Kimberly-Clark De Mex A

Ladies and gentlemen, thank you for your patience and holding. We now have your presenters in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of this morning's presentation, we'll open the floor for your questions. At that time, instructions will be given as to the procedure to follow to ask an audio question. It is now my pleasure to introduce today's first presenter, Mr. Pablo Gonzalez. Please go ahead, sir.

Thank you. Good morning, everyone. We hope you and your families are healthy and safe, and we wish you all a great 2021. Let me start by saying that we had another good quarter and overall a very strong year. We set out our priorities and guidelines early on to navigate through the challenging environment we have faced. We focused on executing them, and that allowed us to deliver strong top and bottom line growth and to keep our margins healthy and among the best in the business sectors in which we participated. During the quarter, we reinforced the various measures and actions to protect the health of our employees and their families, number one priority. We maintained our contact with the authorities and communities to assist during the pandemic and mitigate its impacts. Also, the actions we have taken to guarantee our continued operation, as well as that of our suppliers, to ensure all of our customers and consumers have access to our products, have allowed us to continue to operate our facilities without any meaningful disruptions. On the sales front, despite private and B2B consumption still being affected by the COVID confinement and its impact on the economy, several categories performed well, particularly those related to personal hygiene, health, and protection. We continue capitalizing on new growth opportunities. Altogether, our top line grew for the 25th consecutive quarter, driven by healthy balance, volume, and price. On the cost side, from materials other than fibers to be recycled were flat or compared positively. And together with our increased productivity and very good results on our cost reduction program, as well as expense containment, allowed us to deliver solid bottom line growth in spite of the peso depreciation. So we were able to produce another good quarter and very good year in the midst of a very challenging environment. Javier will now provide more details on the quarter's results. Good morning. During the quarter, our sales were 11.6 billion pesos, a 7% increase versus the fourth quarter of 2019. Volume grew 3%, and price and meat were 4%. The latter because we achieved better price realization, particularly from reduced promotional activity. Consumer products grew 8%. Our web-from-home product sales were down 12%. reflecting the effects from the COVID-related restrictions, particularly in offices, hotels, and restaurants. Finally, our exports business performed very well, with overall sales growing 48% and sales of converted products more than doubling versus last year. Cost of goods sold increased 9%. Against last year, pulp, fluff, superabsorbent materials, and resins compared favorably in dollars. imported and domestic recycled fibers, and energy prices compared negatively. Finally, TFX was higher, averaging 9% more. The cost reduction program, an important component of our business DNA, had once again very good results and yielded approximately 350 million pesos of savings in the quarter. These savings are at the cost of goods sold level and are generated by sourcing, materials improvement, and process efficiencies all contributing in a meaningful way. Broad profit increased 4.7%, and margin was 38.5% for the quarter. G&A expenses were up 1.6%, and as a percentage of sales were 90 basis points lower. We achieved better efficiencies in distribution expenses and continue to find ways to invest more efficiently behind our brands, balancing advertising with points of sales promotions. Operating profit increased 7%, and the operating margin was 22.9%, in line with last year, and representing a sequential improvement of 160 basis points. Net income for the quarter was 1.6 billion pesos, an 11.1% increase, with earnings per share of 52 cents. During the quarter, we generated 3.1 billion pesos of EBITDA, a 5.3% increase, and EBITDA margin was 26.8%. Cost of financing was 423 million pesos in the fourth quarter, compared to 398 million in the same period last year. Net interest expense was 10% higher from increased debt as earlier in the year we pre-financed late 2020 and 2021 maturities to take advantage of favorable market conditions. In the quarter, we have a 3.5% million for an exchange loss, which compares to a 15 million pesos loss last year. For the whole year, our sales were 46.7 billion pesos, a 7% increase. Our EBITDA was 12.5 billion pesos, a 14% increase, and 27% of sales. And our net income was 6.1 billion pesos, an 18% increase, and represented 13% of sales. All of these results were records for KCF. We have a very strong balance sheet, which reflects solid cash generation from EBITDA, with 10 billion pesos of free cash flow generated in the year. Positive results from working capital management, and in general, the priority we set at the beginning of the year to protect cash. Our total cash position was 19 billion pesos. Our net debt to EBITDA ratio was 1.1 times. with a net debt to net interest coverage of eight times. With that, I'll turn it back to Parviz. Let me first make a few additional comments about the year that just ended. We have said all along, our number one priority has been and will continue to be the health and well-being of all our personnel and their families. To that end, we established and executed strict health protocols and have provided extensive support, both medical and emotional, to all KCM employees. Very unfortunately, and despite the strict protocols applied, we very deeply regret the passing away of 25 of our colleagues due to COVID. We have worked with the authorities and several organizations during the pandemic and have supported the communities where we operate. All in all, our COVID-related expenses have been more than 100 million pesos. Proud results translating to an earnings per share of a peso 97 cents, an increase of 18% versus last year. Given this result, profit sharing will again be over 800 million pesos. Our personnel are highly skilled and committed, delivered very good results, and all will share in the benefits. This has always been the case at KCM, and we are very proud. Finally, It's worth mentioning that we continue to advance our sustainability goals and our results have been recognized by being included in the S&P BNP Total Mexico ESG Index, the FTSE for Good Index Series, and both the Dow Jones, NILA, and Dow Jones Emerging Markets Indices. Only five Mexican companies achieved the required scores to be included in the latter. In the coming months, we will update our results as well as communicate our new goals. 2020, KCM delivered good results, and we will continue to strive to do what's best for our employees, consumers, shareholders, communities where we operate, and of course, Mexico. Now let me turn to 2021. We will continue to operate in an unprecedented and uncertain environment. It is in moments like this when KCM's positioning, resiliency, adaptability, strategic model, and very strong balance sheet allow us to not only successfully navigate through the challenges, but also capitalize on the opportunities. Mexico's economy is experiencing a sharp contraction, and the impact on domestic consumption is evident. But we believe we can continue to grow because we sell essential products and have very solid positions in defensive categories, with strong and leading brands and a successful multi-brand and multi-tier strategy. We will face tough comparisons in the first half, but we will achieve healthy top-line growth for the year through a combination of volume, price, and mix, and by taking advantage of our strong innovation pipeline and developing opportunities and technologies for which we will increase investments. On the cost side, we expect pressure from bulk, super-absorbing materials, and more pronounced, from residents. We have plans in place to mitigate this impact. which together with our operating efficiencies, our cost reduction program, and hopefully a relatively strong threshold, should allow us to also post-bottom line growth and achieve healthy margins in 2021. To this end, the cost reduction program will continue to play an important role. The fact that many of these savings are technology-driven, together with our intention to continue actively looking for, developing, and investing behind new products and process technologies, keeps us confident that we should be able to keep delivering good results in this very important area. Finally, consistent with our long track record of shareholder friendly policies, on our February board and shareholders meetings, we will be proposing a dividend increase in real terms and that we resume our shared buyback program. Summary, we had another good year and we believe we can continue to deliver good results for our stakeholders. With that, let me open it up for questions. Thank you all again for participating on the call.

Thank you. Ladies and gentlemen, at this time, the floor is open for questions. If you would like to ask a question, you may do so by pressing star 1 now. If you are on a touch tone phone, please make sure that your mute function is disabled to allow your signal to reach our equipment. Again, to ask a question, press star 1 now. Our first question comes from Bob Ford with Bank of America.

Good morning, everybody, and thank you for taking my call. Pablo, can you talk a little bit about how KCC may be thinking about the structural changes in U.S. consumption and any possible reconfiguration of U.S. capacity versus leveraging KCM a little bit more aggressively and over a longer period of time?

Sure, Bob. Great to hear from you. Look, we know that demand in the U.S. for certain products, particularly tissue products, has continued to be very strong, and both companies and retailers have not been able to restock appropriately, so demand is still, again, pretty strong. We have been, of course, supporting KCC during this period and have been having conversations with them about the supply chain, let me call it, for North America to see how we can participate in the supply chain and together become more efficient. So we're having those conversations and they'll continue throughout the year. In the meantime, we will continue to do all we can to support our partner.

Understood. That makes great sense. And then, Javier, could you explain the lower revenue number in U.S. GAAP. I just want to understand or be able to reconcile the differences in growth in the two accounting methodologies.

It comes mostly from the effects used for translation work. Okay.

Great.

Thank you very much.

Very well. Thank you.

Thank you. Our next question comes from Jen Spies with Morgan Stanley.

Yes, hello. Thank you for taking my call and congrats on the results. So my question is, on this 4% price-mix increase, you mentioned that it was mainly due to better price realizations. But approximately how much was it price versus mix? And also, second question, if I may, the strong results in the consumer product category, the 8% revenue increase, How much of that was volumes and how much of that was price? Thank you.

Sure, thanks. You're not coming across too clearly, so I hope we answered your questions. Otherwise, please let us know. With regards to price realization, we did increase prices on some SKUs or channels. and even in some tiers, so we did some selective pricing throughout the quarter. We reduced our promotional spend and achieved what we believe were promotional efficiencies, and that really drove the increase in pricing. Mix was pretty much flat versus last year. And when it comes to consumer products and the 8% increase, it's basically half and half between volume and pricing.

Okay, perfect. Yes, that ends.

Thank you.

Thank you.

Thank you. Our next question comes from Luis Yance with the Compass Group.

Hi, guys. First of all, Happy New Year and congratulations on the outstanding results for 2020. Just two questions on my side. You know, one is on capital allocation, and you kind of mentioned earlier You know, some of the initiatives you have to present to the board in terms of the dividend and in terms of the buyback. But, you know, how should we think about CapEx? I mean, CapEx was pretty low. Do you kind of go back this year to the usual hundred million dollars or you're still going to be conservative? And despite the big volume increase, you don't really need much of that. And how do we think about, you know, that balance? between dividends and buybacks, especially given that you didn't only have a great year in terms of net income, you also have a very strong balance sheet to begin with at this point. So just to get a sense of that would be helpful.

Hello, Luis. We are wrapping up our CapEx program. It's very likely that in the coming quarters, We'll see higher numbers than what we've had in the most recent ones. We invested ahead. As we've said before, we had the benefit these past two years that we had invested ahead in capacity, particularly in major capacity in tissue. So we didn't know that. We didn't need that, sorry, for the recent past. But in other categories and in other products, we will be investing more. both in capacity as well as in product innovation. So that's it. If I can add, we see no doubt good opportunities on technologies out there to improve our products, increase flexibility, gain efficiencies, and reduce costs. So as Javier is saying, we will be increasing our investments behind them this year. Now when it comes to dividend and share buybacks, Again, we will be proposing to a board meeting and then shareholder meeting in February, an increase for the dividend in real terms. That's still to be determined and then to be approved by both, as well as resuming our shared buyback program. So stay tuned. We will have more information on that once we have those meetings and we get our plan approved.

Great. Thanks. And one last question, if I may. I mean, you mentioned, you know, for 2021, you still expect, you know, some top line and bottom line growth, which is impressive given, you know, the tough comps you have from 2020. So if you could just give us some general sense, you know, what's going to be the main driver? I'm assuming volumes are going to have a tough time given the high comps. Is it going to be mainly pricing? Is it going to be mainly nicks? And then how do we think about that? And in terms of your margins, you've always talked about kind of 25, 27% as the appropriate margin. You're closer to the high end of that. Could you sustain that given your pricing initiatives and what you're seeing in terms of raw material trends?

Sure. We hope that we can achieve a top line that's balanced as we did this quarter. that certainly would be very, very good. We'll see how the year develops. First half of the year, particularly in volumes, as you mentioned, will be a little bit tougher, given some of the comparisons we have, which were volume-heavy in the first half of the year, given COVID and some categories that saw a spike in volumes because of the pandemic. So first half will be a little bit more complicated when it comes to volume, but so far, categories are growing in volume. They have certainly slowed down, but we are seeing growth in volume. And again, we will be very focused on price realization both through selective price increases and promotional effectiveness. So we will certainly strive to achieve a balance for the year, again, for the year between volume and price. And with respect to margins, again, there will be As we mentioned, some pressure, at least initially, on the cost side on bolts and resins. On bolts, it really comes because of strong demand in China, so spots, tons are being diverted to that market, and the producers are trying to increase prices. There's doubt out there as to whether these increases will hold and will be able to continue. Many believe this is temporary and will not last, but we'll see how this develops in the coming months. Now, even if we see some of those increases, it is important to note that we have contracts in place that, one, guarantee supply, and two, will help mitigate any increases. Again, if the increases hold. so those contracts are very, very important for us right now. It is a contract market versus a spot market at this point, and we do have those contracts which will help us. Other than that, again, our plans to achieve greater price realization, to operate more efficiently, and to continue to reduce costs. We've been very successful in doing that over the Last five, six years, you know it's our culture, it's our DNA, and we'll continue to be very aggressive on that. And all of that, it's within our span of control. And then further, let's see what happens with the exchange rate. I mean, at current levels, it would be a tailwind for the year, not in the first quarter, but for the year. So if we can execute and some of these things go our way, we believe we can sustain the margins that we've been able to post. I'm sorry for the long-winded answer, but I hope it gives you a better perspective as to where we stand.

No, that's great. Thanks a lot, guys, and congratulations again. Thank you so much.

Thank you. Our next question comes from Ben Toro with Barclays.

Thank you very much, Pablo Javier, and congrats on the results. Actually, most of the questions just were answered. Just one follow-up, and you had in your prepared remarks, I mean, obviously, the macroeconomic environment is not precisely supportive and easy. So thinking of some of the cost pressure you've just elaborated on pulp, on raisins, etc., How confident are you about the ability to actually push through pricing in 2021, considering that the consumer is definitely stretched and we're seeing difficulties here? Just to understand... how you think of applying a pricing strategy throughout the year. Is it selective from certain brands? Is it across the board? Is it more back-end driven? So just to understand a little bit the dynamic over the year and what you're planning to do on pricing.

Sure. I mean, we really have to see how this evolves. As you say, how domestic consumption moves forward. I mean, there's some things that could certainly change aid in that end, the social program reaching more people, remittances, I mean, they were over $40 billion last year, and we expect them to continue to be strong this year. If the U.S. economy continues to plow ahead, and if the new package that the Biden administration is proposing gets accepted and there is more support, then the U.S. economy might grow at higher levels, and that will certainly aid our exports segment and sector in Mexico, and that could certainly help the economy going forward. So, yes, it's a very tough environment, and with the pandemic hitting us hard, but there are certain things that could help the economy move forward, and we hope that's the case. So we'll monitor very closely how the domestic consumption is evolving. We'll monitor very closely how costs, as I just mentioned, evolve, and act accordingly. For now, what we're thinking of doing is, again, focusing very much on achieving price realization through selected pricing, so not across the board, but looking at different opportunities, channels, tiers, SKUs, et cetera, and certainly how we're investing our money between gross sales and net sales and trying to be much more efficient there emotionally and with discounts. And we hope that provides enough support and that certainly gives us at least inflation or a little bit more. And we'll take it from there. We'll see how it evolves and if costs continue to be an important headwind, we'll decide if we need to do something else. But right now, our strategy, again, is realization through selective pricing and greater efficiencies between gross sales and net sales.

Okay. Very clear. Perfect. Thank you very much, and congratulations again.

Thank you very much.

Thank you. Our next question comes from Pedro Farajat with the Compass Group.

Hi. Good morning. How are you? Congratulations on the results. One question, a follow-up question on cost savings. You mentioned that they have been helping a lot to offset the FX pressure and the raw materials pressure, but do you have a specific target for this year? How much of the previous cost savings and 2021 cost savings come at the gross profit level, and how much do they come from the SG&A level? Thank you.

Thanks for participating. For your question, we don't currently have a target for cost reduction program this year. As you know, we always target at least 5% of cost of goods sold. We've been able to achieve that over the past five years very successfully, and certainly this was a very good year, a record year on our cost this 2020 on our cost reduction program, roughly $1.7 billion. And some of that will run into 2021, and we're already working on additional actions during the year. So, again, we hope we can have another strong cost savings year, and that that will certainly help with ameliorating any cost pressures that we see. Now, most of it really comes at the cost level. There's a little bit that comes at the expense level, but the vast, vast, vast majority of it comes at the cost level. And we expect that to continue going forward.

Thank you very much. Again, congratulations. Thank you. Thank you. Appreciate it.

Thank you. Our next question comes from Mohamed Amin with FG.

Hi, guys. Thank you very much for taking my question, FGP. My question's been asked already, so I just wanted to say congratulations on a pretty good result and hope that 2021 is better for us all. Thank you.

Thank you, Mohamed.

Thank you. Our next question comes from Louise Willard with GBM.

Hi, guys. I guess I'm going to repeat this thing as Mohamed did. So my question was already answered. I think just wishing you a good year and thanks for the call.

Thanks, Luis. And to all of you again, our very, very best wishes for 2021. Thank you.

Our next question comes from Nicholas Lorraine with J.P. Morgan.

Hey, guys. Good morning. I apologize if my line is a bit choppy. I just wanted to follow up a bit on these contracts, Pablo, you mentioned. Could you elaborate a bit more on what the duration of those and also on the potential buybacks? Please remind me if those shares are normally held in treasury or canceled at the end. Thank you.

Sure, Nicolas. Well, on the contracts, again, on the Most of our raw materials, we've got contracts for the year that were negotiated, I would say, early fourth quarter to mid-fourth quarter. And most of them, I would say, in favorable conditions versus what we're currently seeing. So we're happy that, given that, again, it's a contract market right now, not a spot market, that we have those contracts in place and we'll be taking full advantage of them to help our results and certainly to have a supply we need going forward. And that's again, that's in pulp, that's in resins, that's in many other raw materials. So very, very glad to have those contracts in place and they last a year and I think our purchasing unit did a great job in negotiating those. When it comes to the shares that we buy back, those are canceled. They don't stay in treasury. They're always at our shareholder meeting. We tell them how much we bought through the year, and we cancel those shares, and that will continue to be our policy.

Thank you very much, Pablo.

Thank you, Nicolas.

Thank you. Our next question comes from Rodrigo Lacantara with UBS.

Hi. Good morning, and thanks for checking my question. I would like to hear if you could please, Pablo, summarize your view here on the competitive landscape that you observed in 2020. Would you say that the company that Kimber may have gained some market share in 2020 I was wondering if you can comment, please, about this, about the competitive dynamics that you saw throughout 2020. That would be my question.

Thank you. Sure, Rodrigo. As you know, our categories have always been very, very competitive. And overall, I think the – having said that, overall, the market pricing and promotion dynamics that we saw in 2020 – and that we're seeing early in 2021 are really not significantly different from prior years. We'll see how the year evolves based on how the economy goes and how domestic consumption goes. But again, so far we're not seeing anything that's significantly different from prior years. And when it comes to shares, we had a pretty good year. I mean, we improved shares in most of our categories and certainly the most important ones. We're confident with the plans we have in place and the innovation and pipeline of innovation we've got going forward. We feel good about what we have, what we will be offering to the consumer and putting out there in the market. We are happy with how that's evolving. Again, nothing significantly different from a competitive standpoint. Shares looking good. And we've got a good pipeline going forward, so we'll be monitoring how things evolve during the year and act accordingly.

Understood. That's clear. Thank you, and congrats for the results.

Thank you, Radeo.

Thank you. Again, if you would like to ask a question, please press star 1 now. At this time, we have no further questioners in the queue. Oh, I'm sorry, we have one more. Our next question comes from Paul Trejo with Goldman Sachs.

Hi, guys. Thanks for the call. Congrats on the results. Just one on the exports. Again, super strong growth, even though the FX was actually a headwind, so a lot of volume here. Can you just talk about the mix of products?

roles versus finished and also you know how this sets up the outlook for this potentially growing relationship uh and integration with uh kimber corp thank you sir paul uh yes our our experts uh uh sector did very very well and it's a combination of a strong payroll sales but even more importantly finished product sales uh and that has to do with uh finished product that we sell in different countries in Latin America, but even more importantly, finished product that we've been selling to our partner, Kimberley Clark Corporation, to paint them during this period, which again, we saw very important demand in the U.S. market. So we're working with them very closely, very diligently, and we've been able to supply more product with good quality and good costs We've been able to grow that business with them. We actually doubled our business in finished product on the expert side. And quite frankly, we believe that we can double it again this year. And as I mentioned earlier in the call, it's given the success that we're both having through this scenario. we will continue to analyze opportunities to work together and have KC New Mexico become part of the supply chain of KC North America. And we'll see how that develops, but we're very, very excited with the opportunities, and we're very glad we've been able to help through this period and look forward to continuing to work with our partner and continue to extend that relationship and increase our export sales to them going forward.

Just a quick follow-up. Is it fair to say that some of this potential investment the next few years has in mind the growing volumes of sales of exports to Kimber Corp and other regions?

Well, we certainly hope so. Again, to some degree, it has started as just support to them during this period as again they've seen that we can work together very well and that it makes sense for both of us to do it given quality, given cost, etc. We hope we can have discussions on just overall capacity for North America and how can we be part of that and insert ourselves into the supply chain. Certainly the intention, that's what we're starting to talk about, and hopefully that will evolve well, and it will be, again, a winning solution for both Kimberly Clark Corporation and Kimberly Clark for Mexico.

Great. Thank you again.

Thank you, Paul.

Thank you. Our next question comes from a follow-up from Mohamed Ame.

Hi, guys. Sorry. Just on that, to pique my interest a little bit, What would be the rough breakdown of your export revenue between the three categories you mentioned, which is supplying into KCC, exporting finished products to other countries, and then the intermediate products?

I would say from our expert sense, Mohamed, probably still about two-thirds are still parent growth sales and the rest is finished product. But again, that will be changing here going forward because we expect parent growth sales to still be strong this coming year, but we expect to double finished product sales. So those ratios will be changing for 2020, for 2021.

Okay, and is the finished product primarily into U.S., or is it largely into Latin America?

Sorry, I didn't quite catch that one, Mohamed. Can you say it again?

The finished product sales, are they primarily... You're not coming through, Mohamed, for some reason. I'm sorry. Oh, that's okay. Sorry, I have a bad connection. I'm

Sorry about that, but you're breaking, so we can't hear you. But we'll be glad to take this off of line. We're making the numbers here, Mohamed, as I was answering. Javier was putting the numbers together. And it's close to what I was saying. It's a little bit over a third, the product sales. It's about 40% of the sales of export. That's the finished product, and the rest is hand rolls. But again, we expect a very, very strong growth on the finished product side, so those ratios for 2021 will change in favor of a finished product.

Okay. Thank you very much. Thank you, Mohamed.

Thank you. At this time, we have no other questioners in the queue.

Well, thank you all again for participating in the call. I'm glad to continue to talk to you if you have any further questions in the coming days. And most important, again, we hope you and your families are healthy and safe. Stay healthy, stay safe, and we wish you all a great 2021. Thanks so much.

Thank you, ladies and gentlemen. That concludes this morning's presentation. You may disconnect your phone lines, and thank you for joining us today.