Kimberly-Clark de México, S. A. B. de C. V. (OTCPK:KCDMF) Q3 2020 Earnings Conference Call October 16, 2020 9:30 AM ET
Pablo González – CEO
Xavier Cortés Lascurain – CFO
Conference Call Participants
Jens Spiess – Morgan Stanley
Nicolás Larrain – JPMorgan
Luis Willard – GBS
Rodrigo Alcantara – UBS
Mohammed Ahmad – SGP
David Cardona – Signum Research
Excuse me, ladies and gentlemen. We now have our presenters in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of the presentation, we will open up the floor for questions. At that time, instructions will be given to the procedure to follow, if you’d like to ask a question.
I’d like to now turn the conference over to you Mr. Pablo González. Please go ahead.
Thank you. Good morning, everyone. I hope you and your families are healthy and safe. Let me start by saying that we continue to deliver good overall results, as we operate in-line with the priorities and guidelines we set forth to navigate through the current environment, which is still very challenging on many fronts. Notwithstanding, our challenging it is we delivered strong top and bottom-line growth and our margins remained very solid and are among the best in our industry.
During the quarter, we reinforced the various measures and actions to protect the health of our employees and their families, our number one priority. And we remain in 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 our customers and consumers have access to our products have allowed us to operate our facilities without any meaningful disruption.
On the sales front despite private and B2B consumption still being affected by the COVID lockdown and its impact on the economy, several categories performed well particularly those related to personal hygiene health and protection and we continue capitalizing the new growth opportunities. Altogether, our top line grew for the 24th consecutive quarter driven by strong volumes. On the cost side, most raw materials convert positively and together with our increased productivity and very good results on our cost reduction program allowed us to deliver solid bottom line growth and improve margins year-over-year in spite of the significant peso depreciation. In summary another good quarter in the midst of a very challenging environment. Xavier will now provide more details on the quarter results.
Xavier Cortés Lascurain
Good morning. During the quarter our sales were at MXN 11.1 Billion, a 7% increase versus the third quarter of 2019. Volume grew 7% with price and mix in line with last year’s consumer products also grew 7% with all increase due to volume. Away from Home Products sales were down 31% reflecting a slow reopening of offices, hotels and restaurants.
Finally our export business performed very well with sales growing 54%. Cost of goods sold increased 7% against last year. Both fluff, super absorbent materials and resins compared favorably in dollars as these domestic fiber prices. Imported recycled fiber and energy prices compared negative.
Finally, the FX, was significantly higher averaging 15% more cost reduction program an important component of our business DNA had once again very good results and yielded approximately MXN 400 million of savings in the quarter. These savings are at a cost of goods sold level and are generated at various fronts from with sourcing materials improvement and process efficiencies all contributing in a meaningful way.
Although, we cannot anticipate or forecast specific targets going forward 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 developing and investing behind new product and process technologies gives us confidence that we should be able to keep delivering good results on this growth.
Gross profit increased 5.5% and margin was 37.9% for the quarter. SG&A expenses were up less than 1% and as a percentage of sales were 100 basis points lower. We achieved better efficiencies in distribution by expand distribution expenses as well as some investment behind our brands, balancing advertising with point of sales promotion.
Needless to say we continue to review other expenses to make sure our investment behind the lines remains a competitive advantage. Operating profit increased 9.5% and the operating margin was 21.3%. During the quarter we generated MXN 2.8 million pesos of EBITDA, a 7.8% increase, and EBITDA margin was 25.6%. Cost of financing was MXN 428 million in the third quarter compared to MXN 391 million in the same period last year. Net interest expense was 9% higher.
As we previously disclosed in July the company very successfully placed a record in Mexico and Latin America — and Latin America low rate $500 million of 144 [indiscernible] senior unsecured notes at 2.431% with partial maturities of one third each in years 2029, 2030, and 2031 and entered into a related swap agreement to hedge the currency risk. And since the proceeds of these placements will initially and primarily be used to pay down debt due 2020 and early 2021, our long term debt and cash position increased substantially.
In addition, to the In addition to the funds from replacement, we have generated a very strong balance sheet which reflect solid cash generation from EBITDA with MXN 10 billion of free cash flow generated in the last 12 months, positive results from working capital management. And in general, the priority we set up at the beginning of the year to protect cash, our total cash position was MXN 22 billion.
Our net debt to EBITDA ratio was 0.9 times with an EBITDA to net interest coverage of a tax. In the quarter, we had a MXN 10 million per exchange loss, which compares to a MXN 6 million loss last year. Net income for the quarter was MXN 1.3 billion an 8.9% increase with earnings per share of MXN 0.44.
With that, I turn it back to Pablo.
Thanks, Xavier. We continue to operate in an unprecedented and uncertain environment. This in moments like this when KCM’s positioning, resiliency, adaptability, strategic model and a very strong balance sheet allow us to not only successfully navigate through the challenges, but also capitalize on the opportunities. Mexico’s economy experienced a sharp contraction in the second quarter and showed some signs of a rebound in the third quarter, but the impact on domestic consumption together with the peso depreciation are evident.
Notwithstanding the fact that sell essential products and participate in very defensive categories together with a multi-brand and multi-tier strategy has allowed us to continue to grow and maintain very solid positions in our categories. Going forward, despite the uncertain environment we are confident we can continue to grow our business through a combination of volume, price and mix and taking advantage of developing opportunities and technologies for which we will increase investment.
On the cost side, raw materials are general, stable and comparing positively. For the most part we expect that to continue. After that our operation efficiencies and our cost reduction and innovation DNA which has been critical and will continue to play an important role. And we expect to continue to post healthy bottom line growth on markets.
So we have been able to operate efficiently through the most complicated part of the pandemic and are confident we will continue to be able to do so. Always focused on our stated priorities and operating guidelines committed to improving the lives of our consumers personnel communities where we operate in the country as a whole.
In summary, we’ve had a good third quarter and first nine months of the year. And we’re confident we can continue to deliver good results for our shareholders despite the very uncertain and challenging environment. So that concludes our very brief prepared remarks. And 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. [Operator Instructions] Now our first question comes from Jens Spiess with Morgan Stanley.
Yeah hello. Thank you for taking my question. I just want to see if you could give us a bit more color on the main drivers of the quarter-over-quarter top line decline. I mean you posted a very strong second quarter. But if you could give a bit more details on the main drivers of the decline during this quarter and also if you could provide an update on the situation of the recycled paper market and prices, it would be great if you could give color and outlook and any trends you have observe there lately? Thank you.
Hi Jess thanks for your questions. Look as we mentioned we posted a 7% increase in net sales. Yes it is sequentially lower than the 9% we achieved in the second quarter in that quarter of course we had some sales attributed to the pandemic. So there were some increases that were beyond what we would normally expect the categories have stabilized now.
So you see demand a little bit thinner from that — from that respect, but having said that we believe that under those circumstances a 7% increase is still quite strong and hopefully going forward we can continue as we mentioned given our resiliency and adaptability we can continue to post good top line growth as well as bottom line growth. When it comes to as you know it was all volume driven.
Going forward we are analyzing opportunities on the pricing front and there are certainly some categories and in some cases channels and even specific products or tiers where we see an opportunity. And there we will go ahead and move our prices it will not be overall approach more of a very specific and strategic approach again depending on the category, the channels, products and even tiers as I mentioned in and where we don’t currently see an opportunity to increase prices we will strive to be much more efficient in our investments and we should start to see that reflect particularly in the first quarter of next year as we work through that in this quarter.
And the competitive front on just the dynamic we really overall when it comes to pricing and promotion dynamics, we see no significant difference from prior years, as you know our categories have always been very competitive. But having said that, we’re not experiencing a particularly intense competitive environment or it done very different from what we’ve seen in the past years.
Okay. Thank you. And regarding the recycled paper prices, I guess they remain high. Are you seeing any trends of them decreasing?
Yes. When it comes to recycled paper prices, we started to see late in the third quarter and we believe it will continue the fourth quarter of prices coming down and actually coming down in an important matter. So the past couple of quarters, they have been a headwind. I’m not sure that they will be coming tailwind in the fourth quarter but certainly their impact or their negative impact will be much, much lower than it, than it was in the past couple of quarters.
Okay. Great. Great to hear. Thank you.
Thank you. Our next question comes from Louise [ph] with Compass.
Hi, guys. Congratulations on the quarter. Two questions on my side. I mean, the first one it’s related to your leverage. I mean you’re right now below one times clearly you know very strong results this year drove that results, but I just wonder you know given where you are and historically your desire to pay dividends.
Can we expect the step up in dividends, given where you are in terms of leverage or at least on the buyback front, because it seems like your results, the strong results this year have not been fully reflected on a strong share price I wonder if there’s something you can do on the buyback/dividend front?
And then the second question is related to margins. You continue this fund margins year-over-year throughout the year, but as we move into this fourth quarter you start facing, I guess, tougher comps, 27% EBITDA margins kind of thing for the next couple of quarters. Are you comfortable that the margin expansion that we have witnessed could continue going forward? Thank you.
Hello, Luis, let me take the first one. Yes, our balance sheet as you mentioned is strong and we have been generating cash and we should continue to generate cash and earnings going forward. At this moment, we will continue to be conservative with our balance sheet. And going forward if this situation continues and our view is that it will continue. We will definitely consider our alternatives, and this is something that we’ll probably start thinking about next year. At this moment, again our plans continue to be conservative with the balance sheet.
Xavier Cortés Lascurain
And let me take the other two question as you mentioned, yeah, even under very challenging circumstances we’ve been able to stay within the target of our EBITDA margins that we’ve stated between 25% and 27%, which we believe are very strong margins and again some of the strongest in our categories worldwide. And yes, we will continue — we will start to face more challenge in comparisons particularly this fourth quarter and the first quarter of next year, even into the second quarter of next year. So we’re — again we’re doing what we know how to do.
We saw that we try to maintain that margin and its target, which is certainly growing the top line. And again we hopefully will start to see not only volume but a little bit of price in the mix going forward. And we will continue to be very aggressive on being more efficient on our cost reduction program on expense reduction. I mean just what we know very well how to do and we will be very, very aggressive on it as we’ve been in the past. So we believe we will continue to have those types of margins going forward and we’re redoubling our efforts to make sure that’s the case.
Great thanks a lot guys and congratulations again.
Thank you we appreciate it.
Thank you. Our next question comes from Nicolás Larrain with JPMorgan.
Hey guys how are you doing? Thank you for taking my question. I have three questions very brief. One on the cost front you guys mentioned in the recent months in the opening remarks that some of them compared possibly in dollars. So I just wanted to get a sense with you on how those — how most of the or most relevant costs are comparing in pesos in year-over-year.
Also if you could maybe expand a bit more details on the SG&A efficiencies. I mean they came in very strong. I just wanted to understand where you guys sourcing these efficiencies from? And lastly maybe the discussion more to Xavier, how much that do you expect to pay in fourth quarter and first quarter on 2021 after the issuance of the bonds? Thank you guys.
On the third one, the comparisons in — I’m sorry I had my face, my face mask on. On the third one, the comparisons on fibers, if you put them in pesos, there’s still, fibers are still a slightly down to flattish in terms of recycle they are up as you could say that for all derivatives once you translate those to pesos, they’re flattish.
So, so overall when you, I think when you turn those costs in dollars into pesos for the most part we’re flat to higher than last year and that’s where again our efficiencies and our cost reduction programs come into play to absorb and reduce the impact then allow us to have the margins that that we posted.
So that’s on, on the costs on the SG&A efficiencies I mean a couple of things, one as we’ve mentioned we have seen opportunities in the logistics side. And we’ve been working very hard on that front and seeing some nice improvements both working with third parties to improve not only the service but the cost and within our own fleet where we’ve become much more efficient given the process changes that we’ve put forth. And this is an area where we continue to believe there is a good opportunity.
And then there is also of course our AMP investments where, where as I mentioned we’re trying to we’re striving to be much more efficient in our investments and thus obtain the same results with less money invested and on expenses we’re just going line by line and looking at any opportunity to be tighter and bring down — bring down those costs. So it’s really a combination of the things that we’ve been doing — that we’ve been doing on the SG&A front that have worked very well and again we will continue to be very aggressive in all of those fronts.
On the debt, the debt that we have coming due later this year and very early in January next year, all together is very close to MXN 7 billion. That’s what we will be paying down. We have an additional maturity in 2022 of MXN 3 billion. And we in essence refinanced that given the conditions that we were able to obtain on the bond placements that we did this year.
Understood. Thank you very much, guys. Congrats on the results.
Thank you. Our next question comes from Luis Willard with GBS.
Hi, guys. Good morning. Thanks for taking my question and congratulations on the results. I think most of my questions have already been answered by Pablo and Xavier, but can you talk about little bit more on the dynamics of mix that you have seen across tiers. Are you seeing some sort of trade down that could be hurting mix in the comparison?
Sure, Luis. Thanks for being in the call. We are seeing some trade down, no doubt in some categories but I would say so far it’s been marginal. Just to give you an idea, it represented less than 100 basis points top line I would say so far it’s been marginal. Just to give you an idea it represented less than 100 basis points top line reduction in consumer products for this past quarter. So no doubt there’s a little bit of that going on, but it hasn’t been significant.
Great Pablo thank you and congrats again.
Thank you. Our next question comes from Rodrigo Alcantara with UBS.
Yeah hi good morning Pablo, Xavier. Thanks for taking my question. I guess the first one would be for Pablo. So as we have seen Kimberly-Clark in other countries are launching a business to consumer platform just curious about your thoughts about perhaps doing the same in Mexico would it make sense or not for you? And also in my second question would be well so far you have elaborated very clear on the drivers of SG&A line right marketing and distribution.
Just wondering looking ahead, I mean to get a sense of your operating leverage that you can achieve. Just wondering if you think that at least for you is going to be sustainable or easy to sustain current levels of SG&A or perhaps a lower than EBIT in real terms. Do you see any tailwind or any headwind on the SG&A that would be helpful? Thank you.
Thanks Rodrigo. On the B2C platform look we’re right now really focused on both the let me call it traditional business and the tremendous growth that we’re seeing on e-commerce. Having said that we’re no doubt analyzing different opportunities we have not come to a conclusion whether that’s one that we should be pursuing, but it is something we are looking into.
When it comes to SG&A and in sustaining those levels sure, I mean it’s monitory and it gets harder at times to be able to squeeze more and more out of what we’re doing and become more efficient but — that’s in our DNA and we will continue day-in and day-out to look for those efficiencies and we feel pretty comfortable that we can maintain the current levels and we’ll continue to look for additional improvements going forward.
Great, thanks. Pablo then — likely if you could comment based on product innovation are you working on something that you can command now or any material changes under product assortment that would be my last question. Thanks.
Look we have continued to innovate throughout the year and we’ve introduced new products in the diaper front and wipes, certainly in the soaps on cleaning surfaces, categories we’re even producing some masks so there’s quite a bit of things going on as I mentioned particularly in diapers.
We’ve got quite a few things that we’ve introduced into the market in the past couple of years that have performed very well particularly the clothes diapers as opposed to the open diapers and same on wipes etcetera. So we are comfortable, we’re glad with the way our innovations have gone forward.
We are introducing right now into the market some additional products that have to do with the diapers and that tend to bring into the mix of materials that are more sustainable or more friendly to the environment and that’s certainly an area where we will continue to push and in all of our categories we’re looking particularly into that area and seeing how we can be more aggressive and bring to market some better solutions in that front.
Going forward, we are quite frankly exploring some technologies and we’re exciting about that the possibility of bringing innovations and significant improvements to some of our categories, not in a position to disclose those at this point because we’re there in the — again exploring exploratory phase. But we’re excited with what we see going forward and with the pipeline that we have a innovation coming in the next couple of years.
And thus we will increase our investment behind them as well as on much as product improvements, but just technology as a whole to bring more efficiencies into our interior operations. So excited with some of the opportunities we see going forward, very good pipeline. And as we go along for the next year, I’m sure, we’ll be able to touch on some of this particular introductions that we will get into the market.
That’s great. Thank you very much.
Thank you. [Operator Instructions] Our next question comes from Mohammed Ahmad with SGP.
Hi, guys. Thank you very much for taking my question. I hope all yourself and your families are doing well. My question is one regarding consumer business. I think right at the start of the call, you did mention about how much of consumer revenue growth was volume versus price mix if you could just sort of say that again because I didn’t quite catch it. And also, just building on the trade down discussion, can you give a sense of you know how much of the pricing situation or lack of pricing price mix growth is mixed versus pricing.
Sure. Mohammed, thanks for being in the call and likewise hope you and your family are doing well. Look, on the sharing the consumer product side as we mentioned it was — the growth was all volume — volume driven and then when you look at the price and mix there was a little bit of price in there, but mix was slightly down as I mentioned a little bit less than 100 basis points top line reduction of consumer products. So, when you look at price and mix, price is slightly up and mix is slightly down and that’s why they come in flat versus volume up at 10%.
Excellent. Thank you very much guys.
Thank you. Our next question comes from David Cardona with Signum Research.
Hi, guys. Thank you for the question and again congrats for the good results, and my question is well is more than my question is can you give us a guidance for the — for the [indiscernible] 2020 year on the margins please.
I’d say we generally don’t — don’t do that kind of guidance, what I can say is that the fourth quarter shouldn’t be very different from — from — from what we were seeing in the third quarter the conditions are not that different, so that’s as much as we can say at this moment.
Okay, guys. Thank you very much.
Thank you. There are no additional questions at this time.
Great thank you all again for participating in the call we’ll be glad to take your calls as we go forward and again hope you and your families are healthy and safe and we’ll talk to you at least all of you together until the first quarter of next year. So we hope you have a terrific end to the year. And again stay healthy and safe. Look forward to continue talking to you. Thanks so much.
Thank you. Ladies and gentlemen this concludes today’s presentation. You may now disconnect.