Kimberly-Clark De Mex A

Excuse me, everyone. We now have all of our speakers in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions. Instructions for asking questions will be given at that time. I would now like to turn the conference over to Mr. Pablo Gonzalez, CEO. Please go ahead.

Pablo Gonzalez Good morning, everyone. I hope everyone is safe and healthy. Let me start by saying that we're very pleased with the progress we've made on our priorities and operating guidelines to navigate through the current environment with our second quarter results. Despite an extremely complicated environment on many fronts, we delivered strong top and bottom line growth and increased margins. With respect to our priorities and operating guidelines, We implemented a large number of measures and actions to protect the health of our employees and their families, our number one priority. And we have worked with the authorities and communities to assist during the pandemic and mitigate its impacts. Also, we took several actions to guarantee our continued operation, as well as that of our suppliers, to ensure all our customers and consumers have access to our products, all the while ensuring we become more efficient in every aspect of our operation to deliver the best possible results and generate and protect cash. Our consistent and good execution in these priorities enabled us to take good care of our workforce, provide support to those in need, continue operating efficiently, and again, deliver strong results. On the sales front, despite private and B2B consumption being severely affected by the COVID lockdown and its impact on the economy, our strong growth reflects the fact that several categories performed well, particularly those related to personal hygiene, health, and protection, and that we capitalized on new growth opportunities. Altogether, our top line grew for the 23rd consecutive quarter through a combination of volumes, price, and mix. On the cost side, most raw materials prepared positively, and together with our increased productivity and very good results on our cost reduction program, allowed us to deliver strong bottom line growth and improve margins year over year in spite of the significant peso depreciation. In summary, a good quarter in a very complicated health, economic, and consumer environment. Javier will provide more details on the quarter's results.

Hello, everyone. During the quarter, our sales were 12.3 billion pesos. a new record and a 9% increase versus the second quarter of 2019. Volume grew 5% while price and mix were 4% higher. Consumer products, which include sales of our affiliate companies, posted an 11% increase. Away-from-home product sales were down 42%, a significant contraction as offices, hotels, and restaurants shut down. Our exports business performed very well with sales growing 64%. Cost of goods sold increased 7%. Against last year, pulp, fluff, superabsorbent materials, and resins compared favorably in dollars, as did domestic fiber prices. Imported recycled fiber and energy prices compared negative. Finally, EFX was significantly higher, averaging 21% more. The cost reduction program had very good results and yielded approximately 600 million pesos of savings in the quarter. Gross profit increased 12.4% and margin was 38.3% for the quarter. The GNA invested was in line with that last year and as a percentage of sales was 150 basis points lower. Leveraging our top line growth and reflecting our emphasis on improving our investments in advertising and point of sales efficiency, while reviewing the expenses and supply chain costs across the board. Operating profit increased 23%, and the operating margin was 22.9%. During the quarter, we generated 3.3 billion pesos of EBITDA, a 19% increase, and the EBITDA margin was 27%. Cost of financing was 401 million pesos in the second quarter, compared to $379 million in the same period of last year. Net interest expense was lower, as our net debt position has been reduced. In the quarter, we had a $33 million foreign exchange loss, which compares to a $20 million gain of last year. Accordingly, net income for the quarter was $1.6 billion, a 22% increase. Earnings per share were $0.52. We ended the quarter with a strong balance sheet at EBITDA, efforts to improve working capital, and our strategy to protect cash have translated into significant cash generation. Our cash position was 10.3 billion pesos, and net debt represented 11.9 billion, with a net debt to EBITDA ratio of 0.98 times. In July, the company placed $500 million dollars 144A Regex Senior Unsecured Note at 2.431% with partial maturities of one-third each in years 2029, 2030, and 2031. This so-called soft wallet structure minimizes refinancing risk. Needless to say, we entered into a related swap agreement to hedge the currency risk Both the principal and the interest are converted to PEDS. The funds will initially and primarily be used to pay down debt during late 2020 and early 2021. With this placement, we doubled our debt profile average life. We were very pleased with the spread, coupons, and demand for our debt. Finally, as you may know, our affiliate, 4E, is voluntarily recalling its hand sanitizer in the U.S., due to the potential presence of methamphetamine. We will support 4E in doing what's necessary to comply with all FDA requirements. With that, I'll turn it back to Paulo.

It goes without saying that we're experiencing a new operating environment together with very high uncertainty regarding the magnitude of the impact of the COVID-19 epidemic on several fronts, including the spread of the virus among the Mexican population, the health of the Mexican economy and private consumption, as well as the impact on the Mexican vessel. At this point in time, it's simply impossible to try to determine the impact and what may occur. At KCM, we remain focused on our stated priorities and operating guidelines. We have always been committed to improving the lives of our consumers, personnel, communities where we operate in the country as a whole, and we will be doubling our efforts to have an even greater impact in this very tough moment. When it comes to delivering the best results and creating shareholder value, while we don't foresee that our growth rate in the coming quarters will necessarily match our second quarter results, we are very pleased with the resiliency of the company and optimistic that we'll continue to find ways to grow our top line as we leverage our brands, our technology, our innovation capabilities, and our multi-tier and multi-channel strategy. There's great uncertainty and all this in flux, but as consumer habits and interests evolve, we're carefully reviewing our portfolio to ensure we better meet their needs, and we have some promising prospects and are working diligently to act on them. With respect to costs, most raw materials will still compare favorably versus last year, although we are seeing some sequential increases and imported fibers are up significantly. The Mexican PESO and how it performs continues to be an important headwind. Accordingly, we're reviewing and optimizing our pulp and fiber strategy and will continue to push operating efficiencies and work to reduce costs and expenses to offset negative impacts. A strong financial position and cash generation ensure that we can not only withstand what is a very difficult economic scenario, but we will be able to emerge stronger from this environment. In summary, we've got a very good first half of the year, and we're confident we can continue to deliver good results for our shareholders, despite an extremely uncertain and challenging environment. With that, let me open it up for questions, and thank you all again for participating on the call.

Thank you. At this time, we will open the floor for questions. If you would like to ask a question, please press star followed by 1 on your telephone keypad. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the questioning queue, press star 2. Again, to ask a question, press star 1 now. We will now go to our first question.

Hey, thank you. Good morning, everybody. Hope you're safe and well as well. Pablo, exports were very impressive. Can you talk a little bit about any progress in maybe partnering more closely with KCC to keep that going? And additionally, can you comment on opportunities in hand sanitizer exports beyond the recall or any other material categories you might see?

Sure. Good morning, and thanks for being on the call. And likewise, I hope you're all so well and healthy. Sure. When it comes to partnering with KCC, as we said, there are new growth opportunities that we want to capitalize on, and certainly our experts, both of parent roles and finished product of KCC and others, are one of those new growth opportunities. And we continue to progress very nicely with them on several fronts and have different projects that we'll be analyzing the coming months. So hopefully we can continue to support KCC and increase our sales to them going forward. In terms of other opportunities that we're seeing out there, you've certainly mentioned one, which has to do with gels, but there's quite a few others. Certainly our soaps business is performing very well, both bars and liquids under Escudo. Our new surface cleaning wipes are doing very well. Disinfectant aerosols, which we introduced in the markets, are also doing well. We see opportunities in the non-women's category for personal protection equipment. So there's quite a few areas that we are exploring and working on and already producing results, and we're very confident that going forward they'll provide a strength to our sales.

That's very encouraging, Pablo. And then one last question, and that is with respect to the imported fiber costs, how do you think that plays out as you look forward at your competitors and their cost structures compared to you in terms of the relative pressure you may be experiencing?

Look, we are all experiencing the same pressure when it comes to fiber costs. Now, the good thing is that those fibers increased significantly between January and June, but what we're starting to see now is that prices are coming down. The increase was significant, so they'll still compare negatively versus last year in the coming quarters. But prices are no longer going up. They're starting to come down. And that's why we're looking at a Fiverr and Fluff strategy to see how we arrange it. We've got different factors in that strategy. I hope I can't get too much into it. But we've got different factors, and we'll make sure that we're maximizing the use of of fibers that allows to reduce our costs. But all competitors should be feeling the same pressure from recycled imported fibers.

I guess where I'm coming from is I feel that the relative importance in your COGS from fiber on a comparable product may be less. Is that fair to say?

Well, on the tissue front, I think it may be less, but we don't know exactly, but it could be less, yes.

Okay. Thank you very much.

Thank you, Pablo. Our next question comes from Vin Thayer with Barclays. Please go ahead.

Hey. Good morning, Pablo. First of all, thank you very much for the call, and congrats, and hope you're safe and sound. So I wanted to dig a little bit into the sales performance, which clearly was very positive, and you've highlighted it in your prepared remarks with the combination of price, volume, and mix. Could you elaborate a little more on the different sales channels and how that helped you perform throughout the quarter, where it was basically modern channel versus the traditional channel, just to understand a little bit of the demand dynamics within your personal care items? That would be my first question.

Sure, Ben. Thanks for being in the call. We have experienced growth in most of our channels. And it really depends on the category. As I said, several categories perform well, and it depends on some of those categories. They perform differently in the channels, but overall our sales were up in the different channels when it comes to consumer products. Certainly on the professional side, we saw a big impact, and we expect that to improve as the economy reopens. And, again, our export sales did very, very well for the quarter.

Okay, perfect. And then just to understand a little bit of what else you can do, I mean, it was for sure impressive what you've already reached in terms of cost savings, and you've highlighted that in the press release, approximately $600 million or so. Where do you think we can end up with that number? I mean, it's a pretty sizable amount now on a quarterly basis. So where else would you see opportunities to save costs and maybe with that react a little bit to some of the cost pressure you've mentioned on fiber, et cetera?

Look, we continue to look everywhere to make our operation more efficient and And we performed very well in the second quarter in all fronts, on the purchasing area, on product redesign and improvements in material use and operating efficiencies. So we're very proud of what we were able to accomplish in the second quarter. And given the rate at which we're running, we expect total savings for the year to be between 1.6 to 1.7 billion pesos, which will be a new record for the company. And, again, we are looking everywhere. The environment is very uncertain, very challenging, and it requires us to look at every single area of our operation and improve on every single area. And we did very well in the second quarter. We expect to continue to do well and, again, deliver between 1.6 to 1.7 billion pesos for the year.

Okay. Perfect. Well, that's all from my side. Well, thank you very much, and congratulations again on the results. Have a good day.

Thank you, Ben. Our next question comes from Jen Spieth with Morgan Stanley. Please go ahead.

Yes, hello. Congrats on the results, and thank you for taking my question. I have a related question to the previous question. Was the price increase mainly due to mix, or were there also some price increases included there? And I mean, was it the function of the shift from away from home to consumer products simply causing that increase? And within the consumer product, did you see any trade downs as the economy has contracted?

Thank you. Yes, on the first question, Most of the improvement on price and mix, as you mentioned, came because of the mix, mix within our categories and mix within our business. So it was nice to see the combination of volume, price, and mix. We'll see going forward how we can continue to perform at this level. When it comes to trade-downs, There are some categories where we are seeing some trade-down, but overall we are still not seeing any big impact in that respect, and it remains to be seen whether we will see that going forward.

Okay, thank you. And related to that, do you think you will be able to increase prices in the second half of the year?

Well, really what we're doing is we will monitor what's happening with commodities, the impact of the exchange rate, and certainly the market dynamics, including the consumer behavior, and then we'll decide how to proceed in each category. So we'll see how that goes on into the third and fourth quarter.

Okay, great. Thank you so much.

Thank you. Our next question comes from Mohamed Hemet with FGP. Please go ahead.

Hi, guys. Thank you very much for taking my questions. I hope you guys are all well. A few questions. Just consumer volume growth, if you could just tell us that. Second question is, has the FX impact fully flown through or gone through your income statement in Q2, or should we expect that to sort of ramp into Q3, given the case of depreciation happened at the end of Q1? And finally, on the OPEX side, you know, it was very good performance, but we've heard from some other consumer companies that a large part of them, a large part of it was for them at least related to, you know, event sponsorship, concert sponsorship. So I just want to sort of understand if it's just a temporary dip later in the year or part of it is for something like Welfife, which has come down a lot.

Hi, Mohamed. Well, on volumes in the consumer product segment, let me go to the – got it. Sorry, I was just checking something here. The growth in consumer products was pretty evenly split behind volumes and price and mix segments. on the first question. When it comes to the exchange rate, I think the biggest impact we've already seen in the second quarter, some of it might spill into the third quarter, but again, the biggest impact already happened in the third quarter. And when it comes to... Depending on what happens going forward. Yeah. I mean, we need to monitor what happens... Assuming it stays where it is right now. That's right. Assuming the exchange rate stays where it is right now. But the initial impact we saw... flow through in the second, most of it flow through in the second quarter. And when it comes to SG&A, what we experienced is that we continue to invest heavily behind our grants and our innovations, and we'll continue to do that. But we saw an improvement on our distribution expenses, and the improvement came behind higher spot arrangements versus dedicated arrangements. and new strategies that we're implementing along our supply chains and along our distribution of our products, for example, on how we handle the last mile and quite a few other strategies that we're putting together. So we saw better distribution costs, and that certainly helped on SG&A.

And we did not delay any expense on the SG&A. No, we didn't. So it's not that they will – they should not ramp up going forward.

Okay, that's great. Thank you. Just so that I understood the first answer correctly, you said it's basically the growth in consumers split evenly, so a third, a third, a third between volume, price, and mix?

No, evenly, sorry, half of it is volume, half of it comes from price and mix.

Oh, awesome. Thank you very much, guys. And once again, thank you for taking my question and hope you guys all stay well. Oh, thanks for participating, Mohamed.

Thank you. And once again, if you would like to ask a question, it is star 1 on your telephone keypad. We will next go to Luis Willard with GBM. Please go ahead.

Hi, guys. Good morning. Thanks for taking my question. I hope you're all right. Congrats on the results. So, Pablo. Could you tell us about how do you feel in terms of capacity, the capacity and utilization levels that you have currently, and how does that move your capital allocation decisions? I mean, for 2020, mostly said, but maybe 2021 or 2022, especially in the face of the things you have going on with KCC. Thank you.

Let me see if I got your questions correct. I'll answer, Luis, and if I missed something, please let me know because you're not coming on too clear. On capacity utilization, it certainly depends on the categories, but particularly on those that have to do with hygiene. We're running at a very high capacity, both because we are – Those categories have momentum here in Mexico, but we're also exporting finished product to our partner, and we're using some of our paper-making capacity to also export parent rolls. So on the tissue side, we're running at high capacity. On personal care, we are running pretty much at the rate we have been running. And we're pretty confident there that we don't need any additions here in the short term. We have enough for us to continue to innovate and push our brands and push our growth here in the coming quarters and years. When it comes to KCC, again, very robust plan that we've developed with them. Some of it has already materialized. Some of it is in the planning process. and we're very confident that we'll be able to continue to support them and continue to add sales to our export business through what we're doing with KCC and other partners in the U.S. and other parts of the world.

Thank you, Pablo. Yeah, that was exactly my question.

Perfectly.

Thanks.

Thank you. And at this time, there are no further questions.

Okay, thanks again, everyone, for attending the call. We would be glad to take any additional questions that you may have in the coming days. And I hope you and your families all stay healthy and safe. Look forward to talking to you in the third quarter, and we'll continue to work diligently to deliver and create value for shareholders that we've done through this first half of the year. Thank you all so much for participating.

Thank you ladies and gentlemen. This concludes today's conference. You may now disconnect.