Kimberly-Clark De Mex A

Good day everyone and welcome to the Kimberly Clark Mexico's first quarter 2022 earning school. At this time all participants are in a listen only mode. Later you will have the opportunity to ask questions during the question and answer session. You may register to ask questions at any time by pressing the star and one on your touch down phone. You may withdraw yourself from the queue by pressing star two. Please note this call may be recorded and I will be sending by should you need any assistance. It is now my pleasure to turn the conference over to the CEO, Pablo Gonzalez.

Thank you. Good morning, and thanks everyone for your participation on the call. We hope you and your families are all safe and healthy. A few brief remarks. Our first quarter results represent a significant improvement as we increase top line, bottom line, and margins versus the previous quarters. We're on the right track and expect to continue delivering better results as the year progresses. We achieved record net sales for a quarter, including a monthly record in March, and both our prices and volumes were stronger sequentially. Our pricing actions improved operating efficiencies and solid advances in our continuous cost reduction efforts outpaced the raw material sequential cost inflation and we were able to improve our profits and margins versus the third and fourth quarters of the last year by a double-digit margin in the case of the latter. Progress, no doubt, but our results are still lower than last year, and we still have much to do. Our focus in greater price realization, achieving further efficiencies, and expanding our cost reduction program, while aggressively innovating, investing behind our brands in state-of-the-art technology, and strengthening our shares, is steadfast. I'll share more details on each of this after Javier provides a review of our results. Good morning.

During the quarter, our sales were 12.6 billion pesos, a 3.8% increase versus the first quarter of 2021. Volume was down 3.5%, with price and mix contributing 7.3%. Sequentially, volume was up 3%, price was up 4%, and overall, our record sales increased 7% versus the fourth quarter of last year. Compared to last year, consumer product sales decreased 0.9%, with volumes down 7% and prices up 6%. As is usually the case in our categories, when we lead price increases, we take a temporary hit in This time around is no exception. However, pricing increased 5% and volume increased 4% to add up to a 9% sequential improvement from the fourth quarter. And our market shares are coming back. Given the cost pressures, we will continue to focus on price realization and we will continue monitoring prices and volumes to find the best combination going forward. Away from home product sales increased 12.4% reflecting a gradual return to in-person activities. Export sales grew 51%. Sales of finished products continued growing at a very good pace, increasing by more than 20%. Cost of goods sold increased 16%. Against last year, every commodity and raw material category compared negatively. Fault was up approximately 30%, depending on the grade. Imported recycled fiber prices grew close to 70%, and domestic recycled fibers and fluff averaged high in increases. On the personal care side, superabsorbent materials were up 50%, and resins up low teens. Finally, energy compared negatively, while natural gas compared positively, given last year's February winter storm. The FX was slightly higher, averaging 1% more. Our cost reduction program once again had very good results and yielded approximately 300 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. Gross profit decreased 15.5% and margin was 31.3% for the quarter. SE&A expenses were 0.65% higher year-over-year. and as a percentage of sales were 50 basis points lower. Operating profit decreased 26.8%, and the operating margin was 15.9%. We generated 2.5 billion pesos of EBITDA, a 22.4% decrease versus last year, but a 20.4% increase in the equation. EBITDA margin was 20%. which is a 220 basis points sequential improvement, underscoring that we are on the right track towards margin recovery. Cost of financing was 419 million pesos in the first quarter, compared to 422 million in the same period last year. During the quarter, we had a 4 million pesos foreign exchange loss, which compares to an 18 million pesos gain last year. Net income for the quarter was 1.1 billion pesos with earnings per share of 36 cents. We maintained a very strong and healthy balance sheet. Our total cash position at March 31st was 12.4 billion pesos. Our net debt to EBITDA ratio was 1.5 times with an EBITDA to net interest coverage of 5 times. Thanks. Back to Pablo.

Thanks, Javier. Progress in the first quarter, as anticipated, was spearheaded by our focus on execution on different fronts. Let me briefly comment on some of them. As you are all aware, we implemented a price increase in the November-January timeframe, which was partially reflected in the quarter but fully reflected in March. This, together with our efforts to achieve better efficiencies and returns behind our promotional and advertising investments, allowed us to achieve greater price realization, a key component of our strategy given the substantial and unprecedented cost increases we have experienced, particularly during the last nine months. Unfortunately, costs have not abated. On the contrary, in many areas they continue to increase, such as the case of pulp, recycled fiber, and energy. A few others have stayed constant or have come down slightly and are still at very high levels compared to last year and even historically. we may see some marginal improvements in all derivatives, but prices are very volatile. That is why, in addition to ramping up our efficiencies and cost reduction efforts, which I will touch upon in a moment, price realization will continue to be a top priority. Efficiently executing this strategy while protecting our market positions will be key as we strive to continue to improve our results sequentially and end the year with margins that are much closer to our targets. Second, efficiencies and our cost reduction program. Another pillar of our strategy is achieving further efficiencies and expanding our cost reduction program. With volumes coming back, we saw volumes in consumer products grow 4% sequentially. Cost absorption has improved and our personnel continues to make improvements in productivity and waste measures. Further, we're investing to strengthen our operations and logistics footprint and incorporating data and technology to improve our execution. On the cost reduction front, we continue to identify opportunities and for 2022 expect to achieve record savings. As you know, our program is rooted in our culture and made up of an important number of initiatives. Some of them small, some more impactful, and all add up. Let me mention a couple of initiatives of particular importance. In March, we started the operation of a new non-woman's machine at our Tlaxcala mill. The state-of-the-art technology significantly improved the feel and quality of products in the personal care segment of our business, while at the same time bringing about important cost savings, both in the short term as well as going forward, as we take advantage of our technical capabilities to continuously improve product performance as well as our cost structure. Also, we're making important investments to improve our tissue footprint. By the end of the year, we expect to have an incremental 15% converting capacity with a 20% reduction in assets, achieving improved quality and performance, as well as lower distribution expenses. These are only a couple of the numerous projects we are undertaking. Every peso counts. We will continue to look for and find ways to expand and accelerate our program for 2022 in the coming years. Finally, a relentless focus on consumers. We will continue to invest in the most advanced technologies to bring relevant and differentiated innovations to market, offer the best products to consumers, and increase their preference. Our innovation pipeline is very strong, both for the short and long term. We are supporting our launches and brands aggressively and efficiently. As we do so, our volumes, sales, and shares are responding. During the quarter, we launched new embossing patterns and improved products for pétalos of L-path tissue. We improved our Depend lineup, and we recently launched new digital tampons and menstrual cups under the Kotex brand. Consumers are at the center of all we do, and together with our clients, we're coming up with better ways to serve them and meet their needs. It's worth mentioning that our investments behind innovation, data, and state-of-the-art technology and efficiencies will be at least $100 million for 2022 in the coming years. We see great opportunities and will invest accordingly. And on a final note, our shareholders approved a dividend of a peso 64 cents payable in four installments during the year, which currently amounts to a 5.7% yield. This is consistent with our continuous commitment to deploy earnings in a shareholder-focused manner. Summary. Our actions are taking hold and allowed us to post significant sequential improvements. We still have much to do, and we're confident that our laser focus on consumer needs, greater price realization, incremental efficiencies, and acceleration of our cost reduction program will allow us to continue to improve results sequentially and have a strong second half in 2022. With that, we'll open it up for your questions. Thank you.

At this time, if you would like to ask a question, please press the star and one on your touch-down phone. You may withdraw your question at any time by pressing star two. Once again, to ask a question, please press the star and one on your touch-down phone. One moment while we queue. We'll take our first question from Ben Drew with Berkley. Please go ahead. Ben, your line is open.

Hello, hello?

Can you hear me?

Yes, we can.

Okay. All right. Let me try to – all right, let's start again. Two questions. I'll keep it short. So one, obviously you have still – you mentioned you talked about the raw material price inflationary environment and A lot of that is most likely going to be accelerated into the coming quarters and it most likely will require an incremental pricing action. How do you feel now about the consumer? Because I remember two months ago, you weren't too excited about the state of the consumer. So where do you think the consumer stands now? And also in light of like inflation coming from every single item you can just think through, be it food, energy, and so on. So how confident are you that you can further push on the pricing side to offset inflation? what your cost inflation is to hopefully get those margins even higher than the just 20% level what we at least got this quarter, which was already significantly better sequentially, but clearly still far off from where you would want it to be. So how do you feel about the consumer? First question.

Thanks, Ben. Thanks for the question. And so far, consumption in Mexico is holding up. Growth in volumes is... Weak, I would say, but there's still some growth, and most of the growth really in sales is coming from price increases. But we continue to see some growth, and we'll see going forward because, as you mentioned, there's quite a bit of inflation going on, and we'll see how the economy evolves. functions going forward, and then we'll see how consumers react. So as we always do, we will try and balance our pricing realization together with what's happening with consumption, volumes, and our consumers' needs. and try to figure out what's the best combination going forward. Having said all that, and notwithstanding some of the cost pressures that we continue to see, we are fairly confident that as the year progresses, and particularly as we get closer to the end of the year, our margins will be much closer to our target where they are right now.

Okay. Perfect. Thanks. And then the second question is really on the cost reduction combined with some of the operating efficiencies. And You've done, obviously, a tremendous job in the quarter with your operating expenses being very much under control. How much more can you achieve here, if you think about it, going forward in the coming quarters? Is there more room for efficiencies on cost savings? And then, obviously, within what is on the Cox side, on those savings, What is your expected run rate? What are you then going to get, particularly with the new non-woven machine at the Tlaxcala mill that you've just opened about a month ago?

Sure. We expect our cost reduction program to accelerate starting this quarter and throughout the rest of the year. Behind our investment, as you mentioned, at the Tlaxcala mill and our tissue footprint investments that we're going to be making. Those will probably really take hold at the end.

Excuse me, this is the operator, but your name and company was not recorded. May I please have it? Please make sure that you're unmuted.

You are now rejoining the main conference.

Okay. Perfect. Thank you very much. Thank you, Ben.

We will move next with Luis Jans with Compass Group. Please go ahead.

Hi, guys. Thanks for taking my questions. Two questions from my side. One on the pricing side. I know you mentioned you were going to focus a lot on pricing realization, and you did this – price increases in November, January times. I'm just wondering, what's the plan for the rest of the year? Are you trying to implement something again this quarter, or would you wait until the second half? If you could talk a little bit about the magnitude of that, that would be helpful. And then the second question goes back to margins. I mean, we saw a good improvement sequentially, as you mentioned before. Just wondering that we saw a big spike on some of your key input kind of later in the first quarter. So I'm assuming it didn't impact you as much because of some inventory you may have had. But just wondering if the second quarter is going to be the most challenging from a cost standpoint and whether you feel comfortable that despite that you could still achieve improvements in margins sequentially again. That would be my two questions. Thanks.

Thanks for the question, Jen. First, on the pricing issue, Again, we continue to analyze the market, the consumer, to see what additional opportunities we might find, and we will move upon them as we identify them accurately. So we do expect to do more in terms of pricing going forward, just not completely defined at this point. At least on the consumer's front, When we think about professional business, we are moving ahead. We recently implemented a 7% price increase, and we'll probably move ahead with another 5% to 6% price increase during this quarter. And when it comes – that's on the open market, and we're trying to accelerate the renegotiation of the contracts there. on the professional side to bring about more pricing over there. Professional is one of our businesses that is a little bit further down the road in terms of improving its margins, so we're moving quickly over there to improve that. The other thing we're doing on exports is trying to make sure that we reflect the cost that you just mentioned as quickly as possible on our pricing for our sales and exports products, and that should also help. So it's really on the – those two are very clear. On the consumer side, that's where we just are coming out of the last price we implemented, and we're analyzing what additional opportunities we have, not only on pricing, but also we're about to enter the – heavy summer promotional system, and we're being a lot more careful in how we allocate resources to those different promotions so that overall, not just through pricing, but through less and more efficient promoting, we get greater price realization. So that will continue to be a focus going forward, and we're throughout the year. When it comes to margins, you're right. Some of the costs that we mentioned, particularly fibers, both will see some more impact in the second quarter, and we'll see how our prices, as I said, our price realization holds up, and we'll see how our margins come out in the second quarter. But what we're confident of is that by the end of the year, you will continue to see margin improvement and, again, margins that will be much closer to our target range. So for the year, we do expect an important improvement in margins.

And just to follow up on that, the margin target is still kind of the 25%, 26% you've mentioned before?

Correct. That's our target. And again, by the end of the year, we should be much closer to that than where we are right now.

Okay, great. Thanks a lot for your answers.

Thank you, Jan.

We'll move next with Bob Ford with Bank of America. Merrill Lynch, please go ahead.

Thank you very much, and congratulations on the sequential improvement, Pablo. Pablo, the export business was particularly strong. How should we think about the sustainability and profitability of that part of the business and the role of KCM and KCC's North American production plants?

Sure, Bob. As you mentioned, our expert side of the business is Both were strong, and when I say both, it's one of our role sales, but particularly our sales of the finished product to our partnership with our corporation. And we continue to, again, identify opportunities with them and think about the footprint for North America and see how we can be a part of that and improve results for our partner and certainly for us. And those discussions are ongoing. And, again, it's great that teams every quarter, we find different opportunities to build upon. And we'll continue to work very aggressively on that together with them to find the best opportunity for both companies. So we're very excited with what we see going forward on that end of the business.

That's great. And S&E seems to be signaling some price increases this morning. Has there been any evidence of that so far in Mexico, and might there be a strategic reason that they would lag further?

Sorry, Bob, we didn't quite get this second question. Can you repeat it, please?

Yeah, I apologize. Essity seems to be signaling some price increases this morning. They also reported results, but this morning, right? And I was curious if there's any evidence of pricing from Essity in Mexico, or if there might be a strategic consideration that we should, that would cause them to lag even further?

No, we actually have seen, as we mentioned in the last call, we usually lead price increases, and then we have our competitors follow, and what we've seen throughout the quarter is that that has been exactly the case. So we led, and they have followed, and again, we're all in the same cost pressure mode, and we expect that we will all be looking for additional opportunities for greater press realization. I think that will continue throughout the year.

Great. Very helpful. Thank you.

Thank you, Paul.

And we'll go next to Sergio Maximano with Citigroup. All right. Good morning. Thank you for taking my question. Could you please give more color on the investment on this year on the innovation and the non-woven tissue footprint? I just wanted to understand those better, particularly on like, where is the, how does that reduce costs for you like how was it done before and you know and then with this investment how would that improve so before and after picture and also if you could touch upon this uh data analytics uh investments that you will do thanks sure uh first of the i mean as i mentioned we see great opportunities and that's why we're increasing our

our investments behind them, and not only for this year, but for the coming years, and particularly when it comes to this new wovens machine. There's quite a few areas where we improved, because one, this is a machine that will allow us to produce many materials internally versus going out and sourcing them from third parties, and we get certainly a much better pricing or cost when we do that. So that's one very big advantage. The other one is that since we're going to be operating this equipment, and we've shown this throughout our history, we're very good. We've got very good people operating and technology for this equipment. And we usually find that we start them up And as we progress, we find ways to improve the materials and reduce the cost significantly, and we expect this time will not be different. So not only are we seeing initial savings, we are confident that we will see continued savings going forward. And on the product side, you get great advantages because there are going to be better products, nonwovens that are more soft, more resistant, and that will provide a great product performance. So we expect to improve our lineup in our personal care products in an important way and both not only improve the lineup, but also reduce costs going forward. So a lot of going on there also, as I said, on the tissue footprint, which we're also implementing. And again, those are just a couple of examples. And as we do all of this, we're bringing in technology to be able to get more data and use the data to operate more efficiently in our mills. And we're making great strides on that front. And that will also allow us to be more productive, more efficient, to reduce waste going forward. And that certainly will have its advantages and cost savings. So they come hand in hand, if you will. And, again, we see great opportunities, and we'll be investing more aggressively.

Okay. And on the data analytics, is that more of a supply chain data or – or at the point of sale?

It's really broad-based because we are doing it at our operations, we are certainly doing it on the logistics side, and we're also doing it on the commercial side. I mean, our revenue growth management models are helping us become much more efficient in how we implement price increases and how we implement our promotions. So it's really broad-based that we're using data and technology to make better decisions more informed and better overall for the company.

Great. Thanks.

We'll take our next question from Luis Willard with GBM. Please go ahead.

Hello. Good morning. Thanks for taking the question. So, Pablo, I hope I don't repeat the question that you may have answered before. I apologize, I got disconnected. But I wanted to ask, regarding, I mean, competition, so far, as you mentioned, Pablo, competition has followed the pricing pieces. In other calls with the shoulders that, I mean, if we are suffering, they probably should suffer a bit more, even their size. So what's your base case in terms of pricing for the rest of the year? And especially, do you see any of your competitors probably reducing their size or being more cautious in the remaining of the year? That would be my question. Thank you.

Luis, I hope I get to answer your question because you're not coming out too clearly. If I don't answer it, please tell me. But on pricing, and again, let me repeat a couple of the things we've said. One, as we moved ahead on pricing as we expected because we're all subject to the same cost pressures, competitors have followed. Two, as we look further ahead, given that we continue to have cost pressures, one of our main focus will continue to be greater price realization. both behind identifying additional opportunities to increase prices and by using our data and technology, again, to be more efficient in how we spend our money behind or invest our money behind promotions, particularly now that we're getting into the heavy summer promoting season. So we will continue to monitor the market and look for additional opportunities, both in pricing and both in being more efficient in our promotions. So we expect pricing to continue to move forward throughout the year. And again, we're all subject to the same cost pressure. So as we just happened, we expect to lead and for competitors to follow.

Thank you. Yeah, perfectly. I might just add, do you see any of them reducing capacity or promotional efforts or something to prevent their vanishing to other results? something that you could take advantage of to be a market share?

Again, I'm not sure I'm getting all of your questions, but we don't see, I mean, as we're moving forward and they're following and we're bringing innovation to the forefront, et cetera, we see our shares recovering. We see our volumes recovering. And again, we expect if we move with further price increases, as always happens, we'll see an impact in volume. But over time, as they'll follow, we expect that to come back. And so far, shares are still very healthy. We will continue to balance price, share, and make sure that both are healthy going forward. And again, you're not coming out too clear, so I'm hoping I'm answering your questions.

Yeah, perfect. Thank you.

Thank you, Luis.

We'll take our next question from Mohamed Ahmad with FGP. Please go ahead.

Hi, guys. Thank you very much for taking my question. Hope you guys are doing well. Two questions, two quickish questions. One, just what was the volume growth in consumer products specifically And then second question, can you just give us some color on that lawsuit issue in Texas and any potential? I know you can't give me any numbers, presumably, but how did the mechanics of it work a little bit since it was a subsidy which I believe was shut down?

Sure. Hi, Mohamed, and likewise hope you and your family are doing great. A consumer product sequentially volumes increased 4%. and pricing increased 5%. So sequentially, we saw overall an improvement of 9% in sales. Again, that's sequential. When you look at it versus last year, our volumes were down 7%, and our prices were up 6% for a decrease of 1% versus last year, which was still a tough cut. So that's both the comparison sequentially and to last year. And then I'll ask Javier to comment on the question regarding 4E. Hello, Mohamed.

Sure. For all of the restructuring to finalize the recall process that started almost two years ago is in plan. It's coming to an end, and we expect a very little negative impact from it going forward. The business is going strong in Mexico. We have not been selling in the U.S. for two years. So, again, everything in plan and with a positive outlook going forward.

Okay. Thank you very much, guys.

Thank you, Matt.

We'll take our next question from James Spice with Morgan Stanley. Please go ahead.

Hello, everybody. Thank you for taking my question. Building up on what just Mohamed asked about 4E and in an effort to calibrate your cost on a year-to-year basis, I just want to ask how much were costs impacted by 4E last year, considering that there should be no or very small impact this year due to that? Thank you.

Hello, Chris. The impact for the last year, I don't recall exactly the impact for last year, but for the last two years, it was close to 900 million pesos. Okay. And I will check on this and get back, but I... If you assume it was half of it last year and half of it the year before, it's not going to be far from that. And not all of that is in cost. A lot of that was in reduction of sales because we have to return product. And some of it was also in cost saving. So it went across the board.

So we'll come back to you, Jens, if you'd like, with a little bit more detail on that so that you have it.

Yeah, that would be extremely helpful just to avoid assuming that that cost doesn't run into this year. And also, two more questions, if I may. What was the sequential growth of finished products, export products? And lastly, I didn't get, and sorry I joined a bit late, the tissue capacity. Did you provide any details on that? On the additions? Yes.

Yeah, I mean, on finished product export sales sequentially, we're off, I'm going to say, mid-single digits because we had a very strong fourth quarter. of last year, so slightly ahead of fourth quarter, and again with some very interesting opportunities going forward, but we need to work with our partner to materialize them. We hope that will happen here in the coming months. But overall, we look into that business for the next couple of years. Again, very excited about some of the opportunities we see there, and with interesting and improving margins. And on the tissue side, our wanting export sales continue to grow, and we're also about mid-single digits up sequentially, 4% or 5%. And we see strong demand for that, and pricing is reflecting the cost increases we're seeing in both fibers and tissue. and both, so we expect that also to continue here in the coming quarters. And when it comes to the tissue side that I mentioned of capacity, we're doing a whole footprint analysis and we are doing investments so that we can, as I mentioned, increase our converting capacity by 15% with a 20% reduction in assets, and that will certainly be an important improvement for our footprint in terms of logistics and moving things around, moving paper around, being closer to the sources of demand. And so it will all have an important impact in terms of efficiencies and cost reductions.

Okay, perfect. And the timeline for the capacity addition, did you provide anything?

This will be – I mean, it's a program, just to give you an idea where – It's about 20 assets that are coming out and about seven new assets that are coming in. So that will be happening throughout this year. And that's why I mentioned that we'll see a little bit of the impact of this improvement late in this year. But really, the improvement will be felt completely by 2023. That's when we'll see the greater part of the footprint reduction improvement.

Perfect. Very clear. Thank you so much, Pablo.

You're welcome, Jenny.

And as a reminder, it is star and one on your touchdown phone if you would like to join the queue. We will move next with Bernardo Maltica with Campus Group. Please go ahead.

Hi, good morning. Thank you for taking my question. I hope I'm not being too repetitive, but this question is also related a lot to pricing and competitors. Since you were the first ones to increase prices by looking at competitor performance, has this gap made you see something in terms of your market share so far in the year? And what can we expect to happen in this area during the rest of the year? Thank you.

Yes, Bernardo, as we mentioned, as we moved ahead with price increases and initially competitors lagged, we saw some impact on our volumes and on our shares. And as they've moved forward and followed the price increases, we've seen those volumes come back and our shares again come back. I want to just reiterate that our shares are very healthy. We still have a little bit of room to recover, but they're very, very healthy. And an example of this is, as I mentioned, the consumer products volume sequentially grew 4% while our pricing grew 5%. So you can see both the pricing that we implemented really take hold, and as competitors follow, our volumes come back and our shares come back. So that has always been the case, and if we continue to move forward in pricing throughout the year, we expect that to continue to be the case.

Perfect. Thanks, Raj. Thanks so much.

Thank you, Bernardo.

And it appears that we have no further questions at this time. I would now like to turn the call over to the CEO, Pablo Gonzalez, for closing or additional remarks.

Well, thanks again, everyone, for your participation on the call, for your questions and your interest. And glad we're here for any additional questions that you might have. And look forward to having our next call in July. Thanks, everyone. Have a terrific weekend.

Please stop to conclude today's program. Thank you for your participation. You may disconnect at any time.