Kimberly-Clark faces a messy situation

Higher costs, rising competition put consumer-goods maker in a tough spot

A combination of rising competition, higher costs and reduced pricing power are hitting consumer-goods makers. Few are suffering as much as Kimberly-Clark .

The maker of Kleenex tissues, Scott toilet paper and Huggies diapers reported second-quarter results that narrowly beat muted analyst estimates. But, the company also lowered its outlook for full-year earnings, citing higher commodity costs.

U.S. retailers like drugstores and supermarkets, themselves under pressure from online retailers and so-called hard discounter supermarkets, are responding by pressuring suppliers for lower prices and investing more in private-label alternatives.

Kimberly-Clark is especially exposed to these trends because its product categories have weaker brand value compared with the likes of Colgate toothpaste or Tide detergent. Private-label market share in facial tissues has risen to 24 % from 22 % over the past four years, according to Wells Fargo analyst Bonnie Herzog, while the private-label share of toilet paper has risen to 22 % from 19 %.

In the second quarter, Kimberly-Clark’s comparable net sales were flat from a year earlier. In the personal-care segment that includes diapers, North America sales fell 1 %. In the consumer tissue segment, North America sales declined 4 %.

The company is running two concurrent cost-cutting programs. One called FORCE (Focused on Reducing Costs Everywhere) has been going for years and yielded USD 110 million of cost savings in the quarter, according to the company. An additional restructuring announced in January, to cut 13 % of its global workforce and close 10 factories, saved USD 40 million. These savings were overwhelmed by USD 200 million of higher input costs, though—especially for the pulp that goes into tissue products.

The company’s gross margins have fallen to 31.6 % in the second quarter from 36.1 % a year earlier, according to S&P Capital IQ.

The company said it would “continue to aggressively manage costs and evaluate further opportunities to increase net selling prices.” It is not easy, though, to raise prices in such a competitive market. Companies also only can cut costs so far, before they start undermining their own brand value by short-changing advertising and product development.

Kimberly-Clark shares are down around 13 % so far this year. With no clear way out of trouble for the company, they do not look set to rebound any time soon.

www.wsj.com

 

Kimberly-Clark Announces Second Quarter 2018 Results

Kimberly-Clark Corporation reported on July 24, 2018second quarter 2018 results.

Executive Summary

  • Second quarter 2018 net sales of USD 4.6 billion increased 1 % compared to the year-ago period. Changes in foreign currency exchange rates benefited sales by 1 % while organic sales were even year-on-year.
  • Diluted net income per share for the second quarter of 2018 was USD 1.30. Second quarter adjusted earnings per share were USD 1.59 in 2018, an increase of 7 % compared to diluted net income per share of USD 1.49 in 2017. Adjusted earnings per share exclude certain items described later in this news release.
  • Diluted net income per share for 2018 is anticipated to be USD 3.37 to USD 3.87.
  • The company is now targeting full-year 2018 adjusted earnings per share of USD 6.60 to USD 6.80, a year-on-year increase of 6 to 9 %. The company’s prior target was USD 6.90 to USD 7.20. The update reflects higher commodity inflation along with a worse currency outlook, partially offset by increased cost savings and reduced overhead spending.

Chairman and Chief Executive Officer Thomas J. Falk said, “Our second quarter results reflect a challenging environment, particularly with commodity inflation. Nonetheless, we continue to manage our company with financial discipline, as we generated USD 150 million of cost savings, reduced discretionary spending and returned approximately USD 575 million to shareholders through dividends and share repurchases.”

Falk added, “For the full year, we are maintaining our organic sales growth target and reducing our earnings outlook because of significantly higher commodity costs and the recent weakening of most foreign currencies. Given these headwinds, we will continue to aggressively manage costs and evaluate further opportunities to increase net selling prices. While the near-term environment has become more difficult, we continue to execute our long-term strategies to grow our brands and deliver cost savings while we implement our restructuring that will make Kimberly-Clark an even stronger company.”

Second Quarter 2018 Operating Results

Sales of USD 4.6 billion in the second quarter of 2018 were up 1 % compared to the year-ago period. Changes in foreign currency exchange rates benefited sales by 1 %. Organic sales were even year-on-year. Product mix improved 1 %, while volumes fell approximately 1 % and net selling prices were down slightly. In North America, organic sales decreased 2 % in consumer products and increased 2 % in K-C Professional. Outside North America, organic sales rose 1 % in developing and emerging markets and, also in developed markets.

Second quarter operating profit was USD 674 million in 2018, including charges related to the 2018 Global Restructuring Program. Second quarter adjusted operating profit was USD 774 million in 2018 compared to operating profit of USD 814 million in 2017. Results were impacted by USD 200 million of higher input costs, driven by USD 125 million in pulp and USD 45 million in other raw materials. The operating profit comparison was also affected by lower net selling prices and volumes. On the other hand, results benefited from USD 110 million of cost savings from the company’s FORCE (Focused On Reducing Costs Everywhere) program and USD 40 million of cost savings from the 2018 Global Restructuring Program. In addition, the comparison benefited from improved product mix and reduced marketing, research and general spending, including lower general and administrative costs.

The second quarter effective tax rate was 24.1 % in 2018. The adjusted effective tax rate was 23.0 % in the second quarter of 2018 compared to the effective tax rate of 28.2 % in the second quarter of 2017. The comparison benefited from U.S. tax reform, along with resolution of certain tax matters.

Kimberly-Clark’s share of net income of equity companies in the second quarter was USD 30 million in 2018 and USD 26 million in 2017. At Kimberly-Clark de Mexico, results benefited from sales growth and cost savings, but were negatively impacted by higher input costs.

Cash Flow and Balance Sheet

Cash provided by operations in the second quarter was USD 787 million in 2018 and USD 825 million in 2017. The comparison was impacted by cash payments related to the 2018 Global Restructuring Program along with lower earnings, partially offset by lower tax payments. Capital spending for the second quarter was USD 158 million in 2018 and USD 171 million in 2017. Second quarter 2018 share repurchases were 2.2 million shares at a cost of USD 224 million. Total debt was USD 7.5 billion at June 30, 2018 and USD 7.4 billion at the end of 2017.

Second Quarter 2018 Business Segment Results

Personal Care Segment

Second quarter sales of USD 2.3 billion decreased 1 %. Net selling prices fell 2 %, while product mix improved 1 %. Second quarter operating profit of USD 461 million decreased 3 %. The comparison was impacted by input cost inflation and lower net selling prices, while results benefited from cost savings, reduced marketing, research and general spending and favourable product mix.

Sales in North America decreased 1 %. Net selling prices declined nearly 3 %, including higher promotion spending to support innovations and growth initiatives, while volumes increased 2 %. Volumes were up double-digits in adult care, including benefits from innovations and category growth. Volumes were similar year-on-year in Huggies diapers, baby wipes and child care.

Sales in developing and emerging markets decreased 1 %. Currency rates were unfavourable by 2 % while the acquisition of the company’s joint venture in India benefited sales by 1 %. Product mix improved 2 % while net selling prices were down 2 %. Volumes were even year-on-year, including increases in Eastern Europe and declines in China and Argentina.

Sales in developed markets outside North America (Australia, South Korea and Western/Central Europe) increased 1 %, including a 5 point benefit from favourable currency rates. Volumes were down 3 %, driven by South Korea, and the combined impact of changes in net selling prices and product mix reduced sales by 1 %.

Consumer Tissue Segment

Second quarter sales of USD 1.5 billion increased 1 %. Changes in currency rates benefited sales by 2 %. Volumes decreased 3 %, while net selling prices increased approximately 2 % and product mix improved slightly. Second quarter operating profit of USD 207 million decreased 16 %. The comparison was impacted by input cost inflation and lower volumes. Results benefited from cost savings, higher net selling prices, reduced marketing, research and general spending and favorable product mix.

Sales in North America decreased 4 %, driven by changes in the timing of promotion shipments, along with lower sales in facial tissue. Volumes fell 6 %, while net selling prices and product mix each improved 1 %.

Sales in developing and emerging markets were even year-on-year. Net selling prices increased 2 % and product mix was up 1 %, while volumes fell 3 %. The changes in net selling prices and volumes occurred primarily in Latin America.

Sales in developed markets outside North America increased 12 %. Currency rates were favourable by 7 %, mostly in Western/Central Europe. Volumes increased 3 % and net selling prices rose 2 %.

K-C Professional (KCP) Segment

Second quarter sales of USD 0.9 billion increased more than 3 %. Changes in currency rates benefited sales by approximately 2 %. Volumes and product mix each improved 1 %. Second quarter operating profit of USD 165 million decreased 1 %. The comparison was impacted by input cost inflation, mostly offset by cost savings, volume growth and favorable product mix.

Sales in North America increased 2 %. Volumes were up 2 %, with growth in all major product categories.

Sales in developing and emerging markets increased 3 %. Volumes were up 2 %, driven by Asia-Pacific, and net selling prices improved 1 %.

Sales in developed markets outside North America were up 7 %. Currency rates were favourable by approximately 7 %, mostly in Western/Central Europe. Product mix improved 1 %.

Year-To-Date Results

For the first six months of 2018, sales of USD 9.3 billion increased 3 %. Currency rates were favorable by 2 % and organic sales rose 1 %. Volumes increased more than 1 % and product mix improved slightly, while net selling prices declined about 1 %.

Year-to-date operating profit was USD 921 million in 2018, including charges related to the 2018 Global Restructuring Program. Year-to-date adjusted operating profit was USD 1,598 million in 2018 versus operating profit of USD 1662 million in 2017. The comparison was impacted by USD 375 million of higher input costs and lower net selling prices. Results benefited from volume growth, USD 200 million of FORCE cost savings, USD 40 million of cost savings from the 2018 Global Restructuring Program, and reduced marketing, research and general spending.

Through six months, diluted net income per share was USD 1.56 in 2018. Year-to-date adjusted earnings per share were USD 3.30 in 2018, an increase of 8 % compared to diluted net income per share of USD 3.06 in 2017.

2018 Global Restructuring Program

In January 2018, Kimberly-Clark initiated the 2018 Global Restructuring Program in order to reduce the company’s structural cost base and enhance the company’s flexibility to invest in its brands, growth initiatives and capabilities critical to delivering future growth. The program will make Kimberly-Clark’s overhead organization structure and manufacturing supply chain less complex and more efficient and is expected to broadly impact all of the company’s business segments and organizations in each major geography.

The company expects the program will generate annual pre-tax cost savings of USD 500 to USD 550 million by the end of 2021, driven by workforce reductions along with manufacturing supply chain efficiencies. As part of the program, Kimberly-Clark expects to exit or divest some low-margin businesses that generate approximately 1 % of company net sales. The sales are concentrated in the consumer tissue business segment. To implement the program, the company expects to incur restructuring charges of USD 1700 to USD 1900 million pre-tax (USD 1350 to USD 1500 million after tax) by the end of 2020.

Second quarter 2018 restructuring charges were USD 130 million pre-tax (USD 102 million after tax), bringing cumulative charges to USD 707 million pre-tax (USD 530 million after tax). Second quarter 2018 and cumulative restructuring savings were USD 40 million.

2018 Outlook and Key Planning Assumptions

The company updated the following key planning and guidance assumptions for full-year 2018:

  • Net sales similar, to up 1 %, year-on-year (prior assumption increase of 2 to 3 %).
    • Changes in foreign currency exchange rates anticipated to have a neutral to 1 % negative impact on net sales (previous estimate 1 to 2 % positive impact).
    • Organic sales expected to increase approximately 1 % (no change).
  • Adjusted operating profit decline of 2 to 5 % (prior estimate growth of 2 to 5 %).
    • Inflation in key cost inputs of USD 675 to USD 775 million compared to the previous estimate of USD 400 to USD 550 million. The update reflects higher assumptions for pulp costs in particular, and secondarily other raw materials. In North America, the company is assuming full-year market prices of USD 1,200 to USD 1,250 per metric ton for eucalyptus pulp and high-USD 60’s per barrel for oil.
    • Cost savings of USD 425 to USD 450 million from the FORCE program. The prior target was for savings of approximately USD 400 million.
    • Cost savings of USD 100 to USD 120 million from the 2018 Global Restructuring Program. The previous estimate was for savings of USD 50 to USD 70 million.
  • Adjusted effective tax rate expected to be at the low end of the 23 to 26 % target range.
  • Adjusted earnings per share of USD 6.60 to USD 6.80. The prior estimate was USD 6.90 to USD 7.20.

Non-GAAP Financial Measures

This press release and the accompanying tables include the following financial measures that have not been calculated in accordance with accounting principles generally accepted in the U.S., or GAAP, and are therefore referred to as non-GAAP financial measures:

  • Adjusted earnings and earnings per share
  • Adjusted gross and operating profit
  • Adjusted effective tax rate

These non-GAAP financial measures exclude the following items for the relevant time periods as indicated in the accompanying non-GAAP reconciliations to the comparable GAAP financial measures:

  • 2018 Global Restructuring Program. Mentioned elsewhere in this release.
  • U.S. tax reform. In the fourth quarter of 2017, the company recognized a net benefit as a result of U.S. tax reform and related activities. In the first quarter of 2018, the company recognized a net charge associated with U.S. tax reform related matters.

The company provides these non-GAAP financial measures as supplemental information to our GAAP financial measures. Management and the company’s Board of Directors use adjusted earnings, adjusted earnings per share and adjusted gross and operating profit to (a) evaluate the company’s historical and prospective financial performance and its performance relative to its competitors, (b) allocate resources and (c) measure the operational performance of the company’s business units and their managers. Management also believes that the use of an adjusted effective tax rate provides improved insight into the tax effects of our ongoing business operations.

Additionally, the Management Development and Compensation Committee of the company’s Board of Directors has used certain of the non-GAAP financial measures when setting and assessing achievement of incentive compensation goals. These goals are based, in part, on the company’s adjusted earnings per share and improvement in the company’s adjusted return on invested capital and adjusted operating profit return on sales determined by excluding certain of the adjustments that are used in calculating these non-GAAP financial measures.

This news release includes information regarding organic sales growth, which describes the impact of changes in volume, net selling prices and product mix on net sales. Changes in foreign currency exchange rates and acquisitions and divestitures also impact the year-over-year change in net sales.

Kimberly-Clark and its trusted brands are an indispensable part of life for people in more than 175 countries. Fuelled by ingenuity, creativity, and an understanding of people’s most essential needs, we create products that help individuals experience more of what is important to them. Our portfolio of brands, including Huggies, Kleenex, Scott, Kotex, Cottonelle, Poise, Depend, Andrex, Pull-Ups, GoodNites, Intimus, Neve, Plenitud, Viva and WypAll, hold No. 1 or No. 2 share positions in 80 countries. We use sustainable practices that support a healthy planet, build strong communities, and ensure our business thrives for decades to come.

www.kimberly-clark.com