© 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.
Excuse me, everyone, we now have our presenters in conference [Operator Instructions] I would like to now turn the conference over to Mr. Pablo González. Please go ahead.
Good morning, everyone. Thanks for your participation on the call. Let me start by making a few comments.
Our second quarter results compare positively both sequentially and year-on-year as we continue to grow our top line and our margins start improving. Our pricing and cost savings initiatives are helping us deliver better results. On the revenue side, private consumption in Mexico is decelerating, and we're experiencing sluggish growth in our categories. In addition, efforts to reduce and control inventories by our clients as well as our pricing increases have placed our volumes under incremental pressure.
However, such efforts have resulted in a positive price and mix comparison that allowed us to grow for the 19th consecutive quarter, post record sales for a quarter and have helped mitigate the significant input cost pressures that built up over the last couple of years, resulting in improved margins.
On the cost side, raw materials remain at high levels and for the most part still compared negatively, even though we have seen some easing in recent months. FX was slightly negative during the quarter, and on the positive side, our cost reduction program yielded again very good results.
In summary, we continue to face a challenging consumer environment, both from a competitive and retail viewpoint, and we still have to catch up to the cost increases, but our actions both on pricing as well as on costs allowed us to move margins and deliver better results. We're encouraged with our first half results, and we will stay the course to achieve further improvements.
Xavier will not provide additional details on the results.
Hello, everyone. During the quarter, our sales were MXN 11.3 billion, a new record and a 7% increase versus the second quarter of 2018. Volume was slightly under last year, while price and mix were 8% higher.
Consumer product sales were 6% higher as a result of better price and mix. Away From Home products grew 6% and export sales were down as we sold more tissue rolls domestically, which added to our growth.
Cost of goods sold increased 5% against last year. Pulp and fiber prices as well as cloth compared negatively, while superabsorbent materials and resins compared favorably.
Energy prices were 15% higher and were also a strong headwind. Finally, the FX was slightly higher, averaging 2% more adding to the pressure. On the positive side, the cost reduction program, which yielded approximately MXN 400 million of savings in the quarter, helped to partially offset the negative cost impact.
Gross profit increased 10% and margin was 37.2% for the quarter, 120 basis points higher year-over-year and 200 basis points better sequentially.
SG&A grew 7% and was in line with sales, as we continue to work on controlling distribution costs, and we focused our investments in advertising and point-of-sales activities to strengthen our brands and support our recent innovations. Operating profit increased by 13%. And the operating margin was 20.3%, a year-over-year increase of 110 basis points and a sequential improvement of 160 basis points.
During the quarter, we generated MXN 2.8 billion of EBITDA, a 15% increase. And EBITDA margin was 24.8%, a sequential improvement of 160 basis points, of which, approximately 60 derived from the IFRS 16 accounting changes.
Cost of financing was MXN 379 million in the second quarter compared to MXN 455 million in the same period of last year. Interest expense was higher due to the increased interest from the IFRS 16 lease liabilities. The foreign exchange gain in the period was MXN 20 million compared to a loss of MXN 93 million, the previous year. Accordingly, net income for the quarter was MXN 1.3 billion, a 19% increase.
Finally, earnings per share were MXN 0.42. Pablo will now talk about the rest of 2019 before we take your questions.
Let me start by saying that there is a lot of uncertainty regarding the Mexican economy in general and private consumption in particular. It is now clear that growth will be lower than recent years as public spending has screeched to a halt and the continued uncertainty created by some of the policies and actions of the new administration have meant that both public and private investment have slowed down significantly, job creation has lumped and consumer confidence has deteriorated.
On the positive side, the government social programs, in addition to inflation being under control and wages growing at a higher rate than inflation together with remittances, could provide some support to consumption in the coming quarters. This, of course, is necessary for consumer product categories to grow and will be a determining factor influencing our top line.
In addition, our price increases to offset the significant cost build-up we have faced over the past years have put pressure on our volume in the short term. Some competitors followed, although not with the same percentage increases and overall, all of them have been fairly aggressive during the historically heavy summer promotion season. As the same winds down, we will closely monitor how this evolves, and we will react as needed.
At the same time, we will continue to support our branch with a strong innovation plan for the remainder of the year, and we will continue to work to improve our product mix.
On the cost front, given the recent pullback in some raw material prices, pulp, fibers for recycling and polymers should compare positively in the coming months as well as energy. Near-term projections for these prices suggest they will remain around current levels during the quarter and may show increases towards the end of the year. At current levels, the FX would compare similarly in the third quarter and favorably in the last quarter of the year, but given the above-mentioned uncertainty, it could face great volatility. Operating and executing efficiently, while again achieving a very positive result in our cost reduction program, continues to be key.
We have now identified MXN 1.3 billion for the year and continue to look for and analyze additional opportunities in material savings, product specifications, productivity and distribution. Also we will continue to work to improve our working capital. Our efforts during the second quarter yielded very good results, and this will continue to be a priority.
In summary, we had a challenging but better first half of the year. And we are engaged in executing important actions on the product, pricing, cost and expense fronts to continue improving our results.
With that, let me open it up for questions. And thank you all again for participating on the call.
[Operator Instructions] Our first question comes from Robert Ford with Merrill Lynch.
Congratulations on the results. I really thought the performance was exceptional given how tough the environment was, Pablo. When you think about some of the destocking that's occurring in the industry, how big of an impact do you think that was in the quarter?
Bob, thanks. Well it's hard to tell, Bob. We continue to see some of our clients, again, being very cautious with our their own inventory stance, and we expect this to continue going forward as there is some nervousness again about what the economy will be growing for the rest of the year and how things will evolve. So there -- it certainly had an impact, but it's hard to really determine how much of an impact it had on the results, particularly on our volumes. But again, we do expect clients to be very, very cautious going forward.
Pablo, price elasticities tend to change over the economic cycle. Do you perceive any changes in Mexican price elasticities when it comes to your product group right now?
Not so far. We -- as you clearly point out, in some other instances when the economy has slowed down, we've seen some price elasticity come into works, but it's not the case at this point. Then it might be not be the case at this point because, again, as we mentioned our competitors overall were very, very aggressive during the summer promotional season. So we'll see how it all winds down and where prices end up and probably economy evolves going forward.
Okay. And then Kimber was very excited about the launch of Huggies Special Delivery. And that was kind of -- I was curious if you thought it was suitable for the Mexican market in terms of performance and price points. Or if there's a potential to bring down the price points and make it a little bit more accessible?
Well, there's -- can't tell you at this point, Bob, what we're thinking regarding special delivery diapers. We certainly have a very strong innovation plan going forward. And we will continue to push for a mix improvement, but we will certainly be ready in case that the elasticity, as you mentioned, comes into play and there's some trade down. As you know we have our tiered approach to the categories, and we have a leading products in every tier. So if that will happen, we will be ready for it. But we will continue with our approach of trying to improve price and mix going forward.
Our next question comes from Benjamin Theurer with Barclays.
First of all congratulations on the results. Pablo, I think they were pretty decent, obviously with -- considering all the headwinds. Now one of the questions I have and you talked a lot about the raw material still being a headwind, but we've seen, to a certain degree, some of your inventories coming down since the beginning of the year and on a year-over-year basis. Has that somewhat to do with the reduction of the accounting changes FIFO, and just because of having now lower prices for the raw materials in there? And what would you expect -- how is that going to evolve from our a working capital perspective into the back half? So that would be my first question.
Sure. Look, as some of our clients reduced their inventories aggressively at the end of the first quarter and early into the second half, our inventories grew and we started a process, a very aggressive process to bring down those inventories so that they would be in line with what we expect clients will be demanding going forward, one. And two, because as prices of pulp, fiber and other raw materials are coming down, we want to have our inventories as lean as possible so that we can take advantage of those prices going forward. We didn't get to see those advantages during the quarter because there's always a lag, and we were right in the process of bringing those inventories down. But we do feel we're in a much better place right now to take advantage of those prices coming down. And we will continue to be very aggressive in the way we manage our working capital overall.
And let me just -- inventories were not affected in any way by accounting changes.
Correct.
Okay. Yes. And then just on that, following up, I mean clearly an almost 25% EBITDA margin during the quarter, and you said 60 bps of that was because of IFRS. So let's call it 24.5-ish or low 24s underlying without IFRS. Where do you think -- where could margins go with the current cost environment? Could we go back to 25-plus percent margins just considering how raw materials have come down lately? Or is that not something you can tell as of today?
It's hard to tell at this point, again, because there's so much uncertainty on the top line and what competitors will do with pricing as we get out of the heavy promotional season. So we really need to see what -- how that evolves and how the prices of raw materials continue to evolve. So it's hard to tell at this point. There's a lot of uncertainty.
Our next question comes from Nicolas Larrain with JPMorgan.
Congratulations for the quarter. I have one specific question on the cost savings. Saving of MXN 100 million was impressive, above first quarter. And this guidance -- I wanted to understand where -- what are the main sources of these new cost savings and what can we expect going forward, for next year?
Nicolas, thank you. Well, as we always mention, our cost savings program is focused on opportunities in many areas, material savings, product specifications, productivity and certainly, our whole logistics and distribution area. So there's quite a few areas that we're focused on. And they're all contributing to the good results we're having. And as I mentioned, we have clearly identified MXN 1.3 billion for the year. So that's the number we absolutely expect to be hitting. But we will continue to look for more of these opportunities. And as we find these opportunities and put them in place, particularly in the second half of the year, those will continue to help us as they carry into 2020. And we're already working on 2020 and maybe even to 2021, when it comes to certain specific activities. But I'm not in a position at this point to tell you how we see that going into 2020, '21. But we'll continue to be as we always have been, very, very aggressive on this front. And although we sometimes hear that the -- as we do this year-over-year, it gets harder and harder. That's certainly true, but there are always, always opportunities when you are very aggressive looking into all of these fronts.
And just a follow-up, a bit on the inventory pressure you were mentioning from some of the clients. Would you say this is coming mostly from which channel, obviously the wholesales, the retail? If you could comment a bit on that.
So the destocking has come mostly certainly from modern trade. But having said that, we -- this is something we're seeing across the board in the different channels, wholesale, the drop channel, et cetera. All of our clients are trying to manage their working capital more efficiently. And again, now with the uncertainty of the economy going forward, we do sense that they're all being more careful. So we expect this trend to continue. We don't expect, as we saw last year and late first quarter and early second quarter, to see a big impact of certain clients having their inventories somewhat higher and just deciding to bring them down as quickly as possible. We believe inventories out there are at a fair level. But there's no doubt they will continue to try and manage their inventories at even lower levels, so it's just something we have to work through with them and focus on the sellout to make sure that our selling is healthy.
Our next question comes from Rodrigo Alcantara with UBS.
So on consumer products, I know that you cannot give like further disclosure, but I was wondering if you can comment a little deeply on volume growth, perhaps on diapers and tissue? My second question would be, given the lower expenditure -- given the lower government expenditure, what can we expect at the professional segment sales? That would be my two questions.
Sure. Well, on the volume -- for our categories, as you know the -- as we mentioned, the growth really came from our price and mix on our volumes -- were down versus last year. In all of the cases that's consumer products and professional products, volumes were down low single digits. And again, the growth came from price and mix. On the case of professional, when it comes to the government spending less, it really has -- directly no impact on us because we have -- our business really doesn't depend at all at any government contract. Now as other businesses do depend on that and depending on how the spending of the government evolves, how their volumes and their businesses will evolve, that might have an indirect impact on our business. But again, there's no direct impact. Long time ago, we decided that we wanted to have no dependence whatsoever on government business. And that's the way our professional business is running.
Our next question comes from Luis Willard with GBM.
Congrats on the results. Just have a quick one, and it's maybe a follow-up on the cost side. I mean you have mentioned, and we've seen through history, that benefits from raw materials coming down aren't grasped immediately, and we have some sort of delay from prices coming down. So could you tell us a little bit more of what are the drivers behind the gross margin expansion that you have this year? I mean do you attach that fully to the price action that you've made plus a -- an easier comparison year-over-year? And if so how can we see benefits rolling out in terms of raw materials coming down for the rest of the year?
Yes, Luis. Well, definitely our price and mix has helped when it comes to gross margins. Then that -- the fact that we have operated very efficiently also helped. And we are starting to see some of the benefits of the raw materials coming down when you -- when we see the quarter sequentially from April then May and then June, we certainly saw some of the benefits starting to trickle in. So when you add price operating efficiently, some of the benefits of raw materials coming in and again, our very efficient and successful cost reduction program it all added up so that we could have a better gross margin during the quarter.
Okay. So maybe the full impact of lower raw materials prices, as you mentioned, will be seen probably through the second half of the year, no?
We should certainly see that. And then going forward, what we are expecting is that, again, raw material prices should stay at least at the levels they're currently at. And we'll see about the fourth quarter. Many are predicting that the supply and demand will get a little tighter again during the fourth quarter and that prices may start to come up again. But that'll depend very much on what happens with the Chinese economy, with global growth overall and whether that's strong enough to bring down the very high inventories, particularly on the pulp side. So that prices would start to come up. So there's still a lot of uncertainty about what happens in the fourth quarter, but for the third quarter, we should expect to see costs, at least where they currently are.
Depending a lot on FX, which is a big uncertainty.
Thank you. There are currently no additional questions at this time. I'd like to now turn it back to our presenters for closing remarks.
Well, thanks, everyone again, for participating in the call. Look forward to talking to you in October. And I hope you have a very good quarter. Thanks again.
Thank you. Ladies and gentlemen, that concludes today's presentation. You may now disconnect.