Earnings Call: Q3 2021

Oct 22, 2021

Excuse me, everyone. We now have all of our speakers in conference. Please be aware that each of your lines is in a listen only mode. At the conclusion of today's presentation, we will open the floor for questions. I would now like to turn the conference over to Pablo Gonzalez, CEO. Mr. Gonzalez, you may begin. Thank you. Good morning, everyone. Thanks for participating on the call. I hope you and your families are all safe and well. Let me first make a few brief comments about the quarter, and then Javier will provide more details. Last quarter proved to be very strong, even more than anticipated. Overall consumption remains subdued and compared fully to 2020 panics treated volumes And very significant raw material inflation continues. Top line grew 2% with stable volumes, while price increased 3%, and mix was down 1%. Our brands and market shares remain strong, but our categories are either not growing or doing so slowly, Given strong comparisons and the state of the Mexican economy, where GDP growth is not necessarily translating into robust private consumption increases. You are now rejoining the main conference. Excuse me, everyone. We now have Mr. Gonzales back. Please go ahead, sir. Thank you, Diego. And sorry, everyone, for some reason, we got disconnected. I Don't know exactly how far we've got, so I'll take it over from top line growth and then get into the cost environment. I hope we have no further issues. So I was mentioning that top line grew 2% with stable volumes. While prices increased 3%, the mix was down 1%. Our brands and market shares remain strong, but our categories are either not growing or doing so slowly. Given strong comparisons and the state of the Mexican economy, GDP growth is not necessarily translating into robust private consumption increases in all categories. As you may recall from our last call, With the expectation of a reverse or at least a stabilization of the cost environment trend and considering the consumer environment, We decided to increase prices by approximately 4%. The effect of these price increases will be fully reflected in the 4th quarter. But in hindsight, given the continued very high cost inflation, we fell short. You are now rejoining the main conference. Excuse me, everyone. We now have our speakers back online. Please go ahead, sir. Hello, everyone. Again, we're really sorry. We don't know what's happening with the connections. We'll give it another try. So I'll pick it up where I started last time and hopefully cover everything. So I was saying that Top line grew 2% with stable volumes while price increased 3% and mix was down 1%. Our brands and market shares remain strong, but our categories are either not growing or doing so slowly given strong comparisons and the state of the Mexican economy, where GDP growth is not necessarily translating into robust private consumption increases in all categories. As you may recall from our last call, with the expectation of a reverse or at least a stabilization of the cost environment trend and considering the consumer environment, We decided to increase prices by approximately 4%. The effects of these price increases will be fully reflected in the 4th quarter. But in hindsight, given the continued very high cost inflation, we fell short. Our costs have continued to rise very significantly. The sharp increases in prices that have affected most commodities, oil and gas as well as processed raw materials in general, Continue to place severe pressure on our margins. This is certainly not unique to our industry, but it is unprecedented. In this environment, cost grew much faster than sales at 12%. And despite containing and reducing costs, EBITDA margin for the quarter was 20%. Strong cost pressures will continue during the coming quarters, But we will get through this inflectionary environment. We remain confident with the resilience and strength of our business and have plans in place for a solid margin recovery in 2022. We'll talk about it some more after Javier provides details behind the results. So let me pass it on to Javier. Thank you. Good morning. During the quarter, our sales were ARS 11,300,000,000, a 2% increase versus the Q3 of 2020. Volume was stable with price and mix contributing 2%. Consumer Products decreased 1% as we continue to face this low consumer environment and strong COVID related comparables. Away from home product sales increased 38% as the economy starts to reopen. We're still slightly below pre pandemic levels but continue to show strong sequential improvements. Export sales grew 20% with finished product sales more than doubled. Cost of goods sold increased 12%. Against last year, every raw material category compared negatively. Pork was up between 20% and 30% depending on the grade. Recycled fibers and fluff averaged high single digit increases. On the personal care side, suprasurable materials were up more than 40% and rest is more than 120%. Finally, energy and natural gas Ladies and gentlemen, please standby while we reestablish our speaker line. You are now rejoining the main conference. Excuse me, everyone. We may have our speakers back online. Please go ahead, sir. Hello, again. We're really sorry about this. We don't know what's happening. Our fixed lines continue to With all of us, so we're trying to be a cell phone so we can make this work all right. Again, very hard to say where we left off or how much you were able to hear. So I apologize if we're repetitive And we say it again, but we just want to be sure that we get the messages across and that we can answer your questions. So I apologize if you will redeem Some of the information, so let me take it over again from top line and then Javier will go through the details. So once more, I was mentioning that our top line grew 2% with stable volumes, while prices increased 3% and mix was down 1%. Mentioning that our brands and market share have remained strong, but our categories are either not growing or doing so slowly In strong comparisons and we state the Mexican economy, where GDP growth is not necessarily translating into robust private consumption increases in all categories. As you may recall from our last call, with the expectation of a reverse or at least a stabilization of the cost environment trend And considering the consumer environment, we decided to increase prices by approximately 4%. The effects of these price increases will be fully reflected in the Q4, but in hindsight, given the continued very high cost inflation, we fell short. And costs have continued to rise very significantly. The sharp increases in prices that have affected most commodities, Oil and gas as well as processed raw materials in general continue to place severe pressure on our margins. This is certainly not unique to our industry, but it is unprecedented. In this environment, cost grew much faster than sales at 12%. And despite containing and reducing costs, EBITDA margin for the quarter was 20%. Strong cost pressures will continue during the coming quarters, We will get through this inflationary environment, and we remain confident with the recipient's strength of our business and have plans in place for a solid margin recovery in 2022. We'll talk about it some more after Javier provides details behind the results. So again, let me pass it on to Javier. Thanks. Good morning. During the quarter, our sales were ARS 11,300,000, a 2% increase versus the Q3 of 2020. Volume was stable with price mix contributing 2%. Consumer products increased 1% as we continue to face a low consumer environment and strong COVID related comparables. Our work from home product sales increased 38% as the economy starts to reopen. We're still slightly below pre pandemic levels but continue to show some sequential improvements. Export sales grew 20%, Prestige product sales more than doubling. Cost of goods sold increased 12%. Against last year, every raw material category compared negative. Plop was up between 20% 30% depending on the grade. Recycled fibers and flop averaged high single digit increases. On the personal care side, super absorbent materials were up more than 40% and resins more than 120%. Finally, energy and natural gas also compared negatively with the latter growing more than 90%. The impact was lower, averaging 11% less. Our cost containment and reduction program once again had very good results and yielded approximately MXN 350,000,000 of savings in the quarter. These savings are mainly at the cost of goods sold better and are generated by sourcing, material improvements and process efficiencies. Gross profit decreased 14% and margin was 31.7% for the quarter. SG and A expenses were 1% higher year over year and down 20 basis points as a percentage of sales. Operating profit decreased 26% and the operating margin was 15.3%. We generated MXN2.2 billion of EBITDA, a 21% decrease, and EBITDA margin was 19.7%. Cost of financing was MXN445 1,000,000 in the Q3 compared to MXN 428 1,000,000 in the same period last year. During the quarter, we had an MXN 8,000,000 foreign exchange gain, which compares To a ARS10 1,000,000 loss last year. Net income for the quarter was ARS879 million With earnings per share of $0.29 We have a very strong balance sheet, which reflects solid cash in nature. Total cash position at September 30 was MXN 14,300,000,000. Net debt to NPL ratio was 1.1x with a net debt net interest coverage of 6x. For last 9 months, Sales were flat, and we had a 23.3 EBITDA margin. Thanks. Back to Pablo. In the short term, we expect uncertainty to be the norm. During the Q4 and heading into 2022, We will have to contend with an economy that is rebounding but not quite recovering and is still very complicated cost environment. Mexico's economy has been losing momentum. Consumers are stretched because of the pandemic and they're feeling the pinch of inflation. But as the economy continues to reopen, we find an improved improving labor market and strong remittances, domestic consumption should improve albeit slowly. On the cost side, given supply demand imbalances and increased logistical costs, We will continue to pay significantly higher costs in basically all raw materials. And at this point, it is not clear when we might see some meaningful relief. Overall, without an important change in trend, given how much and how quickly they've risen, all raw materials will be significantly higher during the Q4 and into the first half of next year. So what are we doing? We're focused on achieving greater price realization, accelerating our innovation pipeline increasing CapEx focused on product improvement and cost reduction and stepping up our productivity and cost reduction efforts. On the price realization front, We have already announced additional price increases averaging 7%, which will start to be implemented at the end of this quarter and show their full effect late in the Q1 of 2022. Given that the 3rd quarter increase is in the midst of being reflected, But consumption is not strong. And given the competitive environment, we expect it will take longer for this additional increase to be fully reflected and help ensure some of the cost increases. In addition, we'll be leveraging our revenue growth management models and thus more effectively behind our brands. This important volumes have further increased prices. We are accelerating our innovation efforts in all categories, and we're confident that 2022 will be a very strong year in that regard. The new and improved products, together with strong investments in our brands, will help strengthen our position in the different channels and tiers. Another key component behind our strategy will be increased CapEx in the coming years, incorporating new state of the art technology, improve our footprint, increase capacity and efficiencies and reduce costs. These investments, which will also support our innovation efforts, We'll bring about account savings next year. We plan to provide more details on all these plans early next year. So as we move into 2022, better price realization, together with our plans on innovation, investments behind our brands And CapEx to improve efficiencies and accelerate cost reductions will set the stage for a much stronger year with a solid path towards growth and margin recovery. Thank you all for participating on the call, and we will now take your questions. At this time, we will open the floor for Our first question comes from Ben Theurer with Barclays. Good morning. I hope you can hear me. Yes. We can hear you then. Okay, perfect. Well, first of all, thank you very much for all the details and the clarification you gave towards the end in terms of what you expect on the pricing side and how these Now on the other side of the equation, and you've mentioned it at the beginning of the call, obviously, cost was significantly up during the quarter. And there were certain items that really were significantly 100% plus compared to last year. Could you give us a little bit of a preview how that current level you've seen in the Q3 actually runs into the Q4? So just to understand a little bit is that COGS pressure is going to be the exact same if it's actually getting worse or if it's getting slightly better? How do you feel currently about that cost environment? That will be my first question. Thanks, Ben. It's a very good question and unfortunately a difficult one to Because there's been a lot of uncertainty around this throughout the year. And the predictions early on in the year We collected that the prices were going to go up in some of the raw materials as the year progressed. Costs were going to start to come down. Certainly, that hasn't happened. On the contrary, every new prediction seems to put the rate a little bit higher. But let me go through A little bit of detail on this. What we're expecting for the Q4 is that pulp prices We'll start to come down slightly and this is an interesting one because inventories are really, really high out there in the market. But given all the logistical difficulties in getting both around the world, Prices have not yet reflected decreases, but we expect a little bit, but again, I'm saying slight decreases in the 4th quarter. And at some point, as things start to normalize, we expect that there will be more relief there given the very high inventories that When it comes to recycled fiber, we will see a little bit more pressure in the Q4 versus the Q3. And this has to do with, to some extent, with pulp. Until we start to see pulp coming down, Before that happens or until that happens, sorry, that people will continue to try and use recycled fiber and to supply bulk. So the pressure behind the cycle will continue to be there. So again, both slightly down in the 4th quarter, We cycled slightly up in the Q4 versus the Q3. When we talk about resins, we also expect to see slight And then of course, these are the materials that have had the higher increases throughout the year, over 120% in the market. We'll see very slight increases in the Q4. There's capacity. There's volume out there. But again, all the Supply and demand and balances plus logistic solutions are not allowing the market to normalize and so that we can see further decreases. We expect that to happen at some point in the next year. And then super absorbent materials will be pressured In the Q4, so a mixed picture coming in the Q4 versus the Q3. And again, as things started coming together, We expect some of the lead in the 4th next year, but it's hard to tell when and by how much given all the uncertainty behind the different elements that impact is. Okay. So in summary, firstly, most likely very much similar Gross margin environment into 4Q as what we saw in 3Q. Now very long term, I mean, that's obviously a massive pressure, and we've been seeing this like 600 plus basis points down on gross margin. And I'm very Sure. You're not happy with that slightly below 20% EBITDA margin having been used to more like mid- to high 20s. Now if we think a few years out, how many, like pricing cycles do you think you need in combination with some easing cost Pressure to actually gain those margins back. Is that a thing maybe we should consider 2023, 2024 To snap back or to the old levels, what would be the condition to get there? Really hard to tell, again, because there are so many variables coming into this. 1, raw material costs. 2, what happens with the Our supply chain issues 3, the exchange rate and 4, prices and of course, then our cost reduction efforts. So it's hard to tell. Of course, the biggest issue we will have to do with how fast and when raw material prices Start to come down. That's really the biggest impact. So we will start to see some relief next year together with our price increases And our very aggressive investment to improve our products but also to reduce our costs, we will certainly see much better margins in 2022, and that's what we're But again, a lot of variables in the mix, so it's hard to tell exactly at this point when we'll get back to normal. Okay. Perfect. I'll leave it here and thank you very much. Thank you, Ben. Our next question comes from James Spiejs with Morgan Stanley. Yes. Hello, Pablo Correa. I hope you're well as well. I just wanted to ask Regarding the 7% price increase, how have been competitors reacting to that given that the consumer environment is still quite weak? And also to your second question regarding the professional division, which performed quite well this quarter. I I was wondering how much that impacted your whole price mix. In other words, how much did you actually increase price, for Gabriela of the Consumer division, excluding the professionals. Thank you. On the question of the price increase, we pretty much just announced That price increases in the market a couple of weeks ago, so a little early to say with the competitors' market. We've heard particularly in the diaper farm that things that they might also The participants in that market might also be increasing prices, but nothing certain at this point. And on the tissue side, we have not heard so far. But again, early in the stage of implementing this. Now as I mentioned, it is important to consider that we're coming up Implementing a 3% to 4% price increase and given conditions in the market, We do expect the implementation of the 7% to take longer than it normally would. So we don't expect that 7 We are very aware and cognizant of what's happening in the market, both in terms of our consumer reaction and certainly competitive reaction and we'll react accordingly. Now this is unprecedented. We all have the same cost pressures. So you would expect that others having the same cost pressures would also move the veteran, but we'll see when that happens early to tell at this point. When it comes to Professional, while we know our Professional business is recovering Now Steve, we still have some room to go, but the economy continues to recover as it is right now, in particular, in the Avastra Gets into the Q4 and then we get some more people coming out and tourists coming to Mexico, etcetera. That business will continue to grow and do better. We're also increasing prices on that business. Overall, that business has lower margins than consumer products business. So to the extent that it grows to Better or more than Consumer Products. It certainly has an impact on our mix and our margins. Our next question comes from Miguel Ulloa with BBVA. Hi, good morning. Thanks for taking my question. That would be Regarding the electricity build that is being discussed in Congress, do you have any idea of how this will play in timber's numbers So far, thank you very much. Thanks, Miguel. No, I mean, that's And we, of course, are following this closely and are analyzing what it would mean, but we have nothing to Mention at this point, and we'll see what happens with the log going forward, whether it can pass on your circuit. If it doesn't pass, we'll see what happens. Understood. Thank you very much. Our next question comes from Robert Ford with Bank of America. Hey, good morning, everybody, and thank you for taking the question. Pablo, you mentioned innovation and ad support in conjunction with pricing. Are there elements of your innovation and differentiation pipeline that you can share? And how should we think about the P and A budget going forward as you move on price? No. We will share as I mentioned, we will share more information early on next year, both on the innovation side And our CapEx efforts, again, I mentioned, pursue quite a few things among them bringing more state of the art technology, improving products, reducing costs and building efficiency. So we will share a little bit more about this early in next year. We'll provide more details A little early to go ahead and do that at this point, but we want to be careful with the competitive position and what we say right now. But You'll hear more about this early next year, and we'll provide you the detail in the evening. But the only thing that I'd probably ask is that, As you can see, CapEx is already ramping up from what we have seen the previous 2 years, and this is a trend that We'll continue in the coming quarters and the next years. That's very helpful. And the summer is always a little bit difficult, right? It's more promotional, there's Julio Regalado and all the competitive responses. Can you talk a little bit about the noise over the course of the summer and maybe how your mix is evolving with all this pressure on disposable income right now? Sure. Look, just as you mentioned, Bob, the some of the promotional The season always brings about a lot of noise. We didn't see anything during This season that was different from what we've seen in the past, which I think is an important point. And what we believe is that, same as we expected some relief or some stabilization of costs, That's probably what the market was also expecting. But again, it didn't happen. In the contrary, we've seen costs continue to rise. So When that happened, I think we all were not able to cut or bring back the promotions that we have already committed to in the Q3. So there's certainly some of that happening. And as you clearly pointed out in your reports, Bob, particularly on the tissue side. So it remains to be seen that we all now have more information, and we see what's happening with the cost environment going forward, How everyone reacts and how everyone moves forward with pricing and with promotions and etcetera. I mean, just trying to figure out how we all go about trying to absorb some of this cost. And on the consumer side, again, there's certainly a recovery in the Mexican economy. There's no doubt about it. It's very uneven. And it seems to be more of a rebound so far than a recovery. And you've seen some of the numbers and the economy is losing And some of the most recent numbers behind what 3rd quarter GDP will be, which will be pretty much in line with 2nd quarter and particularly consumption. When you take a look at wholesale and others, I mean, it seems that it's certainly Listen momentum because consumers have felt the pinch of both inflation and their financial will stretch because during the pandemic, they really have to go in And we have some other savings to make sense to these situations. So So due to consumer environment overall, a somewhat negligible recovery between categories that compare To no volumes last year, this is categories to compare with the back streak in volumes last year. So it's A lot of the reason is out there and difficult to say where we head from here. But again, we expect that hopefully, we will be open And remittance is the economy will move by little and move. And we expect that as everyone sees what's happening with the raw materials and the cost environment that we will all at some point move forward. So we'll see how this evolves. But I hope that helps. It's very helpful. Thank you. Thank you both very much. We'll take our next question from Mohammed Ahmad with FGP. I got it. Thank you very much for taking my question. Hope everybody is well. A couple of more questions here. They might The repetition there because they were having some trouble hearing some of the answers. Could you tell me what the consumer segment volume Was or did in the Q4 Q3? Sure, Mohan. Good to have you here. Volume was down 3%. Price was up 3%, and mix was down 1%. Sorry, mix was down 1% and price was up 3% detail? Yes. Volume down 3%, price up 3% And mix down 1%. Okay. That's great. And just to confirm, Pricing was up 90%. Sorry? When you talk about raw material cost increases, I missed 2 of them. 1 was the recycled material price increase in the quarter. And then you talked about, I think, energy and electricity prices, and I couldn't quite Clearly, you hear that. Yes. Energy and natural gas convert negatively with Natural gas being above 90%. Okay. 9%. Okay, okay. Got it. And what about the recycled fibers? Recycled fibers for the quarter were up single digits, high single digits. Okay, that's great. I just wanted to confirm that. Thank you very much, guys. Thank you, Mohan. We'll take our next question from Ulysses Sarga with JPMorgan. Hi, guys. Good morning. Thanks so much for the space for questions here. So a follow-up first on the pricing side. So any color you can share here on the pricing strategy ahead? How do The negotiations work in the retail channel for you guys. Are there any restrictions or limits here on how much price you pass on at once or anything on this regard? That would be super helpful. And then the second question I had was just maybe if you can share also some thoughts there on reactivating buybacks at these levels. Sure. This is on the pricing, I think there's really no Hard set restrictions. Of course, we have to take a look at what's happening with the consumer environment And decide how far and how much we can how much we can do, but there's really no restrictions out there specific restrictions out there to NUMA pricing. In terms of reactivating buybacks, we usually don't comment on the Strategy on the short term, what I can tell you is that we have authorized for the year ARS 850,000,000, And we still have most of that on our Our next question comes from Rodrigo Alcantara with UBS. Hi. Good morning, guys. Thanks for taking my questions. I have two questions to comment here. The first one On the customer products, the breakdown that you just gave, Pablo. Remember last quarter when we discuss about the impact of COVID related products, we were discussing this about you were experiencing here tough comp versus 2020 and in part responsible of the low volumes there. So just curious in this quarter, how you saw that breakdown, I mean, COVID related products and non COVID? Just thinking perhaps 2022, if it would be fair to say that perhaps we could see Some volume acceleration on these categories stabilize. Just curious about Your thoughts about this? And my second question would be related to the outlook that you have for the export segment. Well, you think that 2022 could be a year where exports could be growing strongly such That's in that to the numbers that we have seen. Just curious about your thoughts about the export segments. That will be my two questions, Paolo. Thank you. Thank you, Oliver. Thanks for taking the question. I mean, there is still some impact on COVID related volumes Products from last year, that's not as big as it had certainly as it was in the Q2, but it still had a little bit of an impact, probably 1 to 2 points in terms of sales. And it really comes behind a little bit of the tissue side, but mostly for this quarter On products that we put out there for hygiene and health, with that referring to Antiseptic gels and wiping products and aerosols, etcetera, which Continue to perform well, but certainly not at the levels that they did last year when net sales of those products were much, much higher. So It is still having the comparison. It is still having a little bit of an impact, but not certainly not as much as it did in the Q2, and we expect that impact to continue to trickle down into the Q4 and then for next year, Of course, it won't have an impact. When it comes to the exports and the outlook, hey, we're very bullish on our export business. We're doing We're doing very well behind sales of our finished product, particularly to our partner, Teva's Corporation, both In the U. S. With also Latin America and other parts of the world. And as I've mentioned before, we've been partnering with them to understand what's the best More efficient, more cost effective supply chain. And they've seen in us a reliable, Low cost, high quality partner, and that's why we continue to be a bigger part of our supply chain. And It continues to grow there. We believe it will continue to grow in the Q4 and into next year. That's great. Thanks for answering my questions, Pavel. Thank you, Rodrigo. Our next question comes from Louise Willard with GBM. Hi, guys. Good morning. I apologize if I asked something that you've already answered, but I mean also connection issues. So I mean, you mentioned in your remarks, although these are unprecedented times, and I'm sure they are. So if it is costing your I'll make it out in that in what the smaller competitors are going through. So my question is, have you seen market participants reducing their offering over Patient in terms of evaluating for marketing that could point to potential market share gains if you want to exhaust petals afterwards? Not so far, at least again. We're just coming off the 3rd quarter summer promotion season. And again, that's always a very highly promoted, very aggressive When it comes to pricing and promotions, etcetera. So we the season was pretty much in line with other seasons. But again, we were all expecting, I think, in the Q2 coming into the Q3 that we would start to see some of the cost increases. But we have our plans in place for the summer season, and at least we couldn't stop much of what we have already committed to the plan. So A little bit of noise there because of the summer season. We'll see what we'll see how weather would react In the Q4 and going forward as we continue to see pressures on the raw material side. So we're moving All right, Pablo. Thank you. Just maybe as a follow-up. I mean, in your experience, this is not The first time seems complicated. So I mean, I think, effectively, is it something that you would expect In the coming months or quarters? Sorry, Luis, we couldn't quite hear your question. You repeat it, please? Yes. So my question is or as a follow-up is, In your experience, would you expect market participants in the future, that's not happened yet, in the future, exiting some categories or Are we using your operations in the country? No, I wouldn't think so. I think what we expect, again, is that as given our experience, as you say, They usually lag what we do. So we expect that there will be some lag in interactions to increase our prices. And we're we know that and we'll be monitoring it and figure out how to respond. But again, given the very, very high increases in raw materials that we described, we expect that eventually everyone will move. Now that given the pressures, we'll somewhat walk out of the market. We don't expect that to happen Anytime soon, we'll see how the scenario of the raw materials and pricing moves forward, and then we'll see What the competitors' reactions are going forward. All right. That's great to hear. Thank you. Thank you. It appears we have no further questions at this time. Mr. Gonzalez, I'll turn the conference back to you for any additional or closing remarks. Thanks, Dave, and thanks, everyone, again for participating on the call. We again apologize for the issues of our new landline dropping a couple of times. Hope you were able to hear as well and hope that we answered your questions. If for some reason that didn't happen, we are, of course, open to hearing from you, and we'll be glad to answer any additional questions you may have or any clarifications you want. So hope to hear from you. Have a terrific weekend. Thanks again for participating.