Earnings Call: Q2 2021

Jul 23, 2021

Quarterly report

To begin playback, press 1. For listening instructions. The following is recording for Hector Pritas with Kimberly Clark Corporation on Friday, July 23, 2021 at 8:30 AM CST. Excuse me, ladies and gentlemen. Thank you for your patience in holding. We now have our presenters in conference. Please be aware each of your lines is in a listen only mode. At the conclusion of the presentation, we will open the floor for questions. At that I'd like to now turn the conference over to Mr. Pablo Gonzalez. Please go ahead. Good morning. 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 the details behind the numbers. During the quarter, we faced 3 distinct challenges: The comparison to last year's COVID sales, Boris' continued recall and raw materials related cost pressures. As you all know, last year's Q2 sales were atypical since some of our businesses saw a boost from the pandemic, Particularly 4E, but also experts in some consumer health related products, while others experienced a severe contraction, mainly away from home. 4E deserves specific attention since it had extraordinary export sales and profits during that period. If you add to that the fact that it is currently facing the continued costs of the recall of some of its products, the corresponding impact to our consolidated results is very That is why for purposes of clarity and to facilitate the analysis, we've provided more information on our press release I'm ready to discuss it with you today. With respect to cost pressures, we experienced high and rapid price increases in most of our raw materials. This is not unique to our industry and it is certainly unprecedented. Combination of increased demand due to strong global economic growth, Some speculation and the supply chain and distribution bottlenecks have caused big disruptions. We expect this will correct itself, But it's hard to say when. In the meantime, the increased costs are upon us, while measures to deal with them take some time to implement. Having said that, excluding 4E, the rest of that contraction was in the low single digits and we maintained healthy margins. We're not happy with the quarter results, but we believe that given the above mentioned circumstances, The adjusted results clearly reflect the underlying resilience and strength of our business. So let me pass it on to Javier. Good morning. Given the impact of 40 in the quarter results, Particularly when compared with last year, on this occasion, we presented results excluding this business, and I'll provide more details on both The consolidated as well as the segregated numbers. Let me start with the underlying business results. During the quarter, our sales were MXN11.3 billion, a 3% increase versus the Q2 of 2020. Volume was stable with better price and mix. Consumer products, again, not including 4E, Grew 1% as we continue to face a slow consumer environment. If we exclude from 2020 the onetime sales related to the COVID-nineteen pandemic, namely antibacterial soaps, cleaning sprays, surface wipes, hand sanitizers and face masks, Consumer Products grew 4%. Our away from home product sales increased 50% As they compared with their weakest quarter last year when most of the economy was shut down. Export sales decreased 9%. The contraction comes from lower parent roll sales. Exports of finished products continue to grow and are expected to double total 2020 sales Despite exceptional sales of tissue finished products last year, as we supply the large volume to Kimberly Clark to help them cope with the surging demand. Cost of goods sold increased 5%. We continue to face rapid and unexpected cost increases in most of our raw materials. Against last year, both domestic recycled fibers, soft super absorbent materials, Resins, energy and natural gas compared negatively. Particularly damaging has been the very strong rise in resins and super absorbent material prices. Only imported recycled fibers compared positively. The FX was lower, averaging 13% less. Our cost 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 level and are generated by sourcing material Improvement and process efficiency. Gross profit increased 3% and margin was 35.3% for the quarter. SG and A expenses were 2% lower year over year and down 60 basis points as a percentage of sales. Operating profit decreased 4% and the operating margin was 20.1%. We generated MXN 2,700,000 of EBITDA, A 4% decrease and EBITDA margin was 24%. Let me now talk about the consolidated results. On a consolidated basis, during the quarter, our sales were MXN7.7 million, a 5% decrease versus the Q2 of 20 Volume decreased 6% and price mix grew 1%. With respect to 40, the sales comparison is particularly challenging As last year, they sold a very large volume of sanitizers in the U. S. And sales this year are still impacted by the effect of the product recall. Given the record, not only Pori is not selling in the U. S, but we are creating provisions that further affected this year's sales, which were lowered by more than ARS900 1,000,000 and decreased 80%. Gross profit decreased 14% And margin was 34.5 percent for the quarter. SG and A expenses were 5% lower year over year and flat as a percentage of sales. Operating profit decreased 21% and the operating margin was 19%. EBITDA increased 18% and the EBITDA margin was 23.2%. Cost of financing was MXN452 1,000,000 pesos in the Q1 compared to BRL401 1,000,000 in the same period last year. Net interest expense was 24% higher As we have additional debt. During the quarter, we had a MXN4 1,000,000 foreign exchange gain, which compares to a MXN30 We have a very strong balance sheet, which reflects solid cash generation from EBITDA. Our total cash position at June 30 was MXN 14,000,000,000. Our net debt to EBITDA ratio was 1.1 times with an EBITDA to net interest coverage of 7 times. Thank you. We hope we've provided greater clarity behind second quarter results, and we'll be happy to answer any additional questions you may have. But before doing so, let me make a few comments on the second half of the year. In the short term, although we will still face some COVID-nineteen top line headwinds, The toughest comparisons are behind us and continued impact related to 40s repo will be smaller. As the Mexican economy reopens and domestic consumption improves based on a recovery of jobs and strong remittances, our domestic sales should improve both on the consumer and away from home businesses. Also, sales of finished product exports will continue to show strong growth and for the year will be double those of last year. On the cost side, on a year on year basis in dollars, the second half will present negative cost comparisons in almost all raw materials with very significant increases in energy and resins and super absorbent materials. Industry publications point to the fact that many such raw material prices will the Q3, it was in tapering during the Q4, but year on year comparisons will continue to pressure margins. To address this situation, we will be implementing price increases in the coming months, averaging 4% to 5%. We'll accelerate our efforts to achieve greater price realization, operate ever more efficiently, leverage raw material purchasing contracts and accelerate costs and expense reduction efforts. We expect top line to strengthen and margins to remain under pressure, While raw material costs come off their highs, our price increases take effect. Our business fundamentals remain strong. As we use this period to push further and harder to achieve efficiencies, we are certain we will come out stronger and better positioned for what lies ahead. With that, let me open it all for questions. And thank you all again for participating on the call. Thank you. At this time, we will open the floor for questions. Our first question comes from Ben Theurer with Barclays. You and your families are well and safe as well. So thanks for all the details. Two quick ones. So you've talked about just now about the price increases you're targeting. We're in the usual summer promotion period. Could you elaborate a little bit of what you've been seeing more recently in recent weeks with some of the promotional activity in retail? And by when you actually plan to implement some of those price increases to get a little bit of a feeling when we should expect those To actually kick in, is it already in 3Q? Or is this more a 4Q? And that would be the first question. Thanks, Ben. Thanks for the question. And likewise, hope you and your family are doing okay. Look, the summer promotional season has been pretty similar to last year and prior years. And what we are expecting is that the summer tapers out that we will be able to implement our price increase. So you should be seeing or we should be seeing a little bit of a price increase late in this quarter, so particularly September. But mostly, we will see the impact during the Q4. Okay. Basically, with that in mind, we should really expect The margin compression is most likely going to peak in 3Q because you said that the raw material cost is, would you expect To be peaking into 3Q and then easing off a little bit into 4Q. Now with those Raw material pressures in mind and the cost cutting, could you give us a little more guidance or at least directional guidance, How much incremental cost savings you see within the organization? And what do you think you can realize over the next couple of quarters? Sure. Look, we again, industry publications point to the fact that costs should peak in the 3rd quarter, But this has been changing almost every week. It's been unprecedented, the rise that we've Hopefully, we'll see a correction that's equally important on the downside, but so far that's not The protection is that it will peak in the Q3 and start to taper in the Q4. So yes, we'll continue to see some pressure in the Q3 and Hopefully, by Q4, we wouldn't have our not only our price increases, but we're working very hard on price. We have greater price reputation. And that together with increased focus on savings, as you just mentioned, should help us bring our margins back up Late in the year. When it comes to savings, I think you should at least expect the same amount of savings that we've been able to deliver in the first Q2 of this year, but we're certainly working hard to see what else we can bring to the table. Okay, perfect. Thank you very much. Thank you. Our next question comes from Ian Spies with Morgan Stanley. Yes. Hello. Thank you for taking my call. I just want to ask, how much upside do you still see for the recovery on away from home Going forward. And also if you could elaborate on the 4e impact, how much Ballpark figure was impacted by high comps and how much of it was related to the recall Thank you. Hi, Jen. Well, first, away from home, we can still expect more growth. I In the 50% increase from prior year, that number still leaves us short of where we were pre pandemic. So the economy continues to reopen and next year's economy recovers, we expect that growth to continue going forward and reach Not only pre pandemic levels, but be higher than that given some of the product that we've launched in that area. When it comes to Tufoury, Let me put it this way. Normally, 4QE sales are roughly MXN 300,000,000 In a quarter last quarter, they were over MXN1.1 billion. And of that, Most of it I mean really most of it has to do with just sales that were lost. The recall is about MXN 100,000,000 for the year. Thank you. Our next question comes from Nicholas Leerink with JPMorgan. I wanted to ask you guys about how you're seeing the underlying trends in the Q4 During these recent months, you guys mentioned just around 3% excluding 4 year in the second quarter. I want to understand how you're seeing this Yes. Let me just come back before you for a second. I mentioned in the sales, if we take a look at the EBITDA for Quarter over quarter, there was a difference of almost MXN 500,000,000. So again, the impact was very important for the quarter. Now going forward, What do we see underlying? I mean, the domestic demand in Mexico is still not very strong, but there is growth. Again, we expect domestic consumption to pick up as the economy reopens and gain some steam behind job growth And remittance. So I think we can expect growth going forward of, I'm going to say, roughly 3% to 5% going forward given domestic consumption, which when you consider the sales of consumer products For the quarter, which were up 1%, but when you account for the fact that we also had COVID sales last year and you adjust for that, We were again, as Javier mentioned, above 4%. So we're comfortable where our brands are and Our shares are. So hopefully, with more growth with the economy, we can increase our growth as well. Our next question comes from Rodrigo Arya Gamsher with UBS. Hi, good morning guys. Thanks for taking my question. Just Quick one here, if I may. Good news. Thank you, Ricky. So you reported a one price mix increase This quarter, right? And if I'm not mistaken, Yuri, with last conference call, we mentioned about a price increase of 4% For this year. So I was wondering if you can help me and concentrate this previously announced 4% price increase versus the reported 1% in this quarter. I assume most of it has to do Very quickly, if you can just repeat that's interesting about the consumer products growing 4% excluding these, Call it related products, if you can repeat to us like what were those products And what are the latest dynamic that you have seen on these products that may support consumer growth for the rest of We talked about pricing in the last quarter. And when you break down the numbers and you take a look at the consumer products For the quarter, again, 1% growth. So that really comes from price mix because volume was down. So we did see some of that price certainly come into the market. It's just that It's not enough given the very rapid and unexpected increases in costs. So again, volumes are down, prices are up, and that's why we're seeing growth in Consumer Products. But we expect volumes to recover as the economy reopened, and we hope that there's no price increases. We'll pass to what we've done in the year and push us forward. When it comes to the products that have to do with Covid, again, There was some increased sales last year on the bathroom tissue, certainly not quite as big as it happened in the U. S, but there was an uptick Last quarter, those products. But particularly, the increases have to do with antibacterial totes, Cleaning spray, surface wipes, hand sanitizers and face masks. And although all these products Are above pre pandemic levels. They certainly have come down significantly from where they were last year. They will continue to be a lag during the Q3 given the comparisons to COVID last year. But as we get into the Q4 and early into Next year, they will be a positive. So it's really just a time lag. But again, we expect all of those categories to be higher pre pandemic, But just not at the level of the boutique, which was second and third quarter of last year. Hope that helps. Thank you, Rodrigo. Thank you. Our next question comes from Mohammed with SGP. Hi, guys. Thank you very much for taking my questions. Good to hear that everybody is very well. Just want to sort of confirm some of the numbers because So you broke up for me a little bit. You said quarter over quarter, MXN 400,000,000 EBITDA impact for foreign e recall. Can you also confirm the revenue quarter over quarter impact? I know you gave those numbers, but I didn't quite catch them right. Yes, Mohammed. Thanks for the question. Again, when it comes to the revenue, The impact was a little over MXN 900,000,000. And when it comes to the EBITDA margin, it was Over MXN 450,000,000 close to MXN 500,000,000 in impact. But that's really Mohammed, yes, that's for the quarter. And most of it has to do with the fact that last year, sales and both sales and EBITDA of 4E were really Extraordinary for the company. It has less to do with the fact of the recall. There is some impact on the recall there, but most of it has to do with just Very, very high sales and profitability last quarter, quarter second quarter of last year for 40%. Sorry, these numbers are Q2 last year versus Q2 this year then? Correct. Correct. Okay. I understand. So if you compare to Q2 2019 and if I look at the gross margin, obviously, with the cost inflation is down quite a bit. Can you sort of give me a little color because this and you are going through very high cost And the worst your gross margin got was around this level, which is around 34%. So I'm just trying to get a sense of as you talk about more cost inflation into Q3, are we actually going to start seeing reverse margin being Well, again, we certainly hope that this quarter is the lowest you will see and that We will see a little bit of pressure on some of the raw materials coming into the 3rd quarter, a little More pressure from raw materials coming in Q3, particularly for pulp. But we will see some better comparisons even though versus last year, it will feel very We'll be very high. The comparisons will be better for resins and some other materials. So our initiatives of pricing At cost savings, we hope we will be able to offset this impact in the Q3 and that little by little, we will bring those markets to the level that we are used to. Again, in the Q2, notwithstanding all this impact, our EBITDA margin was 24%, Which is very healthy and close to our 25% to 27% long term range. So we will work hard on the pricing front and on the cost reduction front To make sure those margins continue to tick up. So from that, like the message seems to me and again, I realize But it does seem like that at least sequentially, things should improve from here, both you're prepared to get easier and sequentially the cost Inflation might not be as much as higher sequentially, not year over year. Given what we see right now, Mohammed, That is the case. But again, this is changing has changed so rapidly that we hope to chase for the better. And it helps us, but it's Our next question comes from Anbino Bledgemond with Nikkara Investments. Name is Jeronimo De Guzman from Interinvestments. I wasn't sure if you're talking about this. So I had a question on well, a few follow ups. Just on the 4Q, just wanted to confirm, so is the recall impact Done. And we're mostly kind of going to see a comparison base effect in future, while we're still seeing some impact from the recall Going forward. And then I also wanted to confirm the numbers in your release because I'm seeing your EBITDA with and without 4E is the same in your release. So just wanted to understand if that's correct. Let me first take the first one regarding for you and the recall. The recall is still on the way, But most of the impact has already been put into the numbers. You will still see A little bit of an impact in the 3rd Q4, but it will be much smaller than what we have to impact the year results in the first half of this year. I guess for the spectrum, that's correct. The number the EBITDA number is the same With and without a 4E, the recall effect that 4, we still have this past quarter basically neglected all of its profitability. Okay. Got it. Okay. And then I guess the another just a follow-up on your cost pressures. Wanted to understand, I mean, you mentioned that you're going to kind of I forget how you said it, the leverage or kind of lean on your Purchasing contracts, just wanted to understand kind of how we should think about those purchasing agreements. I mean, Have you been able to secure raw material kind of farther in advance? Have you been able to get bigger discounts in the end of the lease fee In the market and then another question I had on the cost pressures, which is one on the energy and natural gas side, Just because I can't get a sense of the oil derivatives and the pulp, but I'm not sure exactly kind of what you're facing there. If you could give us a little bit more color on those as well. On the purchasing contracts for some raw materials, we negotiated contracts back in October of last year that are raw materials, which has been a concern in certain areas and in other certainly to minimize the price that we see out there in the market as a whole given the discount we negotiated. So Those contracts have been very favorable for us and we will continue to leverage them going forward again to get the volumes we need And the best prices we can get. And then on oil and gas, I mean, Oil seems to be tapering off a little bit and might be a little bit more stable after what What OPEC and OPEC plus as they call it has agreed to, gas seems to continue to be pushing higher And that's certainly having an impact. And we have no Hedges for those, we really have never had hedges on those. We're just working through it, but making sure we operate as efficiently as we can to use So less gas, less energy and have those increases affect the least we they can our customers. So when you say energy compared negatively, is that energy and natural gas compared negatively, is that including also electricity costs Are increasing for you? And can you confirm this more or less natural gas, what kind of weight it has on your cost of goods? Energy is not increasing significantly. Electricity, natural gas is increasing Significantly. And how much does that weigh on your call, more or less? If you could give me a little color on that. Total energy, including all of its components, It's around 7%, 8% of natural gas, so it will be a small component of that. Thank you. There are no additional questions at this time. Well, thanks again everyone for participating on the call. Hope you and your family stay You have reached the end of all available recordings. To go back to the main menu, press 1. To repeat this message, press 2. To exit, press 9. You've reached the end of all available recordings. To go back to the main menu, press 1. To repeat this message, press 2. 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