Kimberly-Clark de Mexico SAB de CV

BMV:KIMBERA

Q2-2025 Earnings Call

[Operator]

Good day, everyone, and welcome to the Kimberly-Clark de México 2Q '25 Earnings Conference Call. [Operator Instructions]. Please note, this call is being recorded and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. Pablo Gonzalez, CEO. Please go ahead..

[Pablo Roberto González Guajardo, executive]

Thank you. Hello, everyone. Hope you're having a good summer. Thanks for participating on the call. We'll go straight to results, and then we'll make some comments about the quarter and our expectations going forward as well as update you on some important initiatives underway. So Xavier

[Xavier Cortés Lascurain, executive]

Thanks, Pablo. Good morning, everyone. During the quarter, our sales were MXN 14.1 billion, basically flat versus last year, 1.7% higher than the first quarter and an all-time quarterly record by a couple of million.

Total volume was down 3.3%, and price/mix was up 3.3%. Consumer Products and Away from Home decreased 2.2% and 7.8%, respectively. Exports were up 24.5% with double-digit increases in both converted products and hard roll sales. Cost of goods sold increased 7.2%. Against last year, SAM and resins were favorable, virgin fibers were mixed, while recycled fibers and fluff compared negatively.

The FX was significantly higher, averaging 17.3% higher. Our cost reduction program once again had very good results and yielded approximately MXN 500 million of savings in the quarter. These savings are mainly at the cost of goods sold level and are generated by sourcing, materials improvement and process efficiencies.

Gross profit decreased 9.7% and margin was 38.2% for the quarter. Mix was negatively affected by an increase in lower-margin hard roll sales.

SG&A expenses were 3.6% lower year-over-year and as a percentage of sales were down 60 basis points. Operating profit decreased 13.9% and the operating margin was 21.7%.

We generated MXN 3.6 billion of EBITDA, an 11.5% decrease. As we had anticipated, even with the significant Peso depreciation, we were able to maintain our EBITDA margin within our long-term range at 25.4%.

Cost of financing was MXN 352 million in the second quarter compared to MXN 356 million in the same period last year. Net interest expense was slightly higher at MXN 3,73 million (sic) [MXN 3,730 million] versus MXN 390 million last year.

During the quarter, we had a MXN 21 million foreign exchange gain, which compares to a MXN 37 million loss last year.

Net income for the quarter was MXN 1.9 billion, with earnings per share of $0.62. We maintain a very strong and healthy balance sheet. Cash position as of June 30 was MXN 11 billion. We have no debt maturing for the rest of the year and maturities for the coming years are comfortable. Net debt-to-EBITDA ratio is 1, and the EBITDA to net interest coverage is 10x.

Over the last 12 months, we have repurchased close to 50 million shares, more than 1.5% of the shares outstanding, which brings the total payout to shareholders to 7.5%, including the cash dividend. Thank you.

[Pablo Roberto González Guajardo, executive]

As expected and mentioned in our prior call, the first quarter trend continued in the second quarter and resulted in top line basically flat versus last year, albeit a quarterly record, lower bottom line margin, but improving sequentially and EBITDA still within our target range despite significant uncertainty, consumption deceleration, raw material cost increases and very negative exchange rate. Once again, this reflects the strength and resiliency of KCM.

On the top line, we compared to a very strong second quarter of last year, and we faced a challenging environment with leading indicators signaling a slowdown of the economy of private consumption. A key indicator for us is that volume growth in some of our most important categories is muted and even in higher growth ones, it's been slower.

In addition, we continue to see clients aggressively manage their inventories given the economic conditions and uncertainty plus, and this is very important, we intentionally reduced our support during the heavy summer promotional season.

This strategic decision had an important negative effect on our volumes, but it's intended to protect the value of our brands, as well as reduce the negative pricing effects and it means that both consumers and clients did not stock up on our products, which should translate into healthier volumes and prices during the second half of the year.

This together with our accelerated innovation plan, and I'll have more on that in a moment, increased investment behind our brands and execution behind the opportunities we've identified should translate in growth accelerating in the coming quarters. With respect to costs, the higher exchange rate plus the fact that the anticipated relief in pulp prices did not materialize particularly in softwood pulp and fluff, which were at record levels, had a meaningful impact.

Given soft demand from China, we are finally seeing prices come down, but slowly. Going forward, we expect dollar-denominated costs on tissue raw materials that is pulp and recycled fibers to have a more modest impact. And we expect a mixed picture in personal care, higher fluff but lower resins and superabsorbent materials.

Having said that, it's clear that the lack of certainty and many different moving parts could change the outlook. Accordingly, we've carried out selective price increases, have put in place actions to support a richer mix and are well on our way to achieving record savings for the year.

Now let me turn to innovation and provide an update on our launch of the pet business. During 2025, we will introduce product improvements in every category in which we participate. So far, we've introduced important innovations at the diaper, wipes and incontinence categories among others. And in the coming quarters, we'll continue to strengthen our offerings to consumers in bathroom tissue, incontinence pads and feminine care. We'll be in a position to share more details on this in future calls.

Also continue to make progress to bring to market technologies and products that will increase consumer preference for our brands in the coming years.

Finally, as we've discussed with you, in the medium term, we expect to accelerate our growth rate by achieving double-digit growth rates in categories with higher growth potential like wipes, kitchen towels, facial tissue and wipers, among others, as well as through adjacencies and entries into new categories.

With respect to adjacencies, the recent integration of 4e Global into the KCM operation, creating opportunities to strengthen our position and capabilities in the soap and toiletries categories as well as to participate in shampoos and other liquid-based product categories. As we move ahead with our plans, we expect sales to accelerate in these categories during second half of the year and particularly during 2026 and 2027 as we bring our pipeline of innovations to market.

And when it comes to our entry into the pet food business, we are in the process of gaining distribution behind our brands and have started the commercial and marketing efforts to support them. We have received excellent feedback from consumers and we'll embark on an aggressive sampling program to get more consumers to try our superior products and start to position and grow our brands.

We're in the first mile of a marathon, we are excited with the consumers very positive reaction to our products. We'll keep you updated on our products. With that, let's turn to your questions.

[Operator]

[Operator Instructions]. We'll take our first question from Alejandro Fuchs with Itaú.

[Alejandro Fuchs, analyst]

I have just one brief one on the top line. Maybe Pablo wanted to see if you can elaborate a little bit more into the volume pressure. I know you mentioned some macro slowdown and consumption slower that we have seen across the board in Mexico, but I wanted to see maybe you can also touch if you think this is also maybe competition, what are some of your competitors doing?

And also, maybe you said that second half should be a little bit better, you had more growth but also you continue to see the slowdown today and comps are a little more difficult for Kimberly in the second half. So maybe what would be the drivers to grow in the second half of the year?

[Pablo Roberto González Guajardo, executive]

Thanks for the question, Alejandro and participating in the call. Yes, as you know, the Mexican private consumption and the economy as a whole has continued to slow down and we are certainly feeling it in our categories. As I mentioned, it's a key indicator for us that volume growth in our biggest categories is muted. So we're seeing, for example, in diapers, bathroom tissue, growth flat or slightly ahead of last year. In higher growth categories, we are seeing them growing at a higher cliff, but still not at the rates they were doing so.

So there's no doubt that the consumers stretched and they're trying to make ends meet and really trying to stretch their budget. So we continue to see that. And the thing is that -- that's the sell-out in our categories, but then you have the sell-in, and we're seeing a big difference between the sell-in and the sell-out because we see our clients being very, very aggressive in the way they're managing their inventories.

So that whole -- those 2 things are certainly having an important impact in volumes overall in sellout, but then even a higher impact in our case in selling as clients work through their inventories given all of the uncertainty.

Now going forward, we currently see no big support for the domestic consumption to increase significantly in the coming quarters. The reason why we're a little bit more bullish on our end is because one, as I mentioned, we did not participate as aggressively as we have done in the past in the summer promotional season. And we did that to protect the pricing and the value of our brands. But what that means then going forward is that you don't have clients as inventories as they have been in past years and consumers as inventory in our products as they were in past years.

And I'm mentioning clients, not just client because what happened in past years and still continues to do so with these promotions that those who do the promotions, bringing a lot of product to their inventories before they go ahead and then put the promotion in place and then they sell that product both to consumers but also to other clients, they do sell this product to the wholesale channel.

So what would end up happening in past years is that during the third quarter, many clients were inventory and many consumers were inventory plus the price with the value. So now that we didn't do that, we're expecting going forward that our inventories are a little bit healthier out there both with clients and consumers, and we expect that to translate into volumes increasing going forward. That's one.

And certainly, the other is the -- all of our push we have behind our innovations. We are continuing to work on a multi-tier and multichannel strategy that you know very, very well, and we will be strengthening that strategy so that we strengthen our differentiation at every level. We are adjusting accounts, presentations and the corresponding prices to make our products even more accessible to, as I said, stretched consumers.

And also, we are fine-tuning and strengthening our private label strategy where it makes business sense. So again, we think we're in a healthier position, plus the actions we're taking in innovation and strategy-wise, we believe, over the coming quarters, it won't be quick, but over the coming quarters, we should -- we expect our volumes to start to pick up.

[Operator]

Our next question comes from Robert Ford with Bank of America.

[Robert Ford, analyst]

Pablo, are your exports to the U.S. impacted by the incremental tariffs? Or are they shielded by the USMCA?

[Pablo Roberto González Guajardo, executive]

So far, shielded by the USMCA bond.

[Robert Ford, analyst]

Fantastic. And I was just curious, how are the tariffs on China kind of impacting KCC sourcing out of China? And how are you thinking about the export opportunity into the U.S.?

[Pablo Roberto González Guajardo, executive]

Yes. Thanks for the question, Bob. Look, there's, of course, a lot uncertainty as to where all this will end. But there's no doubt that there's going to be higher tariffs on China and many other countries. And we believe that relatively speaking, Mexico will be in a much better position versus all those countries to continue to integrate further with the U.S.

Our partner is looking at this very, very closely, and we're having very productive conversations with them to understand where the opportunities are so that we can increase our exports of finished products to them. I think we'll see this certainly come to bear in the fourth quarter and through next year.

And it's not only with KCC, we're doing this with quite a few other players that are -- they believe they're going to be impacted with what's happening. And we're certainly trying to take advantage of that since we believe we're not only well positioned right now. But as I say, we're confident we'll continue to be better positioned than the rest. So we're exploring all the opportunities. As you know, it takes a little bit of time. But we do believe that many of this will bear fruit in the coming quarters and certainly to 2026. So it's a good opportunity for us, Bob.

[Robert Ford, analyst]

That's great to hear. And with respect to the discipline that you showed in December promotional campaigns, did competition show similar discipline? Or was it the classic, it's almost like a game theory problem, right? So I'm not sure -- I'm just curious what you're seeing in terms of the competitive environment.

[Pablo Roberto González Guajardo, executive]

I think competitors pretty much approached the summer promotional season as they've done in the past. So when the promotions did go into effect for those 4 or 5 days when they do them, we were certainly at a big disadvantage.

But again, we believe that for the long run, this is the right thing to do. It will hurt us during the quarter. but it positions us very, very well going forward. And we'll continue to be very, very diligent in how we approach this to protect the value of our brands and to bring the best value possible to consumers and clients.

[Robert Ford, analyst]

That makes sense. And one last question, if I could, please. And that is you've touched on entering the shampoo category. And I was just curious if you could -- do you plan to extend a scoot on to the shampoo category? Are you thinking about a different branding campaign? I'm just trying to understand the addressable market, the positioning of the product and maybe the margin profile?

[Pablo Roberto González Guajardo, executive]

Sure. We'll be able to share more in the coming quarters, Bob, because we're going through the whole analysis. What I can tell you right now is that we already participate in the shampoo category, particularly when it comes to certainly toddlers and kids, but also in adults, we have some specific brands that we sell through different clients, and they sell pretty well.

So we're just taking a look at the market. We're taking a look at the participants and figuring out what would be our best strategy to participate in that market so that we can do it in a way that we can grow, but grow profitably.

Otherwise, it's something that we have no interest in. So we've been -- we've made inroads so far with a couple of clients and we're finding our way, but I don't think you'll see -- let me just put it this way. I don't think you'll see a national brand and a big, big push behind the national brand. It's really niche and the way we're playing with certain clients with certain brands that they're supporting very aggressively. But again, we'll be able to share more on this and some other very interesting and important initiatives for us in the coming quarters.

[Operator]

Our next question comes from Antonio Hernandez with Actinver.

[Antonio Hernandez, analyst]

Just could you provide a little bit more light on how were sales trending during the quarter? I mean, was it a soft start and then becomes stronger? Or was it [indiscernible] and maybe if you can provide more light also in terms of Consumer and Away from Home within this perspective?

[Pablo Roberto González Guajardo, executive]

Sure. Just Antonio, to make sure I got your question because you didn't come out very clear, but you're asking about during the quarter, how we progress, right?

[Antonio Hernandez, analyst]

Exactly. How you're seeing this start of the third quarter?

[Pablo Roberto González Guajardo, executive]

Okay. I'm going to say that it was -- again, given economic conditions, we didn't see, in our case, very big differences, April, May or June. Again, our competitors who were more aggressive during particularly June promotional season probably saw a difference. In our case, since we managed it differently. It was pretty consistent, and we're seeing the same thing with the start of July.

So again, unfortunately, at this point, we see no big catalysts for domestic consumption to really accelerate. Hopefully, that changes in the near term, but there haven't been any catalysts for that to change. So it's really more about us putting a strategy that allows us to get closer to the consumer and to our clients and gaining some share so we can get growth in the second half of the year.

Now when it comes to professional, yes, we saw an important decrease in sales in our professional business this quarter, and it was mainly driven by volume, our price/mix was slightly positive. And it really has to do with the same economic conditions that we're seeing. And as we talk to our distributors and we talk to our end clients, particularly outside of Mexico City, both hotels, restaurants, et cetera, they're seeing a sharp slowdown versus last year. I mean, double-digit low downs when it comes to tourism in Cancun and many other places.

It's just much, much lower than it was and when you put that together with the distribution system we have for that business, which is through distributors and distributors in this case, tend to have quite a bit more days of inventory then say, in the consumer product side.

So they just have been -- they needed to bring down those inventories. So again, it's a combination of a slower economy and our distributors needing to bring down inventories because of the uncertainty and the slower economy. And we'll see if that picks up here in the coming quarters, but everyone I've talked to so far says that Mexico City particularly seems to be doing well.

But outside of Mexico City, things seem to be quite a bit slower when it comes to services, and that's certainly hitting us on that business. So doing the same as we're doing in consumer products, making sure we have the right products for this moment in time that we're working with our distributors to get those products to market and that we're talking to clients to make sure we understand their needs and we can get those products to them as quickly as we can. But certainly, it's low market at this point.

[Operator]

Our next question comes from [ Brian Lavit ] with Barclays.

[Unknown Analyst]

This is [ Ryan ] on for Ben. So focusing on consumer behavior a little bit here, are you guys seeing any trade down amid the price increases you took during the quarter and lower remittances coming into the country as well.

And going on that a little bit with the value proposition for KCM, what do you think in the third quarter, fourth quarter, as you talk about potential volume increases is going to have customers choosing your products over competitors, especially with the larger price gap now?

[Pablo Roberto González Guajardo, executive]

Thanks, Ryan. Thanks for the question. A very important one. Yes, no doubt, we are in the market. We're no doubt seeing consumers trade down. And I'm being very cautious saying in the market because in our case, we have a richer mix because we've supported many of our upper tier products, and they've performed very, very well. So you've got a dichotomy market where consumers that have a little bit more to spend, continue to do so.

But the majority of the population is stretched and they're certainly trending or trading down to a lower-priced products and lower account products. So what are we doing about it? And we have been doing it, and we have very important plans in the second half of the year to strengthen this.

Again, we're working on our multi-tier strategy, making sure that we have the right prices for every tier and the right product for every tier. As you know, we have products in the economy tier also in the value-add premium. And many -- or most of the times when people are trading down, they trade down from one of our brands in value to one of our brands in economy because we lead in value economy and premium.

But we need to continue to strengthen that proposition because there's certainly more competition out there. So we are strengthening that proposition, and we're seeing in many instances, some very good results.

The other thing we're doing, and this is not just for the economy products, but for all of our portfolios, we're making sure at this moment in time, we have the right count, the right presentations and the right prices out there to make sure our products, again, notwithstanding the tier or even more accessible to consumers. And we're putting in place quite a few things in the coming quarters to that respect.

And finally, as I said, we're fine-tuning and strengthening our private label strategy where it makes business sense. We've always said that we could -- we analyze this and wherever we see an opportunity that we believe makes sense, we pursue it and we continue to fine-tune that strategy, and you'll probably see us be more aggressive on it in the coming quarters.

So I would say those are the key areas behind our push for higher growth in the coming quarters. It won't be -- again, it won't be fast because it's slow out there. But we continue to believe that we're well positioned. And with the actions that I've just described, we'll be even better positioned to take advantage of or to serve our clients and our consumers and certainly in the coming quarters and into 2026 be in a much, much better place.

[Operator]

Our next question comes from [ Froylan Mendez ] with JPMorgan.

[Unknown Analyst]

[indiscernible] [Foreign Language] Pablo, just want to make sure I understand because you mentioned that second half should better volume and even growing volumes. But when I hear more of your comments and your deeper dive into the dynamics in specific categories, et cetera, the only lever that I can hear from your speech is the fact that you're probably with less inventory at the different channels that will allow for the sellout -- sorry for the selling to be more, let's say, more robust into the second half not really that the consumer is actually willing to buy more.

So in that sense, second half outlook on top line, is it really a game -- not a game changer but an inflection point? And if it is the case, what should we expect for margins? Because there, you do have some levers, right, better effects? You mentioned about input costs coming down. In that sense, with the combination of top line plus costs, do you feel more comfortable to end up the year in the higher range of the guidance?

[Pablo Roberto González Guajardo, executive]

Thanks, [indiscernible]. Thanks for the question. Let's see if I can provide a little bit more clarity. Let me put it this way. When we think of top line in the short term, we've got a couple of headwinds. One is, as we've mentioned, the economic slowdown and two, the inventory reduction we're seeing from our clients. And we're still experiencing that.

But again, we believe we're in a better position, so we'll be healthier, certainly through this than many other competitors. So those 2 things are headwinds. Now when we think of tailwinds as you mentioned, we certainly -- I think the strategy we put in place protected volumes, protected prices, very importantly, prices also. So that should certainly help.

And as I was just mentioning to Ryan, very importantly, the adjustments we're making in the second half to a portfolio and strategies which we are confident we'll be able to aid our volume growth. So putting that -- those strategies and portfolio in place doesn't happen overnight. So July might be a little bit slower, but we're certain that by the end of this quarter, we'll see a very different picture. And certainly, by fourth quarter, some of these things we've done already, and there is surely great, great progress.

And we are confident that many of the other adjustments we're making will also provide us with an advantage and bring volume to our site. So might still be a little slower start of the third quarter, but certainly picking up throughout and we believe we'll be in a much better position in fourth quarter certainly in 2026.

So that's on the top line, and I hope that provides a little bit more clarity. On the bottom line, which you mentioned, also some headwinds and some tailwinds. And let me go through that very quickly.

On the headwind side, a couple of raw materials, still pressuring our cost, but we believe the impact will be more moderate than it's been this past quarters, which has been pretty aggressive between the increase in prices, for example, in pulp and fluff plus the exchange rate.

So going forward, that pulp starting to change. As we said, recycled fibers might provide a little bit of a more moderate impact. Fluff will continue to impact. But superabsorbent materials, resins will be a positive. So we're starting to see a different picture of raw materials that have a more moderate impact, those that are still higher and some that are coming down.

So that's one headwind. The other one is that, of course, we've got some inventories in our balance sheet, given the prices that we've seen in the past couple of quarters. Our inventories are higher, not in volume, just in price because of how prices went up. So we have to go through that inventory, but we'll do that here in the coming 1 month, 1.5 months and get through that.

So those are the headwinds. And then the tailwinds, very important is, as I mentioned, some raw materials have certainly turned around. The exchange rate will be in a much, much better place during the second half of the year. And our savings plan continues to bring about great savings, and we're working hard to bring even more in this year and working into 2026 and 2027 already.

So headwinds and tailwinds in both cases, top line and bottom line, as we move through the second half of the year, we have -- we're very, very confident that the tailwinds will be much stronger than the headwinds, and our results will continue to improve. I hope that provides clarity.

[Unknown Analyst]

Perfect. So thinking about the margin guidance of ending in the lower end or in the higher end or in the middle, as you see it today, where do you feel more profitable, on marings?

[Pablo Roberto González Guajardo, executive]

It's uncertain with all of the things happening, for them. But you've seen that we've been able -- even with all of the pressure, we've been able to keep our margins strong. And again, these tailwinds, particularly towards the end of the year and into 2026 go our way, our margins should continue to improve.

[Operator]

Our next question comes from Juan Guzmán with Scotiabank.

[Juan José Guzmán Calderón, analyst]

Congrats on the results. Quick ones here and as a follow-up to your previous answer. Regarding expenses, we have seen some improvements in operating leverage along the year. Although SG&A as a percentage of sales is still a bit above your historical levels.

So my question here is how sustainable do you see these gains? And how much room do you see for further improvements over the next quarters? And aside from the positive effect of a higher top line growth in the future, what measures are you taking on this front?

[Pablo Roberto González Guajardo, executive]

Juan, I'll take the first one in terms of SG&A. Yes, as you noted, this quarter and the first quarter of the year, we made significant efforts to curtail some of our expenses due to the situation we're facing. Some of these and for the most part, we will continue to have going forward, although we will also ramp up our investment behind the brands.

So I would probably say that going forward, we will pretty much be in line with what we've seen on average on the past few quarters, one opportunity and one area where we've reduced expenses and this one will provide -- will continue to provide benefits going forward. But again, it's going to take time, is distribution expenses. That's one on the -- what's happened and what we believe where we'll be in the near term -- longer term going forward, I mean, we're living in a very different environment.

And even though we've always been a very lean and efficient company, we're working very hard and have exciting plans to make sure we stay as lean and efficient as possible. And that, hopefully, in the future, will mean that even the current scenario we can improve upon.

Because again, it's a different competitive environment. It's a different economic environment -- that's the way we see it, and we're approaching it in the sense that we need to continue to evolve with it and transform ourselves and make sure we are the most efficient and leanest company out there, and we've got plans to -- for that to continue to be the case going forward.

[Operator]

[Operator Instructions] We'll take our next question from [ Renata Cabral with Fifth Third Bank].

[Unknown Analyst]

My question is a follow-up regarding SG&A. We know that other industries are more labor-intensive, but there is the discussion of gradual reduction of labor hours in discussions in Mexico. Just want to understand how do you see this impact in the company, if there is any ongoing simulator or initiative to mitigate this impact if the law passes in the future?

[Pablo Roberto González Guajardo, executive]

Renata. The analysis that we've done so far point to 2 things. Number one, any impact will be not on SG&A in our case, but on cost of goods sold because this labor changes could affect union workforce. There's some impact but I'd probably say 2 things there. Again, this is what we've identified so far.

Number one, the size of the impact is not that significant. If you recall, labor represents about 8% of our cost of goods sold. But out of that, a significant proportion comes from profit sharing, and that would not be affected.

The other part, which is directly related to salaries would be impacted in a proportion. But again, it's only on 5% of our COGS. Number two, having identified these risks, we have put in place several teams, several initiatives to see where we can offset this increases, where we can add automation, improve efficiencies so that over the long term, it doesn't have a significant effect on our costs.

[Operator]

It appears we have no further questions at this time. I'll turn the program back to speakers for any additional or closing remarks.

[Pablo Roberto González Guajardo, executive]

Thank you, [ Risa]. Thanks for your help. And thank you, everybody, for participating in the call. Again, I hope you have a wonderful summer. We're ready to take your calls if you have any further questions. And as you know, always happy to discuss further with any of you. Thanks again. Talk to you soon.

[Operator]

This does conclude today's program. Thank you for your participation, and you may disconnect at any time.