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Ladies and gentlemen, thank you for your patience in holding. We now have your presenters in conference. [Operator Instructions]
It is now my pleasure to introduce today's first presenter, Mr. Pablo González.
Good morning, everyone. Thanks for your participation in the call, and let me start by wishing you and your families all the best for 2019. Now on to Kimberly-Clark results. The fourth quarter resulted in a combination of positive top line growth with a slight contraction in operating profit given the unprecedented cost environment. Our business has continued growing mostly through price, but also through volume, which grew in spite of our efforts to lead price increases. And our market positions remain strong. The combination of positive price, volume and mix yielded a 10% sales increase for the quarter, making it the 17th consecutive quarter with top line growth. On the cost side, the very significant challenges that we faced over the past 2 years were still present in the fourth quarter. Prices of most raw materials continued increasing throughout the period, in some cases, with reduced intensity. But considering their current levels, any increase is significant.
Moreover, the comparisons versus the previous years show a very significant inflation across the board. And on top of that, natural gas and energy prices were also much higher, and the exchange-rate added pressure. On the positive side, the cost reduction program yielded a record MXN 400 million of savings during the quarter, MXN 1.4 billion during the year. This results make 2018 the fifth year in a row with savings that represent 5% of the total cost of goods sold. Combination of prices, better efficiencies from higher volumes and cost reductions, however, was not enough to offset the cost impacts, and our operating margin contracted 200 basis points year-over-year. Sequentially, we were able to maintain the previous quarter's margin despite the added cost impacts. Xavier will provide more details on the quarter results.
Good morning, everyone. During the quarter, our sales amounted to MXN 10.3 billion, a 10% increase versus the fourth quarter of 2017. Volume increased 1% while price mix were 9% higher. Consumer products sales grew 11%, with positive volume and pricing comparisons. Away from Home product sales were 3% higher, and export sales increased 3%. Export volumes are now on a more comparable base since available capacity was similar to last year. You may recall that the new Morelia machine was operating in the fourth quarter of 2017. Cost of goods sold increased 15%. Raw material and energy prices were, in most cases, higher than the previous quarter and compared very negatively with the previous year. That was the case for virgin and recycled fibers as well as for oil derivatives which have not benefited from the old price declines. Energy prices were slightly down sequentially but also compared very negatively year-over-year at these natural gas prices. In summary, some increase compared to the previous 3 months have still very negative comparisons versus last year. To give you some more color, cost increases averaged more than 20% on virgin fibers, more than 40% on imported recycling, mid to high teens on oil derivatives and around 40% on energy and gas price. The average FX was not the exception, growing 3% sequentially and 6% year-over-year. On the positive side, our cost reduction program continued to yield very good returns. As mentioned, the amount of savings generated in the quarter amounted to MXN 400 million, which, together with increased operating efficiencies, better mix and higher selling prices, allowed us to partially mitigate the cost difference. Our gross profit margin was 33.3% for the quarter, 290 basis points lower than last year and 60 basis points sequentially.
SG&A grew 4% and was 16.3% as a percentage of sales, down from 17.2%, as we continued to invest behind our brands through innovation and effective communication in a more efficient manner. Operating profit was down 2% versus the fourth quarter of 2017. The operating margin was 17%. This represents 200 basis points of contraction year-over-year and was in line sequentially. During the quarter, we generated MXN 2.1 billion of EBITDA, a 1% decrease, and EBITDA margin was 20.7%, 230 basis points of yearly contraction and in line sequentially. Cost of financing was MXN 359 million in the fourth quarter compared to MXN 382 million in the same period of last year. Net interest expense was higher from increased debt and higher interest rates. We generated a foreign exchange gain in the period of MXN 300 million compared to an exchange loss of MXN 51 million in the previous year. Net income for the quarter was MXN 1 billion, a 5% reduction over last year. Finally, earnings per share were MXN 0.33. For the year, sales increased 8.6% and represented a record. Operating profit, EBITDA and net income increased 7.5%, 5.7% and 4.7%, respectively. Thanks. I will now turn it back to Pablo.
In 2018, we achieved volume growth in a very competitive environment and in spite of leading 2 price increases throughout the year. We posted record sales. And our brands remain strong and are well positioned. Also, once again, we were able to generate cost savings above 5% of costs. These achievements, however, were not enough to compensate for the severe and continued cost inflation that we have faced on raw materials, energy and FX-related costs over the past 2 years. We are, no doubt, facing an unprecedented cost environment. Overall, we posted healthy top line, bottom line and EBITDA growth for the year, but our margins were below our standards even if they are still good in our industry. Now going forward, 2019 will also be a challenging year. The Mexican economy is expected to grow between 1.5% and 2%, slightly below its recent history. On the macro side, some of the policies of the new administration have caused uncertainty and, together with the accustomed first year learning curve, may translate into lower overall investment on public spending. On the positive side, we expect fiscal and monetary discipline to be the norm. And the new USMCA should provide certainty, although the agreement still needs to be approved by the legislatures of the 3 countries. Also, you can expect significant noise because of the ongoing debates regarding interest rates in the U.S. as well as the trade tensions between the U.S. and China, which could mean increased volatility for the Mexican peso. With respect to domestic consumption, consumer confidence is at record levels, which together with the impulse from the government social programs, wage increases above inflation and high remittances could help private consumption grow at a higher rate than the economy as a whole. At KCM, given the cost pressures we continue to face, we will move ahead with another round of price increases of roughly 4% to 5%, which should be effective in the second quarter. And we'll continue to look for ways to spend more efficiently while we support our brands and businesses through our strong innovation and investment plan. As already mentioned, the increases have had some impact on our volumes, so we will monitor the implementation very closely and react as needed. On the cost front, the pressure in virgin and recycled fibers could ease given China's faster-than-anticipated slowdown, but the extent of the pullback is still not clear. If the easing indeed happens, the pressure on costs should ameliorate. But again, we're not planning for significant relief either. So in addition to pricing, we need to step up our operating efficiencies and cost reduction program in order to improve on the year's results, but more specifically, versus the fourth quarter, which is a better proxy of the 2019 cost environment. To put this into perspective, we expect increases ranging between high single digits and low teens in pulp, high teens in recycled fiber and mid to high single digits on oil derivatives versus the first semester of 2018, all of this in dollars, with the first quarter representing the toughest comparisons. Energy prices will also compare very negatively, more than 50% in the first quarter and around half of that during the second quarter. The FX averaged slightly above MXN 19 per dollar in the first quarter of last year, and so far this year has been at similar levels. To be successful on such circumstances, we're executing a plan to improve prices and mix, as already mentioned, deliver meaningful innovation to improve volume and accelerate our cost reduction efforts. In savings, we have already identified MXN 800 million for the year and continue to look for additional opportunities. To support these efforts, our CapEx for the year will be about MXN 100 million, mainly invested in capacity, product improvement, innovation and cost reduction programs. In summary, we continue to face a very challenging cost environment, and we don't expect it to improve in a meaningful way anytime soon. However, the rate inconsistency of raw material price increases could slow down. If that is indeed the case and the exchange rate remains relatively stable, our price and mix efforts, together with higher efficiencies and our continued focus on reducing costs, should allow us to catch up and achieve not only top and bottom line growth, but also margin improvements in the second half of the year. We will stay focused on improving the top line through innovation, investment, volume, price and mix and continue to put great emphasis on the purchasing, manufacturing and cost savings areas. With that, let me open it up for questions, and thank you all for attending the call.
[Operator Instructions] Our first question comes from Nicolas Larrain with JPMorgan.
I wanted to ask you guys about these efficiencies at the SG&A level. And you guys have been considered consistently delivering lower expenses and efficiencies on this front. I wanted -- I mean, I was wondering, how further can we go here and what are the sources of these efficiencies?
Nicolas, thanks for the question. What we've been doing on SG&A mostly is -- as you know, the largest line in SG&A for us is A&P. And what we've been doing is finding ways to invest more effectively and more efficiently behind A&P. We think that -- we don't think we have not -- let me, let's say, reduce the efficiency of the dollars that we put behind A&P, but we've reduced the expense there.
Overall, Nicolas, we've been much more disciplined in analyzing what we're doing in A&P., every dollar we invest, what the returns are and making sure that we're investing only in those activities that provide the highest return. And that's how we've been able to be a little bit more effective and reduce the spending while still providing the necessary support for our brands.
Our next question comes from Alex Robarts, Citigroup.
I wanted to start off just on the cost savings side. I mean, clearly this MXN 400 million that you've got in the fourth quarter was a positive surprise. But kind of beyond the higher end of your range, as you laid it out to us in the last quarter, tell us or if you could comment a little bit about the nature, the sources behind what we saw in the fourth quarter in terms of the cost savings. And is it fair to think about perhaps now a new level for your targets as you think about the cost savings on an annual basis? If you're kind of trending 4.5% to 5% of COGS, might it be a safe assumption to kind of be working with a target above that range? And where could you perhaps see some new areas for savings in this current year? So that's the first question. I've got a follow-up, if I could, after.
Okay. Alex, sure. Look, the cost savings programs, as we've said, mainly come from materials, so looking at materials that allow us to bring down costs or reduce materials while still providing the same functionality for the products; taking a look at the products themselves to see how we can reduce costs, again, while maintaining functionality, so that we maintain the leadership and the fact that we have better products by tier in each of our categories; and certainly, also in our processes, particularly at the mills. So it's materials, products and processes. And given the situation we're at, we really have honed in and being more aggressive on how we approach this. And that's why we were able to deliver even higher savings for the quarter than was expected. And that's also why we are already stating that for the year, for 2019, we've identified MXN 800 million. Some of it will come from what we identified in the second half of 2018. And that will roll into 2019. And there are also quite a few other projects that we have already identified and are working on to make sure that we deliver on '19. So I'm pretty confident we've identified MXN 800 million. I'm pretty confident that we will reach at least the MXN 1 billion mark, and we will continue to move very aggressively on this front to try and again reach the levels we have been able to reach in the past years. It gets more difficult, of course, but there's always opportunities, particularly if you're working with suppliers, if you're really understanding what you can do in materials, if you're really understanding what's happening out there in terms of different options and alternatives and -- for purchasing. So we're, again, really being very aggressive and honing in on it given the situation. And we will be, hopefully, very successful again this year on our cost reduction program.
Our next question comes from Robert Ford with Merrill Lynch.
Pablo, can you touch on competitor, consumer and trade responses following your latest round of price increases, please? And additionally, given the recent fuel shortages in many parts of the country, are you seeing any impact on sellout in the Modern Trade?
Right. Well, first, on competitive responses. Bob, as you know, over the past 2 years, we've led quite a few price increases given the situation. For the most part, we have seen competitors follow, although they have lagged as they usually do. And not only they have lagged, but many of them have been pretty aggressive from a promotional standpoint. So when you take a look at net price increases from some of them, they're certainly lower than what we have been able to put into the market. That, no doubt, in certain categories, has had an impact. And we will continue to monitor that very, very closely. Again, given the situation, the unprecedented situation on costs, we feel we have to continue prioritizing price and mix to make sure we can eventually catch up with these costs. But having said that and being cognizant that -- of this share situation in certain categories, given the promotional activity from some of our competitors, we will react accordingly. Our shares are still strong. Our brand positions are still strong, but we intend to keep it that way. Also, where we have seen an impact, yes, we will move ahead in pricing, but we have certain activities and certain reactions that we will put in place to mitigate the impact of competitors lagging behind. It's not uncommon as we move ahead with prices that they lag. But we will be -- as we are cognizant of that all, we will react accordingly. In terms of the impact, I would say we've seen no material impact of the shortages of gasoline in Mexico. Yes, we've got some difficulties in terms of our logistics and distribution scheme. With that, maybe some products that we have not been able to deliver as we would have liked to; and thus, at the shelf, maybe some products that are not -- we don't have a volume at the shelves that we would like to have. But I would say, it's not material. It's getting better. And so overall, we don't expect that to be -- to have a material impact in the first quarter, if indeed it continues to get better and it doesn't protract for too long.
That's very helpful, Pablo. And one last follow-up, if I may. And that is given the price increases that you pushed through, and generally, it's gotten to the trade, are you seeing any evidence of consumers beginning to trade down?
It's a mixed bag. But what I can tell you is that overall, I would say, categories, really the growth is coming from pricing. Volumes and categories are flat; for the most part, they're somewhat down. Having said that, it's a mixed picture when you take a look at the different categories because some have even increased mix -- or we've seen a better mix in some categories. And there are certain categories where we have seen mix deteriorate but slightly. We're not seeing, in either case, a material impact so far.
Our next question comes from Alex Robarts with Citigroup.
It was really about just your take on these initiatives that we've been seeing so far this year from the government, think about minimum wage increases, the elderly support programs. And we also have seen the data, kind of a multiyear high in consumer confidence. I mean, as we start this year, do you feel like the consumer environment has kind of started in line with where you would have thought it would have been? Or is there some cause for you to be more optimistic on short-term demand trends or really it's more of a cautious view? Kind of is it too early to really take a read of these initiatives? So kind of just your thoughts on the short-term demand environment would be great.
Sure. Alex, on the initiatives, again, on the positive side, the fact that at least the budget reflects fiscal discipline, and we believe that given the ideology of this government is very, very important. Now we're not surprised that maintaining that discipline, they're rerouting some of the funds for more of a social perspective than some other programs. So I think, overall, this was expected. It concerns us to the degree that maybe we will not see the public investment come up. And we'll see what happens overall with public spending. But again, not unexpected that some of the funds are being channeled more to the social side. Now as those funds are channeled to the social portion and given the very favorable consumer confidence levels at which we are as well as some of the increases in wages and high remittances, that all could translate in a slightly better consumption environment than what we've seen in the economy as a whole. But it's too soon to tell. I mean, if they execute on these programs correctly, indeed, this starts to flow. And if that level of consumer confidence translates into purchasing, then we'll see a better demand scenario. So too early to tell at this point, Alex.
Our next question comes from Rodrigo Alcantara with UBS.
Just a follow-up on the competitive front. On the consumers product segment, I was wondering if you could give us, at least qualitatively, the performance at your baby diapers and toilet paper segment in terms of volume and price. And my second question would be, if you have any preliminary thoughts about next year's dividends.
What I can tell you is that, overall, consumer products, as I mentioned, did well during the quarter, mostly because of pricing, but there's also some volume in there. Volume grew at low single digits versus last year and mid-single digit sequentially. So we're pleased with that volume performance. But again, pricing is still by far the biggest contributor to growth. On the diaper category, we're doing well. I think the innovation and the funds that we've set forth in that category have allowed us to have a very good year, and we expect that to continue going forward. On the dividend side, we will be analyzing what we need to propose to shareholders in our upcoming shareholder meeting, which will be at the end of February. And we will announce it when we have a little bit more information. At this point, we're only in the phase of analyzing what it is we're going to propose.
Our next question comes from Luis Willard with GBM.
Maybe I'm just going to ask, I mean, I hope it doesn't sound the same, about how you feel on dividends and maybe buybacks as well. If -- I mean, if the cost environment continues to stabilize and profitability improves, would you be willing to start maybe using your buybacks once more? I mean, you haven't used that program for over a year now. And if that's the case, again, will you be...
Sorry, sorry. Go ahead.
No, no. Only if you're able or thinking of using buybacks if profitability stabilizes ahead.
As Pablo said, on dividends, we're analyzing that at this point, and we'll have something by -- before our shareholders meeting, which is by -- in late February. In terms of buybacks, that's always an option for the future. I wouldn't anticipate anything on the short term or I would not expect anything for this year, at least nothing significant.
Our next question comes from Elise Lee with Federated Investors.
I really appreciate your commitment to dividend over the past years. But then over the past 5 years, the payout ratio has been above 100%. So I just wanted to see if you would be able to comment on sustainability of the dividend.
Yes. Elise, I mean, our policy is, certainly, most likely will continue to be 100% payout ratio. Now we need to determine exactly what that means for 2019, but our policy has not changed.
Your policy because historically it was 4% -- I mean, not 4% -- dividend increase in real terms, but that has changed. So now it's 100% payout ratio?
So the policy of increasing dividends in real terms, hopefully -- and as Luis asked, hopefully, as we get into a scenario where eventually costs come down and we're able to catch up and we increase and get back to the profitability levels we have had in the past, we will most likely again consider that policy of paying a dividend that increases in real terms. In these past 2 years, given the unprecedented environment, what we've done is go back to the 100% payout ratio. And that will probably continue to be the case until we again can get back our profitability and be on more stable footing on that front, so that we can think of increasing our dividends as we did in the past.
Our next question comes from Mohammed Ahmad with FGP.
My question is more, over the last couple of years, regarding consumer products volume. So I was -- again, they're not exact numbers, but I would expect, like over 2 years, you've had low single-digit volume declines in the last couple of years. Now I know you said the category had been sort of flattish, but you're such a large part of certain categories that if you're sort of flat to down a little bit, that means the other guys could be growing low to mid-single digits. So can you give me just a sense, particularly for your 2 big categories that are more material to you, how you see your volume share over the last, say, 2 years? And what is -- at what point do you say, "Okay, we don't want our competitors to continue getting scale?"
Sure, Mohammed. Yes, as you mentioned, overall category volumes have been flat or down, but we certainly have a big impact on that. And our volumes have also been slightly down to flat over this past couple of years. That has to do with inflation overall. So consumer has been stretched. But remember that in 2017, inflation was well above the target of the Banco de Mexico. And although it started to come down in 2018, it's still above the target and unfortunately has not come down the past couple of months. We'll see what happens in 2019. So consumer has been stretched. And as we pass on prices, that has added some pressure, particularly in our categories. Our volumes, again, flat to a little bit down. Overall, our shares continue to be strong. But as I mentioned to Bob's question, we have seen some declines in certain categories, particularly in tissue categories, where competitors have lagged behind, they've been more aggressive on the promotional front. So their volumes have been up, and ours have been flat to down. And -- but we believe our brands are still strong. Our positions are still strong. But we're monitoring it very, very closely. And no doubt, we will react in certain places where we deem it necessary.
Okay. And just on the cost inflation side, clearly, I mean, you -- and I appreciate the disclosure you have with regards to where cost inflation on a year-on-year basis you expect. But converting that to, say, gross margin pressure, if -- and I'm not asking any forecast with regard to changes in your input cost. But more if they were to stay at current levels, both in FX and commodity pricing terms, what would be the full year gross margin headwind or tailwind this year relative to last year?
It's hard to tell because we're going against a moving target. Of course, the costs moving -- going forward, and we don't know exactly how that will end up, Mohammed. So I'm a little hesitant to provide a specific number on margin improvement given our cost scenario. What I can tell you is that, again, we're being very, very aggressive and will continue to be so going forward because we know we need to continue to excel on that front.
At this time, we have no other questions. So I'll turn it back to our speakers for closing comments.
Well, thanks, again, everyone, for participating on the call. We'll be glad to be in touch with all of you, and I hope you have a terrific first quarter and a terrific first year. Look forward to talking to you again. Thanks, again.
Ladies and gentlemen, that concludes this morning's presentation. You may disconnect your phone lines, and thank you for joining us this morning.