Kimberly-Clark Corporation (NYSE:KMB) Q1 2023 Earnings Call Transcript

Kimberly-Clark Corporation (NYSE:KMB) Q1 2023 Earnings Call Transcript April 25, 2023

Kimberly-Clark Corporation beats earnings expectations. Reported EPS is $1.67, expectations were $1.32.

Operator: Good day, everyone, and welcome to the Kimberly-Clark First Quarter 2023 Earnings Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Christina Cheng. Ma’am, the floor is yours.

Christina Cheng: Welcome, everyone, to our first quarter 2023 earnings conference call. Before we begin, please note, today’s presentation will include forward-looking statements. Our actual results may vary materially from those expressed or implied in our forward-looking statements and you should not place undue reliance on any forward-looking statements. Please refer to our SEC filings for a list of factors that could cause our actual results to deviate materially from our expectations. Our remarks today refer to adjusted results, which exclude certain items described in our news release. We use non-GAAP financial measures to help investors understand our ongoing business performance. Please consult our press release for a discussion of our non-GAAP financial measures and reconciliations to comparable GAAP financial measures.

We have published supplemental material, which can be found in the Investor Relations section of our website. Participating in today’s call are Chairman and CEO, Michael Hsu; and our Chief Financial Officer, Nelson Urdaneta. Mike will start the discussion with our strategic priorities and provide an overview of our performance for the quarter. Nelson will provide a detailed discussion of our Q1 results and our outlook before we open the floor for Q&A. With that, I turn the call over to Mike.

Mike Hsu: Thank you, Christina. I’m encouraged by our solid start to the year. We delivered organic growth of 5%, cycling 10% growth in the year-ago quarter. Category growth remain healthy, pricing execution was strong, and costs have begun to stabilize. These primary factors enabled us to continue improving gross margin resulting in a 25% increase in adjusted operating profit and a 24% increase in adjusted earnings per share. Given our Q1 performance and increasing confidence in our underlying operating plan assumptions, we’re raising our 2023 EPS outlook to 6% to 10% growth. Margin recovery continues to be a top priority, and I’m pleased with the strong progress we’re making. This quarter we expanded gross margin by 340 basis points versus year ago building on our momentum from the second half of 2022.

While we are encouraged with our progress, we’re still operating in a challenging environment, input costs have stabilized, but continue to trade well-above 2019 levels. With adjusted gross margins nearly 200 basis points below pre-pandemic levels, we’ll continue to operate the cost and financial discipline. We’re leaning harder into productivity and taking aggressive action to secure supply to better meet the needs of our customers. We remain committed to returning our margins to historic levels, and eventually expanding from there. We’ve taken a thoughtful and holistic approach to mitigating inflationary pressures, carefully balancing price realization with our focus on offering a superior value proposition. This is to enable us to meet our enduring goal of growing market share.

In Q1, we continue to gain or hold share in approximately 50% of our Personal Care cohorts. We’ve invested in building strong revenue growth management capability and that has been critical to our agile and effective price deployment globally. Category growth has remained healthy and broad-based as the elasticity impact on volume continues to be somewhat muted. This reflects the essential nature of the categories we read. While our categories continue to grow, we see bifurcation in consumer demand. We’ve observed resilience and higher-income developed markets like the U.S., but also increasing demand for value in lower-income geographies, especially within D&E markets. We’re meeting our consumers where they need us. As category leaders, we have a broad offering that spans value to premium.

While we’re continuing to see momentum in the premium tiers of our business, we’re accommodating tighter budgets and more rapidly cascading innovation and product features through our portfolio, including our value offerings. Our brands offer excellent value. For parents economizing through usage, superior products like GoodNites XL overnight diapers enable their children to get a better night sleep with 35% less leaks. GoodNites serves an important need and we’re stepping up our brand communications with breakthrough campaigns that highlight the superior performance and value of our offering. Advantage product technologies are key to our brand value propositions and over the past few years concerted investment in innovation has resulted in an exciting pipeline that will help us elevate and expand our categories.

I’ll highlight a few that you’ll see later this quarter. We’re refreshing Cottonelle Ultra Comfort and Ultra Clean in North America, behind a powerful insight. Half of the users in the category are dissatisfied with their existing “Soft & Strong bath tissue”. We’re focused on delivering a superior clean and we’ll launch this initiative with some fairly provocative advertising that highlights down their care and we’re talking about the real down — their issues that we all face. Our suite of products will help address these unmet needs. In China, we’re launching Kotex POLAR NIGHT, our best-ever overnight feminine pads. POLAR NIGHT offer superior protection from back leaks, one of the biggest issues for overnight users. Internationally, KC Professional is debuting our new icon collection, our most advanced towel dispensing system.

ICON has fully customizable panels and ultra-high reliability enabling end-users to be more productive with labor and waste. ICON has been a hit in North America and we are excited to roll it around the world. We have more innovations to launch later this year, including exciting news on Huggies. Our teams are working hard on the innovation pipeline, we’re confident we’ll bring more value to our consumers while elevating our categories, and expanding our markets. In closing, we are encouraged by our strong start to the year and our momentum on the top and bottom line. We serve essential categories and demand for our brands remains healthy. We have a long runway of growth ahead of us and we’re committed to delivering balanced and sustainable growth to create long-term value for all of our stakeholders.

So now, I will turn it over to Nelson.

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Nelson Urdaneta: Thanks, Mike. I’m pleased to report a solid start to the year. First quarter net sales were $5.2 billion up 2% year-over-year. Organic sales increased 5% compared to last year’s 10% increase. On a two-year basis, organic sales growth was consistent across all three segments, with approximately 8% average growth for the company. Strong revenue growth management delivered favorable price and mix benefits with a better-than-expected elasticity impact on volume. Organic growth for our Personal Care business, representing approximately half of the company’s revenue grew 3% with a healthy contribution from price and mix and healthy underlying consumption. Growth was negatively impacted by approximately one percentage point by the exit of a private-label contract in North America.

All Personal Care major geographies contributed to organic growth. After lapping a particularly strong Q1 last year, with North America setting a new quarterly sales record. Feminine care and adult care grew at healthy rates, and we continue to focus on the tremendous growth opportunities created by the aging population and ongoing innovation in women’s health. In baby and child care, gains from product innovation moderated the impact of lower birth rates in China and South Korea. Operating profit for the segment improved 3% in the first quarter. We are confident in our strategy to address significant unmet needs, we’ll continue to unlock a long runway of growth for our Personal Care business. Organic growth in Consumer Tissue was 7%, with broad-based growth across all geographies.

We continue to improve the profitability of our Tissue business with operating profit for the segment up 40% for the quarter. Finally, our KC-Professional business posted 11% organic growth. All geographies grew, with North America and developed markets, delivering double-digit organic growth. Although volume remains below pre-pandemic levels, we remain focused on opportunities where we can deliver value and growth. Operating profit for our Professional segment grew 77% in the first quarter of the year. And we are continuing to make investments in the business to drive long-term sustainable growth. First quarter gross margin increased 340 basis points to 33.2%. Pricing, in addition to FORCE savings of approximately $105 million more than offset the impact of input costs of approximately $160 million, which represented a roughly 300 basis point impact this quarter.

Between the lines spending on an adjusted basis was 18.1% of net sales, up 60 basis points versus year-ago, driven by higher investments in our business. Adjusted operating profit for the quarter increased 25% and operating margin was 15.1%, an increase of 280 basis points versus last year’s adjusted operating margin. Foreign currency was a 12 percentage point headwind on operating profit in the quarter of which five percentage points was due to the impact of translating our foreign subsidiary earnings into U.S. dollars, and the balance impacting input costs. We have made good progress on our margin recovery over the last few quarters. However, our gross margins are, still approximately 200 basis points below pre-pandemic levels. We remain committed, to restoring and expanding our margins over time.

The effective tax rate was 24.5%, compared to an adjusted effective tax rate of 21% in the year ago period. Better than expected top-line and margin performance resulted in earnings per share of $1.67 up 24%, versus adjusted results last year. This quarter also resulted in strong cash generation. Cash provided by operations was approximately $600 million driven by our healthy increase in operating profit and management of working capital. Capital spending was $201 million compared to $253 million last year. During the first quarter, we returned $425 million to shareholders through dividends and share repurchases. Now, let me say a few words about our outlook. We are raising our full year earnings guidance to reflect our Q1 performance and the moderation of commodity headwinds, increasing it to a range of 6% to 10% growth, from our prior guidance of 2% to 6% growth.

We’ve maintained a full year outlook for organic growth of 2% to 4% as we lap last year’s pricing actions against a softer economic backdrop. We are committed to investing behind our brands and people, and we’ll methodically assess incremental opportunities to drive near-term returns. As we scaled recent innovations to more markets and advance our commercial capabilities, we expect to step up brand investments in the second quarter and the rest of the year, as we said last quarter. We are optimistic about bringing superior value propositions that will increase household penetration and market share over time. With the success from our innovation pipeline and brand investments, we have increased confidence in our ability to deliver in the top half of our guidance range for organic growth.

Our input costs, assumptions for the year have improved, but remain a headwind of $100 million to $200 million. In addition to the $200 million headwind from higher wages and other manufacturing costs as stated last quarter. Most of the, impact of input costs, have been realized in the first quarter. And we expect headwinds to dissipate throughout the year. Bear in mind that, the outlook for commodities remains mixed, and cost levels continue to hover significantly above 2019 levels. Our revised input costs assumptions take into account benefits from lower transportation and energy costs. However, beyond these, we have not seen material changes in other commodities versus our prior outlook and markets remain volatile. For example, oil prices have reversed the downward trend with the recent round of supply cuts.

And supply restrictions have contributed to higher prices and other raw materials. Global logistics are improving. However, the labor market remains tight. Certainly, we hope to see commodity abatement in the future. But we cannot count on it to recover the significant impact of inflation in the last three years. We are going to focus on what we can control, which is continuing to offer consumers, superior products, maintain our focus on revenue growth initiatives, accretive innovation, and sustained productivity delivery. We are raising our outlook for operating profit growth to a low double-digit percent range and for operating margin to increase by approximately 130 basis points at the midpoint of our guidance. Currency is expected to impact operating profit by $300 million to $400 million, the majority of which will impact our costs.

Based on these assumptions, we have increased our outlook for earnings per share growth to a range of 6% to 10%. While we do not provide quarterly guidance, let me remind you that we are lapping tough sales comparisons and expect to have continued currency headwinds in the second quarter. As Mike said, we have a full slate of commercial programs coming off. And our teams are laser-focused on executing with excellence. I am proud of our team’s execution leading to a strong start to the year, and we are committed to delivering balanced and sustainable growth that will create shareholder value. With that, we will open the floor for questions.

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Q&A Session

Operator: Certainly. Your first question is coming from Chris Carey from Wells Fargo. Your line is live.

Mike Hsu: Good morning, Chris.

Nelson Urdaneta: Hi, Chris.

Chris Carey: Hi, good morning. So, I just wanted to start on the gross margin line clearly your strong expectation this quarter. If anything, the debate will be like you continue to sequentially decline from here as pricing remains strong and commodities continue to deflate. So, I wonder if you have any thoughts on just the sequential cadence of gross margin development here. And perhaps any of the investments into that line item that might be, a bit more atypical relative to what seems a pretty sequential cyclical recovery in your gross margin. I have a follow-up?

Mike Hsu: Okay Chris, I’ll start and I’m sure Nelson will want to give you some more color and texture definitely encouraged by – what I would say, it’s excellent progress on margin recovery just for reference. I’m really proud of the team, the organization we’re accelerating growth and restoring margins, while still investing to drive long-term balanced and sustainable growth. So, that’s kind of what our overall play is. But on the margin recovery, yes, in the margin we said on the prepared remarks, gross and operating margins were each up about 300 basis points. We had excellent price execution, and I’d say our pricing has been commensurate with what our expectations for cost net of our ramped-up productivity would deliver.

And so I think teams have really done an excellent job around the world there. Input costs, has stabilized and I pick actually for the past two quarters, and this is about the most ability we’ve seen. I think the call is about the same as it was back in January and so for that, we’ve had probably seen about 16 weeks of stability, which gives us something good to aim for, and I think the teams have done a great job kind of work in the productivity. We are seeing some green shoots transportation being a current area. But our current view is that the overall cost environment, it’s going to be fairly consistent what we said overall. I mean it’s going to be about $0.5 billion. We’re going to pick up a little bit of favorability we think. I would add though Chris, I definitely see reversion around the corner, the costs were up to now three-point.

We expect to be over the last three years, $3.7 billion of inflation. I would expect the history of these categories in – our commodities that we buy it generally comes back out. I don’t really see that thus far this year, but we will see maybe some moderation in the second half of this year. But Nelson, you want to give him a little more texture?

Nelson Urdaneta: Sure. Just to build on what Mike was saying, Chris, a few things. So the majority of our cost headwind, and that’s just the now $100 million to $200 million, would have hit us in Q1. We don’t expect it to be too significant for the balance of the year. In fact, we do expect that to begin subsiding as we go into the back half of the year. And to your question specifically on are we going to see further gross margin gains as the year progresses, the answer is yes. I mean, we expect gross margin to continue to gain as we go through the year. This marks the second quarter in a row that we expand gross margins, and by not an insignificant amount versus the prior year. And as a reminder, the last time that had happened had been eight quarters ago, if you step back in time.

So we are very encouraged by the progress made. A couple of things to keep in mind are the fact that we were early in terms of pricing. So we will begin to lap some of the pricing as we go into the second half of the year. Hence, why some of the increases that we’ve seen in last quarter and this quarter in gross margin in terms of absolutes, we don’t expect that to remain. We do expect to exit Q4 at a higher gross margin than what we delivered in Q1. And that really puts us on good track to get back to our pre-pandemic level gross margin of roughly 35% that we saw in 2019. In addition to that, we continue to have a very healthy pipeline of productivity, and the team is focused on managing through all the levers to drive the margin recovery that we’ve committed to and then start expanding from there.

ChrisCarey: Thank you so much for that perspective. Just one quick follow-up. Your gross margin historically have recovered in quite a linear fashion in the same way that they’ve actually gone down during times of pressure. Is there any reason why your gross margin should step up kind of each quarter through the year in context of your Q4 exit rate being higher than Q1? And I just wonder if you have that level of sequential gross margin progression. Can you just remind about your overall investment philosophies and your willingness to, or desire, to put more spending back into the system as opposed to letting this flow to the bottom line, that could be for this year or going into next year as well. So thanks so much for that.

Nelson Urdaneta: Sure. So a couple of things. We have seen an acceleration in the last two quarters, and it’s been fairly strong. So I don’t expect that to sustain because, as I said, two things. One, costs will subside as we go into the second half, but pricing will also subside because we’ll lap it. The good news is we do expect to be continuing to gain as the year progresses. So yes, it will continue to be a straight line, but the slope will change, and it will get a little bit more muted, and it’s as expected. But going to the investment philosophy, I think it’s important to highlight that this quarter, we increased our investment behind the brands and innovation versus prior year, 60 basis points. And as you remember, when we gave the outlook back in January, we said that for the full year, we were expecting at least about 100 basis points of investment.

You would have seen in our prepared remarks that we have a very strong pipeline of innovation that’s been put into market, and we are supporting it as we speak. And this is really the key. And our philosophy, even with all the headwinds that we were facing last year and the prior year has been that we’re in this for the long run. We don’t go for the quarter. So we go for the long run, and we’ve been around for 150 years and counting. And the key has been, we’ve been very disciplined about investing. We’ve been disciplined about our costs. But we do expect, Chris, as the year progresses to step up our investments. Hence, why I’m highlighting the fact that we saw 60 basis points of investment increase. But for the full year, we are expecting about 100 basis points when it’s all said and done.

Mike Hsu: Yes. Chris, just to tack on, we’re continuing to invest in our brands to drive long-term balance and sustainable growth. We’re trying to create the proverbial virtuous cycle, right? And so we definitely see that this year, in that opportunity this year. Certainly, I think the good start gives us a little more room and confidence to be able to invest further. And so even beyond kind of what we had thought during the start of the year, I think we would probably look for additional opportunity because, one, we really are excited about our innovation. I highlighted a little bit of that in our prepared remarks when we have great stuff for 2023. I think there’s magic coming in poop, and kind of what we can do with poop. I talked about Cottonelle with the superior clean comfort protection on diapers.

So we got great news. The other thing that we’re really focused on and our retail partners, I think value, is we’re really focused on expanding the categories, right? And so driving trial and penetration in these categories through advertising, and that’s what some of the investment will be earmarked for. And so — and we think there’s great opportunity to expand penetration, even in the most highly developed category in the world, which is bath tissue, as I highlighted. Because a lot of consumers are still unsatisfied with what the category does. So we feel like we’re improving our brand propositions. We have great news. And so putting more money behind the brands, I think, will work very hard for us, and we’re excited to do that this year.

ChrisCarey: Okay. All right. Thanks so much.

Mike Hsu: Okay. Thank you.

Nelson Urdaneta: Thank you, Chris.