© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for your patience in holding. We now have your speakers in conference. [Operator Instructions] It is now my pleasure to introduce our first presenter, Mr. Pablo González.
Good morning, everyone, and thanks so much for attending the call. Yesterday, we posted Kimberly-Clark de México's second quarter results. We continued growing both the top and bottom lines and our margins were better than last year. Our volume and price increases, together with successful cost reduction programs, are helping us deliver better results in an unprecedented raw material inflation environment. Private consumption in Mexico remained stable, although volume growth in our categories is sluggish. However, some volume growth and a positive price and mix comparison resulted in top line growing for the 15th consecutive quarter and to a new record. On the cost side, we continue experiencing strong raw material pressure. Virgin fiber prices have increased significantly over the past 18 months in dollars, as have all derivatives of superabsorbent materials. On the positive side though, we had higher manufacturing efficiencies and our cost reduction program yielded very positive results. So in summary, we continue to grow but we face a very challenging environment and are acting accordingly to deliver better results and improve our profitability. Xavier will give you more details on the quarter.
Good morning. Second quarter sales were MXN 10.6 billion. This represents a quarterly record and translates into a 10% increase versus the same quarter of 2017. Volume growth represented 3%, while price and mix added 7 percentage points to the top line. Growth by line of business was as follows: consumer products increased 6%; Away from Home products, 12%; and exports, buoyed by the extra capacity from the Morelia mill expansion, increased 87%. Cost of goods sold increased 9%. Virgin fiber prices were, on average, 30% higher for the quarter and as mentioned, over the past 18 months, have increased between 35% and 50% in dollars, depending on the grade. Recycled fibers also compared negatively and all derivatives and superabsorbent materials have increased more than 20% over the same 18-month period. Energy and natural gas prices contributed to the cost inflation as well. Finally, the FX average was slightly negative and the currency depreciated 11% over the last 12 months. This cost inflation was mitigated by the results from our cost reduction program, which generated more than MXN 350 million over the quarter. So gross profit margin was 36% for the quarter, 60 basis points better than last year. SG&A grew 11%, slightly ahead of sales. We continue increasing our investments on advertising and point of sales efforts to strengthen our brands, as well as support our most recent innovations and product launches. Operating profit increased by 13.3% and the operating margin was 19.2%. During the quarter, we generated MXN 2.4 billion of EBITDA, a 10% increase, and EBITDA margin was 23%. Cost of financing was MXN 455 million in the second quarter compared to MXN 300 million in the same period of last year. Interest expense was higher from increased debt and higher interest rates. A foreign exchange loss in the period of MXN 93 million compared to an exchange gain of MXN 1 million in the previous year. Net income for the quarter was MXN 1.1 billion, a 9% increase and earnings per share were MXN 0.35. Finally, during the quarter, the company entered into a MXN 3 billion term loan agreement. The principal will be amortized in 2 installments, on years 5 and 8. Part of the proceeds will be used to pay the MXN 1.5 billion that were coming due in the third quarter of this year. Pablo will walk -- will talk about the second half of the year, and then we'll take your questions.
Thanks, Xavier. Very briefly, domestic consumption is stable, and we expect the Mexican economy to continue to grow in line with recent years. We've yet to see the policies of the elected government, but early indications are encouraging in terms of macroeconomic and fiscal discipline. On the NAFTA side, the uncertainty remains and we can expect more noise because of the upcoming U.S. elections. This, together with the increased trade tensions among the U.S. and the rest of the world, which some believe could end up in a major trade conflict, could mean increased volatility for the Mexican peso. In KCM, we will continue to support our brands and businesses through our strong innovation and investment plan. And given the cost pressure we face, we will analyze further opportunities to increase prices and reduce promotional spending without compromising the health and positioning of our brands. On the cost front, we don't see the pressure in virgin fibers easing as there's no additional capacity coming online in the near future while demand remains strong. We are projecting stability in dollars and most other raw materials. Energy prices are expected to increase in the coming months. We continue to look for additional cost savings opportunities, and we strongly believe that this year, we will pass the MXN 1 billion mark, making it the fifth consecutive year that our efforts yield savings of at least 5% of our costs. These efforts are extremely important and we will continue working to identify additional opportunities. As we've said before, CapEx for the year will be approximately $100 million, mostly focused on innovation, capacity expansion and cost reduction. Finally, as we announced in May, the Mexican Federal Antitrust Commission is currently undertaking a review of some of the markets in which KCM participates. As stated by COFECE, the investigation relates to acts that may have taken place while the prior law was enforced. COFECE has up to 5 periods of 120 working days to complete its investigation. KCM will continue to collaborate with the investigation, acting in accordance with the law and with our internal code of conduct. At this point, we can't make any further comments given that it's an ongoing process. In summary, we faced a very challenging second quarter and overall first half of the year. But our strategies and execution allowed us to achieve better results. We expect the cost environment to remain very challenging and also volatility on the FX for the rest of the year. We will stay focused on improving our top line through volume and particularly price and mix and continue to emphasize our purchasing, manufacturing efficiencies and cost-saving efforts. Thanks again for participating in the call, and we'll be glad to take your questions.
[Operator Instructions] And our first question will come from Luis Willard with GBM.
Just a quick question about volume and pricing. It appeared that volume on the consumer products side continues to be flattish, and it goes more or less in line with your remarks on stable consumption, but hasn't been affected by price increases and most of your consolidated volume growth is coming from exports. How do you see these playing out ahead in 2018 and especially the sustainability of the exports growth?
Thanks, Luis. Yes, as you mentioned, the volumes, for the most part, in consumer products in the market are pretty much flat. We've got variations depending on the category. But overall, you've got slight decreases or slight increases. And overall, it comes to about being flat, and we expect that to continue throughout the rest of the year. In the case of exports, remember that we started our new machine in Morelia in the fourth quarter of last year, and that's why you're seeing very important increases in volume. So the comparison will catch up with us in the fourth quarter.
Okay, perfect. And if I may follow up. On the consumer products side, how it's been -- what has been the performance, especially going to the summer campaigns of retailers, along with pricing? If you could comment about that, that would be perfect.
Sure. As you know, the summer promotional season is always pretty heavy in Mexico, and this is not the exception. This year is not the exception. We participated on it, but in a more -- in a smaller way, if you will. We've seen our competitors be as aggressive as they have in past years, but we expect this to come to pass at the end of this month or early next month as the season comes to an end.
Our next question comes from Robert Ford with Merrill Lynch.
Pablo, it seems like we still have another leg up in terms of cost. Can you comment a little bit maybe on the competitive receptiveness through passing through some of these cost pressures? My perception is that they generally have less value-added offerings and that maybe the input pricing pressure could be even more severe for them.
Sure, Bob. Thanks for the question. Look, we -- for the most part, I think in the first part of the year, we have seen prices come into the market and stick. It's a little bit difficult to, right now, to determine where we will end because although some competitors have been less aggressive on the summer promotional season as we have, some others have been quite aggressive, particularly here at the end of the summer promotional season. So as I was mentioning, we expect this to pass here in the coming months or early August and prices to resume their trend again. But it's still to be seen. What gives us some optimism is that before the promotional season started, we did see prices come into the market since we're all suffering from the same pressures on the cost side. So we expect those pressures to continue going forward. And thus, we expect prices, after the summer promotional season is over, to resume their trend.
And just to make sure I understand, did you perceive yourself to have any disadvantage from a cost structure or a mix perspective relative to some of the larger rivals that you face off with?
No, no, I think we all have the same cost pressures.
Okay. And then the cost reduction that you posted, right, the efficiencies were very impressive. As you go forward, do you see opportunities to maintain the pace of these improvements at least over the course of the year?
Certainly, over the course of the year and we're already working on 2019. Again, given the scenario, we don't expect virgin fibers to let down anytime soon, not through the end of this year and very -- and most likely not through 2019. So we're working very, very hard to find any opportunity we can. So we do expect the second half of this year to also be strong from a cost savings perspective. And again, we're already working on 2019 and going forward. This is an ongoing process and it's not new to KCM. We've always been very, very aggressive with our cost reduction programs. And thankfully, we've been very successful here in the past 4 or 5 years, and we will continue to try to do so.
[Operator Instructions] Our next question comes from Alex Robarts from Citigroup.
I wanted to first start around the fixed costs savings. I mean, I can't remember a quarter where you surpassed MXN 350 million in the recent years. And I'm wondering, I recall there was one point where you've had some very good investments and were able to achieve savings through hollow fibers. What was specifically some of the highlights of this particular quarter's cost savings? And I appreciate you establishing the objective of 5% of COGS to be achieved this year. Is there upside risk to that?
Sure, Alex. Look, the -- again, we've been working on this for quite some time, and there are quarters when things come together and you get a little bump and that's what we're experiencing right now. And it has to do with quite a few things. It all starts with purchasing and our strategies and how we can be more efficient as we go about our purchasing efforts, our manufacturing efficiencies where we have seen very interesting things happening, new technologies that we've been able to put in place that allow us to deliver on these savings and certainly, product changes and others that also allow us to bring about the same. So it's really a combination of factors. We look into all of them continuously, and this was a quarter where quite a few things came online. And as we said, we do believe that we can continue to have a good rate of savings for the second half of the year. And that's why we will again be over the MXN 1 billion for the year. We're fairly confident that, that will happen. And we need to continue to work on this very aggressively for 2019 and going forward. So it's a combination of factors, and we will continue to work on all of them.
Okay. Okay, very clear. The second one was really kind of on the domestic price increase potential in -- thinking back to the first quarter call, you've kind of given us a threshold in terms of the FX rate that might prompt you to consider a second price increase or let's say, a price increase in the second half. The currency has kind of strengthened recently. What are your current thoughts on the necessity of a price increase in the second half? It seems that the cost pressure's not necessarily abating in the way you thought. Is it safe to assume that another mid-single-digit price increase is in store for Kimberly-Clark de México in the second half?
Sure, Alex. Look, first, on the exchange rate, sure, it has appreciated, but it's appreciated from a pretty high number. And when you take a look at the comparison we will face in the third quarter, although it has appreciated, it will be certainly a negative comparison. It will put pressure on costs. We'll see what happens with the exchange rate going forward. I think it has appreciated because, again, some of the early indications by the new administration in terms of macroeconomic and fiscal discipline are encouraging. But we still have NAFTA out there and we've got quite a few other things going on that will certainly keep a lot of the volatility out there for the peso. But for now, better than many expected at this point but still a negative comparison for the third quarter. But what has really changed is that we, and I think this is for the whole industry, not just ourselves, the costs have continued to build up. And we all expected costs to be tough this year, but they continue to surprise everyone and they continue to go up. So given that scenario and given the scenario, as I mentioned, that, particularly, in virgin fibers, we see no relief in the near future. There is no doubt we need to continue to look for opportunities to increase price and mix, and we're currently analyzing what we do in the second quarter. But it could be that we, indeed, need something like a mid-single-digit increase at some point during the second half and probably effective most likely in the fourth quarter of this year.
Our next question comes from Elise Lee with Federated Investors.
Just given your raw material outlook for 2019, does that change your dividend outlook at all?
No. No, it doesn't at this point.
So we had flat dividends for this year. So should we expect a similar trajectory in 2019?
Well, we need to see how the second half of this year, what results we can achieve in the second half of this year, and then the time will come for us to make that decision.
At this time, we have no other questions in the queue, so I'll turn it back to our presenters for closing comments.
Well, thank you all again for participating in the call. Hope you have a nice rest of your summer and looking forward to talking to you in October. Thank you very much.
Ladies and gentlemen, that concludes this morning's presentation. You may disconnect your phone lines, and thank you for joining us this morning.