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Edited Transcript of KIMBERA.MX earnings conference call or presentation 21-Apr-17 1:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Kimberly-Clark de Mexico SAB de CV Earnings Call

Mexico, D.F. Apr 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Kimberly-Clark de Mexico SAB de CV earnings conference call or presentation Friday, April 21, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Pablo Roberto González Guajardo

Kimberly-Clark de México, S. A. B. de C. V. - CEO, MD and Director

* Xavier Cortés Lascurain

Kimberly-Clark de México, S. A. B. de C. V. - CFO

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Conference Call Participants

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* Alexander Reid Robarts

Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team

* Carlos Hermosillo Bernal

Actinver Casa de Bolsa, S.A. de C.V., Research Division - Director of Fundamental Analysis

* Joseph Giordano

JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst

* Luis Rodrigo Willard Alonso

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst

* Robert Erick Ford Aguilar

BofA Merrill Lynch, Research Division - MD in Equity Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for your patience in holding. We now have our speakers in conference. (Operator Instructions) It is now my pleasure to turn this conference over to Pablo González. You may begin.

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Pablo Roberto González Guajardo, Kimberly-Clark de México, S. A. B. de C. V. - CEO, MD and Director [2]

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Thank you. Good morning, everyone, and thanks for attending the call. I'll start with some remarks about our first quarter results.

It was a very challenging quarter for Kimberly-Clark de México. The consumer environment allowed us to maintain our top line growth trend and sales grew in the high single digits, but the strong Mexican peso depreciation continues to put pressure -- put our cost structure and margins under pressure.

Despite a very competitive environment, our efforts to increase price and improve mix together with volume growth resulted in our top line expanding for the 10th consecutive quarter and we posted all-time record sales.

On the cost side, however, we experienced increases in raw materials and in energy, which, together with a much stronger dollar, had an impact on our margins. These impacts were partially offset by higher prices and higher volume as well as by the positive results of our cost reduction program. So we maintained momentum on the top line and our brands and market position are solid, but operating and EBITDA margins decreased mostly as a consequence of the strong and rapid exchange rate related cost decreases.

Xavier will now provide additional details on the quarter results.

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Xavier Cortés Lascurain, Kimberly-Clark de México, S. A. B. de C. V. - CFO [3]

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Hello, everyone. During the quarter, our sales amounted to MXN 9.5 billion, a 9% increase versus the first quarter of 2016. Volume grew 2% while price, and mix were 7% higher. Consumer product sales were 10% higher, Away from Home products grew 13% and export sales decreased by 6% as we have less tissue available for export. Domestic sales increase in the quarter was 10%.

Cost of goods sold increased 16%. We experienced, in dollars, a mixed raw material price environment. While some raw materials, including superabsorbents and virgin fibers compared positively, recycled fibers, polymers, electricity and natural gas were higher. Electricity prices in pesos were 50% higher than the first quarter of last year.

As already mentioned, the peso-dollar exchange rate averaged close to MXN 20.50 throughout the year, 15% more than the year before and 37% more than the same quarter of 2015. This condition impacted the U.S. dollar-denominated raw materials and translated into strong increases in pesos.

On the positive side, our cost reduction program continued to yield very good returns. The amount of savings generated in the quarter amounted to close to MXN 300 million, which mitigated the FX impact. The gross margin -- the gross profit margin was 35.5% for the quarter, 390 and 240 basis points lower than last year and prior quarter, respectively. SG&A growth of 12% reflects increased distribution expenses and the consolidation of the 4e SG&A. Operating profit decreased by 10.8%, and the operating margin was 19.2%.

During the quarter, we generated MXN 2.3 billion of EBITDA, a 8% decrease and EBITDA margin was 23.8%. Cost of financing was down by MXN 176 million as this year, we had a MXN 33 million exchange loss compared to MXN 223 million the previous year.

Net interest was MXN 50 million higher than last year. In consequence, net income for the quarter was MXN 1.1 billion, a 1.3% reduction. Finally, earnings per share were MXN 0.35.

So now, Pablo will talk about our expectations for the rest of the year before we take your questions.

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Pablo Roberto González Guajardo, Kimberly-Clark de México, S. A. B. de C. V. - CEO, MD and Director [4]

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As anticipated, 2017 is proving to be a very challenging year in many fronts for the Mexican economy. Most economies have decreased their GDP projections, which currently average 1.5% to 1.6%. Last year's main drivers of growth, exports and private consumption, are likely to slow down, and government spending and investment show no signs of picking up.

Private consumption, although expected to continue growing, have started to decelerate from the rates achieved over the past 2 years. We continue to create jobs at a record rate, but most of them are not high-paying jobs and inflation has increased sharply, as prices reflect the peso devaluation together with energy and fuel costs. Consumer credit may slow down as well as interest rates increase.

On the positive side, remittances continue to grow and translate into more pesos. Tourism revenue is up strongly, oil prices are higher and homebuilding continues to grow. So overall, a mixed picture, but the general belief is that higher inflation will impact consumption.

And even though Mexico, thankfully, has not been on the front lines with respect to U.S. policies in recent weeks and in consequence, the exchange rate has rebounded to the levels it had before the U.S. election, we still face a scenario of big uncertainty and volatility. At current levels, the exchange rate would still compare negatively against MXN 17.65 for the second quarter of 2016.

As the year evolves, we're analyzing and strengthening every aspect of our business to make sure KCM is well positioned to continue delivering superior results under any circumstance. Accordingly, we will maintain our focus on offering the best products to consumers, effectively investing to strengthen our brands and market position and operating as cost efficiently as possible.

On the innovation front, we have a strong plan for the year, and we will support it to increase the preference for our products and brands.

As mentioned in the past, we will be monitoring the competitive scenario closely and look for opportunities to further improve price and mix. But as we have always done, we will favor the long term before short-term results, and if needed, react to the competitive environment to sustain our market positions.

On the cost side, we expect that the pressure in recycled fibers, energy and polymers will remain throughout the year, and we could also start seeing negative price comparisons in dollars in virgin fibers and superabsorbent materials. So we will stay focused on increasing our purchasing and manufacturing productivity and efficiencies, and we are increasing our cost savings projection from MXN 600 million to MXN 1 billion for the year.

Also, we will continue to look for opportunities to further reduce expenses. And as we have been doing, we will continue to invest to make our supply chain more efficient and effective.

We are maintaining our investment plan for the year. We are on track to invest MXN 400 million between 2016 and 2017. In addition to our acquisitions, our large capital projects, particularly the tissue capacity expansion and the increased (inaudible) base sheet capacity for wipes, are underway and on time and will start off in the fourth quarter.

The rest of the capital investment program, mostly focused on innovation, capacity additions and cost reduction, is also on track. Finally, our shareholders meeting in March approved the payment of a MXN 1.58 per share dividend. This amount represents a 4% increase over the previous years' payment and increase in real terms. The shareholders also approved share buybacks for up to MXN 1 billion during the year.

In summary, as we expected, the first half of the year will be very challenging as the cost impacts are already affecting results while the benefits from our prices, volume and cost initiatives take time to materialize. But as we've said before, we are confident that the initiatives we're implementing will help us deliver the best possible results this year and will strengthen KCM for the future by making us a stronger, leaner and more efficient company.

With that, let me open it up for your questions, and thank you again for participating in the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Joseph Giordano, JPMorgan.

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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [2]

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I want to explore a little bit more the gross margin trends throughout the year, particularly as we see the peso strengthening since the end of last year. I know that we have, at least like our local analyst here, forecast further hikes to pull prices towards the end of the year. But I'd like to get your views on how this should play out with the strengthening peso throughout the year, particularly in light of the relatively high -- so not high, but above inflation price and how our mix that we have been seeing over the past couple of quarters.

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Pablo Roberto González Guajardo, Kimberly-Clark de México, S. A. B. de C. V. - CEO, MD and Director [3]

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Sure, Joseph. Let me try and break down the main cost impacts we have this quarter and talk a little bit about how we see them going forward. First of all, as you clearly pointed out, the exchange rate had an important impact, being 15% higher than last year and 30% overall over the past couple of years. We certainly started this quarter with a better number but still higher than last year. And it's difficult to predict what will happen because of the great volatility that we're seeing in the market. Even when you take a look at what some of the banks are expecting in terms of the exchange rate for the rest of the year, there's a huge range because there's some that believe the exchange rate will end the year at roughly MXN 18.50 and some that believe it might end up over MXN 21. So that tells you the range and it's, of course, because of the uncertainty and volatility. So hard to predict what will happen there, but we're certainly starting sequentially the second quarter on a better note. Second, it was the raw materials. The impact of raw materials, particularly this quarter, have to do with recycled fibers, which as we've said before, there's less fiber out there because the world is going digital. So it is being harder to get fibers to be recycled. And so we expect pressure to continue for recycled fibers in the second quarter, but we expect comparisons for the second half to be better. Then the virgin fibers, which were higher sequentially this quarter than the fourth quarter. And this, quite frankly, pretty much no one expected virgin fibers to be increasing at the start of this year. The reason for the increase has to do with greater demand from China, more downtime in the industry and new capacity not coming online fast enough. So we expect virgin fibers to still increase in the second quarter. But most experts believe prices will come down starting in the third quarter and more markedly, in the fourth quarter as capacity comes online. And then we had polymers, which also had an impact. And going forward, I believe they will continue to be somewhat pressured. And as we've mentioned in our original remarks, we might also see a little bit of superabsorbent material pressure in the second quarter, but it'll stay flat after that, so second half comparisons will be better. Third had to do with electricity or energy prices which, as we've mentioned, were 50% higher than last year. Prices are coming down at the start of this quarter, but still much higher than last year. So we will -- we do expect that electricity will continue to be a headwind going forward. And finally, it was the conclusion of the 4e results within our results that also had an impact. To give you an idea, without 4e, our EBITDA margin would have been roughly 80 basis points higher. So that would have been pretty much in line with some of your estimates. Some of what happened with 4e are onetime expenses. We -- 4e will certainly improve slightly in the second quarter. And my belief, we will see much better results in the second half of the year. So those are the 4 aspects that had an impact on our cost, exchange rates, raw materials, energy and 4e. And I hope this gives a little bit of a perspective as to what happened and what we expect going forward.

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Operator [4]

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Our next question will come from Bob Ford, Merrill Lynch.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [5]

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Pablo, could you discuss pricing and competitor behavior right now as you move to raising prices?

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Pablo Roberto González Guajardo, Kimberly-Clark de México, S. A. B. de C. V. - CEO, MD and Director [6]

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Sure, Bob. On pricing, a mixed environment, Bob, because we have seen -- let me put it this way, there's 3 things happening. Some have increased prices, but at the same time, they increased promotional activity heavily. We will see that promotional activity continues as we move forward. Some have announced price increases but have not done so yet. And we expect that those who have announced price increases, that we will see that come into the market probably in May, I would say, middle of May. And there's a couple who pretty much have not moved yet. So it's a pretty mixed environment out there. I would expect that with the -- yes, we're seeing a better start to the quarter with the exchange rate, but as I mentioned, we're also seeing quite a few items being pressured in dollar terms in -- for raw materials and we're also seeing pressure in energy. So we would expect that everyone eventually will follow, but it's taking time. It's taking a little longer than we expected. And as I mentioned, those who have done it are very aggressive on the promotional side. And then what we will have is that you're coming very quickly into the summer season, which as you know, is very heavily promoted. So we'll see what happens here in the coming months. And as we mentioned in our initial remarks, we are very -- monitoring the situation carefully. And of course, if we see any additional opportunities for price or mix improvement, we will move forward. But on the other hand, if we see that competitors don't end up following as we expect and need to react to defend our positions, we will do so.

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Operator [7]

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Our next question will come from Alex Robarts, Citi.

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Alexander Reid Robarts, Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team [8]

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Two questions. First, regarding the cost savings, and second, a follow-up on your price increases. I can't remember the last time we saw a MXN 300 million or close to MXN 300 million savings in -- so early in the year. In other words, in the first quarter. And I appreciate the comments about the alignment of the factors on FX and energy and 4e expenses. But I guess, just wondering, could you help us understand a little bit how you've been successful in getting so much savings here at the beginning of the year? And would this kind of make it fair for us to assume that you still have upside risk to your new MXN 1 billion number per savings, given you've really gotten so much here early in the year and you're almost at the 5% of COGS level that we've seen as kind of a top end of the savings range. So that's the first question. And then the second one is really about the stickiness that you've seen on the price increases in Mexico in March. I mean, I have the understanding that this is when you started to move and perhaps you could give us a sense of how sticky they've been so far. And is it safe to assume that the magnitude on the portfolio as a whole of the nominal price increase is a mid-single-digit number?

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Pablo Roberto González Guajardo, Kimberly-Clark de México, S. A. B. de C. V. - CEO, MD and Director [9]

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First, on the cost savings front. Of course, some of the savings that you see this quarter are coming from last year for initiatives that we started in the second half of the year and that are coming into this year and helping us move that number up, starting at the start of the year. Also, we've been ramping up efforts very, very aggressively. I mean, it was clear that we would have a lot of pressure on the cost side because of the exchange rate. We have made every effort possible to accelerate and as I say, ramp up our efforts to increase our savings and that's why you're seeing this number. Now going forward, no doubt, it gets harder as we already have identified MXN 1 billion for the year. So improving that number will get harder and harder. But what I can tell you is that we are looking absolutely everywhere and turning every stone to find places where we can save and be more efficient, more productive and bring that down to the bottom line. So we'll see what happens. Hopefully, we can improve that number. On the stickiness of price increases, indeed, our prices pretty much came online late in the quarter and we're holding our ground. As I've already mentioned, some have announced price increases and put into place price increases, but they're being very aggressive promotionally. It might be a strategy to -- just temporarily, you put your prices up, you increase promotions and little by little, you take promotions away and then the price stays into the market. We hope that's the case. Some have announced price increases but will come online mostly at middle of May. So we're holding our ground, and we hope it sticks. And there's a good chance for that to happen. But let me say it again, if indeed they don't move and our positions are challenged in an important way, we will have to react. We hope that's not the case. So far, we're holding our ground and we'll see what happens going forward.

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Alexander Reid Robarts, Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team [10]

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I mean, I guess, just to understand though, when we think about the higher inflation, right, in Mexico this year, and I guess, generally, we're seeing this across other categories with some trading down. There's obviously a mix effect that might create pressure on average selling price, I guess. So I mean, do you think it's still -- or would it be fair to assume that you're going to try to aim for at least inflation type of price increase during the course of this year? Or perhaps it's too early to tell and you'd like to see how the summer, Julio Regalado campaigns go?

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Pablo Roberto González Guajardo, Kimberly-Clark de México, S. A. B. de C. V. - CEO, MD and Director [11]

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Well, our goal would certainly be to at least have -- and prices go up at the same rate as inflation. But too early to tell what will happen, Alex, again, because of prices just coming online and then we have a promotional season coming forward and if indeed inflation takes a bite at -- from domestic consumption. Many, maybe even retailers, would want to be more aggressive to make sure they get the consumers into the stores. So there's a lot of uncertainty as to how the economy will progress forward and thus, what will happen to prices and volumes.

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Operator [12]

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Our last question will come from Luis Willard, GBM Asset Management.

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Luis Rodrigo Willard Alonso, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [13]

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It's actually a quick one. It's actually 2. The first, could you share with us what are your thoughts on the 4e, on the integration within your current structure? And how should we see that playing out through the year both in terms of, I don't know, costs and maybe top line or synergies within your current strategies in terms of products? And the second one is, would you say that you feel -- even though there's a lot of uncertainty ahead on the exchange rate primarily, would you feel that you're a little bit more, I don't know, calm regarding the future of the company through the year than you were, I don't know, after the election or even earlier this year? Those are my questions.

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Pablo Roberto González Guajardo, Kimberly-Clark de México, S. A. B. de C. V. - CEO, MD and Director [14]

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Thank you for your questions, Luis. On the 4e integration, I mean, 4e continues to progress and continues to do well on the top line and we're very excited with this opportunity and what we see in terms of their innovation pipeline. And as we've said before, their aggressiveness, their speed to market, it's something that we're very excited about and we believe the company will grow at very good rates for the rest of the year and then to the future. On the cost side, we are working with them to try and find efficiencies and improve productivity. And as we do in Kimberly-Clark also, we have started -- well, they have started putting together their cost savings program. So we hope some of that -- those initiatives will start to pay off going forward. They are facing some of the same issues we faced with the exchange rate and with some raw materials. But again, given that we're trying to be more aggressive on productivity, on cost savings, et cetera, we expect the results to improve sequentially and have particularly a very, very good second half of the year. In terms of synergies, we work with them closely. As you know, they operate separately, but that doesn't mean we are not that involved in their operation and we are not learning from them and we're not trying to pass on what we do well so that they can take advantage of it. So there's great interaction amongst both companies and we continue to be very excited with what we see going forward with 4e. On the exchange rate, look, I think the -- it's hard to argue with the fact that after the election, everyone thought that some of the new President of the U.S. policies would be very, very detrimental to Mexico, so the mood was very, very sour. I think as time has gone by and particularly as the new President has found that the -- that you have to work with 2 realities, the political reality of putting your agenda forward and making -- being able to move it forward plus the economic reality of this huge integration between our economies and the fact that we are more competitive together than we are separately and the fact that it's taking some time for things to move forward and has allowed some of the interest in favor of NAFTA and in favor of the relationship to Mexico to organize and also start putting some pressure, all of that would tell you that things should be at least better than what we initially thought. By that, I'm not saying that we won't see any volatility or we won't see any setbacks going forward because we know how this new government operates and 1 week, they're saying one thing, another week, they might change tack and say another thing and -- but I think the market is sensing that it won't be as easy to add some of the changes he wanted to make and that those might not be, even if they come on board, might not be as detrimental to Mexico as initially thought. So overall, we're feeling better but absolutely not out of woods. And it's going to be a long, hard, difficult negotiation. Then while that happens, there's going to be volatility and uncertainty. And if not, I mean, just a couple of days ago, the peso was at MXN 18.48. He gets a rally in Wisconsin where he says NAFTA is terrible and we got to do something and now we're at MXN 18.80. Not a disaster, it didn't go to MXN 19, MXN 20 or MXN 21, but it still has an impact in terms of what people think might happen as we go forward. So great uncertainty going forward, but we do feel better than we did after the election. Sorry for the long response.

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Operator [15]

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Our next question will come from Carlos Hermosillo, Actinver.

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Carlos Hermosillo Bernal, Actinver Casa de Bolsa, S.A. de C.V., Research Division - Director of Fundamental Analysis [16]

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Just trying to get a sense of the trends in the industry. Could you provide an organic growth volume that you're looking in the quarter? And also regarding prices, what would you say is the main driver? Is it the phenomenal price increases? Or is it the mix?

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Pablo Roberto González Guajardo, Kimberly-Clark de México, S. A. B. de C. V. - CEO, MD and Director [17]

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Look, on volumes, again, given the changes that are happening in the market and all the volatility, it's very hard to predict what will happen to volumes going forward. What I will say is that we see volumes in categories, still growing but decelerating from what we saw the past couple of years. In terms of pricing and mix, we see more price than mix in the combination, but we are getting some mix in there. And we hope to be able to continue to push that going forward.

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Operator [18]

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At this time, we have no further questions, so I would like to turn the conference back over to Luis -- to Pablo, excuse me.

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Pablo Roberto González Guajardo, Kimberly-Clark de México, S. A. B. de C. V. - CEO, MD and Director [19]

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Thank you. Thank you very much. Thanks, everyone, for attending the call and look forward to talking to you in July. Thanks, again.

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Operator [20]

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Thank you very much. Ladies and gentlemen, this conference has now concluded. You may disconnect your phone lines, and have a great rest of the day. Thank you.