one, any impact would be not on SG&A in our case, but on cost of goods sold because this labor changes could affect union and workforce. There's some impact. But I probably say two things there. Again, this is what we've identified so far. Number one, the size of the impact is not that significant. If you recall, labor represents about 8% of our cost of goods sold. But out of that, a significant proportion comes from profit sharing, and that would not be affected. The other part, which is directly related to salaries, would be impacted in a proportion, but again, it's only on 5% of our COCs. Number two, having identified these risks, we have put in place several teams, several initiatives to see where we can offset This increases where we can add automation, improve efficiencies, so that over the long term, it doesn't have a significant effect on our costs.

Thank you so much for the call. Very helpful. Thanks, Renata.

It appears we have no further questions at this time. I'll turn the program back to for any additional or closing remarks.

Thank you, Liza. Thanks for your help, and thank you, everybody, for participating in the call. Again, hope you have a wonderful summer. We're ready to take your call if you have any further questions, and as you know, always happy to discuss further with any of you. Thanks again. Talk to you soon.

This does conclude today's program. Thank you for your participation, and you may disconnect at any time.