Kimberly-Clark De Mex A

Good day, everyone, and welcome to Kimber's third quarter 22 earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity during the question and answer session. You may register to ask a question at any time by pressing the star and one on your touchtone phone. You may withdraw yourself from the queue by pressing the star and two. Please note this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to your Chief Executive Officer, Mr. Pablo Gonzalez. Please go ahead.

Thank you. Good morning, everyone. Thanks for your participation on the call and we hope you and your families are doing well. Our third quarter results continue to show improvement as we significantly increase stop line, bottom line, and margins versus prior year. we achieved bottom line and margin improvements versus the previous quarters. We're on the right track and expect to continue delivering better results in the fourth quarter and into 2023. We achieved strong net sales for the quarter with better pricing and robust exports and away from home performance. Price realization, higher operating efficiencies and solid advances in our cost reduction efforts outpaced the raw material sequential cost inflation. and we were able to improve profit and margins versus the third and fourth quarter of last year, as well as versus the first and second quarters of this year. From their lows at the fourth quarter, their EBITDA margins have improved 370 basis points, notwithstanding the continuous cost pressures. Progress, no doubt, but we still have much to do. Our focus on greater price realization, achieving further efficiencies, And expanding the cost reduction program while aggressively innovating, investing behind our brands and in the state-of-the-art technology and strengthening shares is steadfast. I'll share more details on each of these after Javier provides a review of results. Thank you. Good morning. During the quarter, our sales were 12.8 billion pesos, a 12.8% increase versus the third quarter of 2021. Net sales were boosted by very strong growth in exports, a highlight in the quarter, and away from home, which grew 36.3% and 17.2% respectively. Consumer products were 8% up. We will continue monitoring prices and volumes to find the best combination going forward. Cost of goods sold increased 10.4%. Against last year, Every commodity and raw material category compared negatively except for resins. All imported and domestic recycled fibers compared negatively. On the personal care side, superabsorbent materials and fluff also compared negatively while resins were down. Finally, energy compared negatively as natural gas prices grew 60%. The FX was slightly higher, averaging 1% more. 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. Gross profit increased 18% and margin was 33.2% for the quarter. The G&A expenses were 7% higher year over year and as a percentage of sales were 80 basis points lower. Operating profit increased 29.7%, and the operating margin was 17.6%. We generated 2.8 billion pesos of EBITDA, a 23.3% increase. EBITDA margin was 21.5%, a 70 basis points sequential improvement, and a 180 basis points improvement versus the third quarter of 2021, underscoring our focus towards margin recovery. During the quarter, we issued Certificados Bursátiles, or SEBURES, for 10 billion pesos through two placements. The first for 7.75 billion pesos with equal amortizations in years 10, 11, and 12. The second for 2.25 billion pesos with a term of five years. This allowed us to anticipate our financing needs for the maturities of 23, 24, and 25 under favorable conditions and to improve our debt maturity profile. During the quarter, we also prepaid 1.5 million pesos of a bank loan that originally matured in 2023. Cost of financing was 425 million pesos in third quarter compared to 445 million in the same period last year. Net interest expense was lower despite our incremental gross debt because we earned more on our cash investments. During the quarter, we had a 2 million pesos FX loss, which compares to an 8 million pesos gain last year. Net income for the quarter was 1.2 billion pesos with earnings per share of 40 cents. We maintained a very strong and healthy balance sheet. Our total cash position at September 30 was 18.1 billion pesos. Our net debt-to-earnings ratio was 1.5 times, with an EBITDA-to-net interest coverage of six times. Thanks. Back to Paulo. Thanks, Javier. Continued progress spearheaded by our focus on execution on different fronts. particularly our relentless focus on consumers, price realization, accelerating efficiencies, and our cost reduction program, but not as fast as we would like to. Unfortunately, costs have not abated. In many areas, they continue to increase or are stable but at historic highs. As Javier pointed out, such is the case of bulk, recycled fiber, and energy. A few others have come down slightly but are also at very high levels compared to last year. We are seeing some improvements in residence, but prices are very volatile. All in all, still a challenging cost environment. We expect it to improve as we get into next year, but the degree and speed remain to be seen. Notwithstanding, our actions are taking hold and are allowing us to continue to post sequential improvements. We still have much to do, and we're confident that our laser focus on the priorities I mentioned will allow us to continue to improve results sequentially and have a strong fourth quarter in 2023. Thanks again for participating in the call, and now we will take your questions.

Thank you. At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1 to ask a question. We will pause for a moment to allow questions to queue. We'll take our first question from Luis Yance with Compass.

Hi, Pablo, Javier. Thanks for taking the questions and congrats on the sequential profitability.

Pretty impressive despite the cost headwinds you guys are still experiencing. So a couple of questions from my side.

I guess the first one on the top line side, a very strong top line again, growing 13%, just wondering if you could give us a bit of color in terms of volumes. Is it kind of the same trends of the past two quarters where volumes were slightly negative? Is it actually getting closer to flat? And whether you've started to see there, you know, some trade down or perhaps a little bit of weakness in certain categories due to the overall inflation. And if you could comment on, you know, a bit slower growth in the consumer products was going on there.

And I guess on the export side, super strong, just wondering if, uh, you know, if that sort of trend should continue going forward.

Thanks. Sure. Thanks for the questions. Thanks for being on the call. Sure. On the top line, as you mentioned, number one, very strong sales from our expert business, and we expect that to continue here in the fourth quarter. It's a little bit more skewed towards iron world sales than finished product. but still very strong, and we expect, again, that to continue. Same with away from home with a 17% increase, which was also pretty strong. And as more people are coming back into the office environment and many people are traveling, again, we see that business recuperating very nicely, so we expect also growth to continue there. And consumer products, good growth with 8%, but a little bit more challenged on the volume side, and the trends continue to be pretty much the same as in past quarters. And there's a couple of reasons for that. Let me talk a little bit about them, why the volumes are down. Number one, we've got quite a few categories that had very strong sales in the past couple of years given the COVID pandemic, and we're seeing volumes decelerate significantly in many of those categories. Examples of that are antiseptic gels, cleaning wipes, aerosols, even soaps, and to some degree, kitchen towels. All of this, again, were used significantly, and their volumes increased significantly during the COVID period, and we're seeing a deceleration. We expect all of us to end up with higher base volumes than before the pandemic, but still we're having that effect. Second, there's some categories that are not growing per se, and that's because the consumer's been stretched with inflation and the increases in prices on the one hand, and others that, for example, we see a deceleration in bathroom tissue, and that has to do with the fact that, as we just mentioned, a lot of people are coming back to the office So we see an increase in paper usage in the office versus home. So we see the category in consumer products decelerating and actually being below last year a little bit. And the third reason is that as we've increased our prices and competitors have followed but have lagged, we have seen a little bit of a loss in share in some of our categories. So those are the three reasons why volumes are down and the trend continues to be similar versus previous quarters. On the trade down, we haven't seen too much of it. It's been marginal. What we've experienced really is that consumers are stretching the use of the products they like versus trading down. And there are certain categories where we do see a little bit of growth private label, but that's really particularly on the napkin side. All of the other businesses, it's pretty stable or slightly ahead of last year. But again, trade down, not a big, big impact so far. We'll see how that behaves going forward.

That's a great caller on that answer.

And on the price increases, What should we expect in terms of further price increases in the fourth quarter in 2023?

I know it's hard to get a good sense on costs going into 2023, but what are you guys thinking from now until year-end or perhaps early next year?

And are you going to be much more selective? I mean, you mentioned some categories earlier. kind of being impacted by the recent price increases.

So perhaps not like a widespread price increase across the board, but maybe more selective.

You know, if you could help us think how we should think about that would be helpful. Thanks. Sure. Look, we're really taking a close look at the balance we want to achieve between price and volume. And again, given where we see volumes and the reasons why volumes are down, we are not very worried at this time, but we are monitoring that very, very closely. That's one side of it. The other side is that, just like you mentioned, it won't be as we move forward and we look for opportunities to increase our price where costs have increased very significantly. It won't be across the board because categories have behaved certainly differently. We expect costs to behave differently going forward. Over the past 12 to 18 months, we've seen everything go up. But as we mentioned, residents and some things are starting to come down. We expect hopefully by next year that we will start to see bulk also start to come down. Again, we don't know by how much and how quickly, so we're going to be careful with that. But again, it's a different situation depending on the category, so we're going to be monitoring that closely and figuring out, given the cost environment, where we need to be more efficient in our price realization and then decide how to move forward. Nothing specific. on that end. But again, it's something we monitor, as you know, day in and day out, and we will be defining how we go forward here in the next couple of weeks. Great. And my last question on the profitability side, you know, how do your overall costs look like so far in the fourth quarter on a sequential basis? And this trend of gradually restoring profitability on a sequential basis, how Should that continue in the fourth quarter?

And how do we think about 2023? Is it reasonable to think that, you know, that kind of normalized margin we've talked about, the 25%, 26%? Is that something you're still aiming for next year?

Yeah. But first, for the fourth quarter, we expect the trend that we have posted this year to continue. When you look, for example, at third quarter versus second quarter, so sequentially Our pricing, 4%, was a little over what we saw the cost environment, which was slightly down 1%, 1.5%. So pricing was over cost, and that's what allowed us to improve our margins. We expect that trend to continue into the fourth quarter. Now, as we see things right now, as you know, this is very, very volatile, but as we see things right now, we would expect our margins to continue to increase into 2023. and certainly at some point in the year get quite a bit closer to our target margins that you just mentioned. So, again, we believe our actions are taking hold, and we'll see how it costs a move from here on. But our current scenario would be for us to continue to improve margins throughout next year and, again, come closer to our margin targets. Great. You know, very good detail. Thanks for your answers and congrats again. Thank you. Appreciate it.

Thank you. We'll take our next question from Antonio Hernandez with Barclays.

Hi. Good morning. for questions. Two quick questions, one on cost ratings. What are your expectations for the next year? And I could follow up regarding the innovation pipeline. How much can that help support profitability by improving first mix and source? Thanks.

Thanks. I couldn't hear you all that clearly, Antonio, but it sounded like you wanted for us to talk a little bit more about our innovation and how it can support innovation. what we see going into 2023. So I'll get into that. And if I miss anything of your question, please come back to us. But very, very strong innovation pipeline and very strong pipeline on our cost reduction program and both. And we're trying to accelerate the same. And given the very forecast environment we faced here in the past year, year and a half, we've really, really accelerated everything. And I think by first quarter next year, we'll be able to, when we talk about the results of fourth quarter in the first quarter of next year, we'll be able to give you more detail on what innovation you can expect going into next year. But we're very, very happy with the pipeline. We believe it will certainly support our goal of moving forward and increasing sales with volumes and prices. And on the cost side, we've mentioned about our footprint rationalization on the tissue side. That will really be happening here between the fourth quarter and first quarter of next year for the most part. We have already started implementing it, but there's quite a bit more that will be happening. And that will be a very important improvement on the tissue side when it comes to efficiencies, costs, productivity, and certainly product innovation. So very excited with both the innovation side and our pipeline on the cost reduction program. And we believe those two, together with all of the actions we've mentioned, will provide the needed support so that, again, we can continue to 2023, not only growing our top line, but also growing our bottom line and improving our margins. And, again, at some point during the year, getting much closer to our target margins.

Okay, so if I understand correctly, then basically all of these different strategies and pricing actions and so on are already weighted in that optimistic view or at least better view for next year, right?

Again, on pricing, we will continue to monitor the situation, and it will be on a category-by-category basis. but we will do what we need to do to make sure that we can absorb the very, very important cost increases that we've experienced here over the past year and a half.

Okay, perfect. Thanks, everyone. Have a great day.

Thank you. Thank you. We'll take our next question from Bob Ford of Bank of America.

Hey, good morning, everybody, and thanks for taking my call. Pablo, you mentioned competitor price lags, and I was curious if there's anything in there that makes you at all uncomfortable. And with price increases, how are channel inventories behaving? And as that rate of change maybe decelerates somewhat in 2023 and interest rates rise, how do you expect channel inventories to evolve over the next several months? Okay.

We'll see. Well, first, thanks for being on the call, Bob, and thanks for your question. Channels, what we're seeing so far is that the smaller stores and the stores that are closer to consumers, so convenience, bodegas, et cetera, are the ones that are growing at the fastest clip, with consumers really placing an emphasis on... what they can spend really on the different categories given how high inflation has been. So they're really looking for the closest store. We haven't seen much trade down, but we do expect consumers to really go for the smaller packages. It's really their disbursement that's in question here. So we have to see how that continues to evolve and how the consumer or consumption holds up in the coming year. We hope it does. But for now, what we're seeing, again, is that those are the channels that are are growing at a faster clip than some of the other channels.

That's very helpful. But do you see any buildup in inventory as retailers, especially the bigger guys, anticipate price increases?

No, we really haven't seen that. I mean, when prices have happened during this year, you always see a little bit of buildup on the wholesale channel, but that's what traditionally happens. We haven't seen anything that's different from trend. And no, we don't see any buildup in inventories.

Understood. No, and your categories are difficult. They're voluminous, right? The export business was also very impressive. How should we think about the sustainability of that going forward?

Again, we're balancing between what we're doing on the parent role side and what you know we're doing on the finished product side. It's been a little bit softer on the latter here, as you know, in working with our partner and becoming a stronger partner of the supply chain. But as some of the volumes also on their side have decelerated a little bit, so that has come down a little bit. So, on that side of the business, we need to really wait and see what happens with volumes, not only in Mexico but around the globe, with how consumers hold up with this inflation environment and what we expect with the economy going forward. But we continue to work with them. We continue to find ways to become part of their supply chain, and we believe that going forward, It will have its ups and downs. It won't be in a straight line. But going forward, it will certainly provide great advantages for us and for them. On the parent growth side, we still see a strong demand. It's not diminishing. And we expect that to continue here in the next quarters. And, again, we'll see. We'll see how it all holds up. It all comes down to domestic consumption over here in the U.S., and let's see what happens with that given the inflation that we're all experiencing.

Thank you very much, and congratulations on the quarter.

Thank you, Bob.

Thank you. We'll take our next question from Bernardo Mampica with Compass Group.

Hey, Pablo Javier, thank you for taking my question and congrats on the results and the sequential improvement. I have two questions. The first one is could you give an update in terms of vertical integration? I mean, what have been the advances in this quarter? What do you expect for next quarter, for next year? Should we see something important here? And my second question is regarding capital allocation. With such a strong balance sheet and profitability gradually recovering, why not step into buybacks within the current level of the stock price?

Thank you. Thanks, Bernardo. First, vertical integration. I mean, we continue to look at every opportunity to become more efficient and bring down our costs. We just worked a little bit on that, as we mentioned, on our non-moving stocks. machine that we just started up in our Tlaxcala mill this year, which has provided great advantages as a lot of the, quite a bit of the non-wovens that we were buying outside, we can now produce inside at lower costs with great quality, and it allows us to improve product performance. So that's a very clear example, and we will continue to look for those opportunities anywhere they are, and where it makes sense, we will certainly integrate vertically. And again, but it has to bring about efficiencies, cost reductions, and allow us to improve product going forward. So nothing additional at this end at this point, but certainly something that we continue to analyze continuously. And as we find additional opportunities, we will certainly be mentioning those over the course. And I'll pass the second question over to Javier. Hi, Bernardo. On the capital allocation and buybacks question, as you know, if we were to do buybacks, those funds would have to come from the retained earnings account of the equity part of the balance sheet as the same as the dividends. This year, we privileged dividends over buybacks, particularly because of the net income that we had last year. As we go forward, if net income continues to increase and we are able to maintain the level or probably even increase the dividends, we will start considering buybacks again. But that's not going to happen this year.

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

Thank you. We'll take our next question from Jin Spice of Morgan Stanley.

Yes, hello, Pablo and Javier. Thank you for taking my question and congrats on this good result despite the challenging cost environment. So I just want to know if you could maybe clarify how much your volumes and also price mix change quarter over quarter and year over year.

Yes, we're really focusing on what's happening quarter over quarter, so sequentially. And what I can tell you there is that our prices increased 4%. Our volumes were down mid-single digits, so close to 5%. And as I mentioned, costs were down 1.5%. So very pleased to see sequentially prices better than third quarter, better than second quarter, and costs coming down, and that's what allowed us to improve our markets. On the volume side, third quarter is always a little slower than second quarter, but again, volume trends continue to be pretty much the same as in previous quarters. We already talked about the reasons why volumes are down, and we will monitor that going forward and see what actions, if any, we need to take.

Okay, perfect. And in terms of cost, you mentioned the year-over-year change, but how have the individual's components compared on a sequential basis? Have you seen costs coming down for other items besides resins?

What we see in costs sequentially is that we continue to see a little bit of pressure on the fiber and pulp side and even on the fluff side, while retins have improved somewhat, and we expect that to continue going forward. So we're really, at this point, it seems... have reached the peak. Now, they're at very, very high levels, and they really haven't started to come down still, but with capacity coming into the market and the possibility of volumes around the world, particularly in America, being a little bit softer given the inflation conditions and the economic conditions, we would expect that to start to come down at some point in the next year. Now, We have heard this before, and it hasn't happened. It's taken a little longer, certainly, than we all expected, but it seems, again, we've reached a peak, and it should start to come down at some point. We just don't know the magnitude and the speed at which that might happen. That's, again, on the both side resins. As I mentioned, we're down sequentially, and it appears they'll continue to come down as we get into the fourth quarter and into next year.

Okay, in terms of recycled fibers, some indices are showing decreases in the U.S. What are you seeing in Mexico, and do you think that that will be a positive tailwind for the next quarter?

No, what we're seeing is still very, very high comparisons sequentially versus last year in the third quarter, and quite frankly, we expect that to continue in the fourth quarter. Our expectation is that as both prices weigh down a little bit, that then that will put pressure on fiber prices to start coming down also. But not clear when that will happen. We're not expecting it in the fourth quarter, maybe at some point into next year.

Perfect.

All right. Thank you.

Thank you.

As a reminder, if you would like to ask a question, please press star one. We'll take our next question from Sergio Matsumoto with Citigroup.

Yes, good morning, Pablo and Javier. Thanks for taking my question. I want to just ask further on the prior question about the pulp price cost trends. Do you see a a sequentially higher pull price, at least in the short term, or has that second spike of the pull price already passed you? And we can see, we could expect a gradually improving margin in the coming quarter. So we want to see the sense of whether it's going to be where the worst has already passed, or is there another bump coming along the way? Thanks.

Again, what's still not clear is by how much and when this will start to occur. It's still not clear, really, what that might happen. We're in the process of negotiating contracts for next year, so really waiting to see how this evolves. and when we start to see the improvement. So it's hard for me to tell you at this point, Sergio, what will happen in the first quarter, second quarter specifically. But what I can tell you is that we do expect lower bulk prices for 2023 versus 2023.

Understood. Thanks so much.

Thank you. It appears we have no further questions in queue. I'd like to turn it back to management for any additional or closing remarks.

I just want to thank you all again for participating on the call. I know it's early for what I'm about to say, but it's the last time we talk to you this year, so our very first wishes for the end of the year. I hope you have a A terrific holiday season, great end to the year, great start to the year, and we look forward to talking to you early next year with our fourth quarter results. If there's anything else that you guys need, please feel free to reach out to our IR team, and we'll be glad to talk further. Thanks again, and take care.

This concludes today's program. Thank you for your participation. You may disconnect at any time.