Kimberly-Clark Corporation (NYSE:KMB) Q1 2024 Earnings Call Transcript

Kimberly-Clark Corporation (NYSE:KMB) Q1 2024 Earnings Call Transcript April 23, 2024

Kimberly-Clark Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning everyone and welcome to the Kimberly-Clark’s First Quarter 2024 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 Chris Jakubik. Sir, the floor is yours.

Chris Jakubik: Thank you and hello everyone. This is Chris Jakubik, Head of Investor Relations at Kimberly-Clark, and welcome to our Q&A session for our first quarter of 2024 business update. During our remarks today we will make some forward-looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties, and these are discussed in our earnings release and our filings with the SEC. We will also discuss some non-GAAP financial measures today and these non-GAAP financial measures should not be considered a replacement for, and should be read together with GAAP results. And you can find the GAAP to non-GAAP reconciliations within our earnings release and the supplemental materials posted at investor.kimberly-clark.com. Before we begin, I am going to hand it to our Chairman and CEO, Mike Hsu, for a few quick opening comments.

Mike Hsu: Okay, thank you Chris. Hey, before we get into the Q&A I would like to start by saying thank you to all my colleagues at Kimberly-Clark who worked really diligently over the past few years to build our strong foundation and to deliver these Q1 results that provide a very good start to our next chapter of growth. Our strategy to elevate our categories with breakthrough innovation and expand our markets is working. We are effectively navigating the ever changing external dynamics of today’s new normal while driving our consumer centric culture. We are making the company better, stronger, and faster. I am very, very proud of our progress to date and I am confident that we are going to continue to leverage our core strengths to achieve our potential. We are on an exciting path and are well positioned to deliver durable growth and sustainable shareholder returns. So with that I would like to open it up for your questions.

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Q&A Session

Operator: [Operator Instructions]. Your first question is coming from Bonnie Herzog from Goldman Sachs. Your line is live.

Mike Hsu: Good morning Bonnie.

Bonnie Herzog: Hi, good morning. Hope you are all well. First, I have a quick question on your guidance. You reported a better than expected Q1 so curious to hear why you didn’t pass through the full Q1 beat? And then also hoping for a little more color on the better than expected volume growth you saw in the quarter, what were the key drivers behind this, and ultimately how sustainable is this moving forward and curious, was there any pull forward for instance or should we expect to see continued volume improvements as the year progresses? Thank you.

Mike Hsu: Yeah, Bonnie, maybe I’ll start and Nelson will talk about why we decided to pass through and our logic for that. But really, I’m encouraged with our good start. I think our organization is running very, very well in what we would call internally our new normal. And I think this is like the first year in a few that we’ve had kind of a stable business despite a lot of the geopolitical things that are going on. So the underlying strength in the quarter was predicated on a couple of good fundamental factors. One, better volume, which you observed, and there was no pull forward. In fact, it was the opposite. We had an inventory, retail inventory reduction in the quarter, but kind of, I think the volume, the inherent strength and the consumption kind of overshot — overcompensated for that.

And so I think that was probably when also the market shares are moving kind of in the right direction. So I think we feel very good about the underlying volume momentum in the business. And then on top of that, then with a stable input cost environment, the productivity that was strong in the quarter tends to drop a little bit stronger through the bottom line. And so that’s the underlying kind of driver of our strong Q1. And we feel really great about it. The team’s done a great job operating. There’s still a couple wars going on in the world, as you’re well aware. Argentina’s been very volatile and our teams are doing a great job there. So, we feel like we’re really running well in a new normal environment. Nelson?

Nelson Urdaneta: Yeah, and just to add a few details on what happened in Q1, Bonnie. So first, obviously very pleased with the start of the year, and Q1 was particularly strong as we saw significant benefit in China from our Chinese New Year execution. And particularly in March, I mean, the trends in the business continued. China grew volumes double-digits in the quarter. And in North America in particular, as Mike said, while the trade de-stock happened as we had projected back in January, and just for perspective total company, that was around 80 basis points of growth, that still — we came in March and had a much better consumption in the month in March, which flowed through in the quarter. So that was the other bit on volume as we thought about what happened and reconciled the numbers for the quarter.

Having said that as we look at what’s been happening in the balance of the year, couple of things. One, as Mike said, we’re cautiously optimistic. A few things that we’re all aware of is we still have geopolitical challenges underway, and we have begun to see some of our commodities begin to uptick. Just for perspective, in the first quarter, we’ve seen how pulp and the fiber complex has increased in the single digits in the first quarter sequentially versus Q4. For perspective, in the full year we now expect commodities to be — the net input cost, the total basket to be around $250 million inflationary. So we are taking that into account. That’s within the range that we have provided back in January, but it’s still something that we’re watching.

A couple of other things to keep in mind is that as we head into the back half of the year, we expect to see about an $0.08 headwind from the Personal Protective Equipment divestiture in profit that’s built into our outlook, but that is something that is new news versus the outlook we provided back in January. And the other bit to keep in mind is, we will further step up investments as the year progresses. On a year-over-year basis, our advertising spend increased 50 basis points. That was largely in line with what we had in Q4. And what we said at the beginning of the year is that as our innovation pipeline builds up, and that’s starting in Q2, we will further step up investments as the year progresses, and we expect it to be around another 50 basis points for the balance of the year.

Bonnie Herzog: Alright, thank you.

Mike Hsu: Good, thanks, Bonnie.

Operator: Thank you. [Operator Instructions]. Your next questions come from Anna Lizzul from Bank of America. Your line is live.

Anna Lizzul: Hi, good morning, and thank you for the question.

Mike Hsu: Good morning, Anna.

Anna Lizzul: I was wondering if you can comment on market share. A competitor mentioned a misstep on their part with a lack of innovation at the lower end of the pricing ladder in toilet paper, which caused some pressure there. So I was wondering if that helped you to pick up share and if you can comment on how you’re progressing in terms of market share also on a weighted category basis, that would be helpful? And then as a follow-up, volumes were clearly better than expected despite some retail inventory reductions in the quarter that you had anticipated for Q1, so I was just wondering to what extent this ended up impacting the quarter and how should we be thinking about it for the full year? Thank you.

Mike Hsu: Okay. Yes. Anna, thanks for the question. Great question. Market share I’m very encouraged. I think we’ve made very, very solid progress on overall market share. I expect further improvement in the year as the year progresses. Overall, in the quarter, we were up and even in just under 60% of our market category combinations. Although I would say also flat on a weighted basis, and we look at share in two ways on both metrics. Importantly, I’d say North America improving. North America was up or even in 6 of 8 categories. We were soft in 2023, as you may recall, a lot of that was predicated on severe supply constraints that we had last year. And so I think this was like maybe the second quarter that we’ve had in a row of unconstrained supply.

And I think that kind of performance reflects our ability to ship product and kind of restore promotion. Just for reference, Kleenex in the quarter was up 400 basis points on share — or more than 400 basis points on share. What drove it, well, we did have new social media campaign around cold, flu, and allergy season which I think has been very, very good. But the other part is we restored merchandising which we had been off from for several months. And so again, I think our merchandising, we still plan — we’re probably still under-indexed versus the overall category. But we’re just kind of returning to kind of normalized merchandising behavior. So we feel good about our performance overall. And again, market share in other markets like in China, we were up a couple — a couple of hundred basis points on how these diapers had a very, very strong Chinese New Year execution.

So volumes were up double-digit against the category that was still down about 10% in China. So I think overall, we’re feeling very optimistic about the performance of the business and feel good about the volume delivery of the business.

Nelson Urdaneta: And just to build on Mike’s point and to your question on what to expect on volumes for the balance of the year. But as we said in January, I mean, 2024 should mainly reflect the pacing of our innovation pipeline and in-market programming. We still have the innovation and a lot of the programming coming into place as we go into Q2 and the second half of the year. Hence, why, from an overall perspective and volume plans, we don’t see any changes versus what we had planned back in January and we’re taking into account the volume over delivery that we had in Q1.

Anna Lizzul: Thank you, very helpful.

Mike Hsu: Okay, thanks Anna.

Operator: Thank you. Your next question is coming from Lauren Lieberman from Barclays. Your line is live.

Mike Hsu: Hi Lauren.

Lauren Lieberman: Hey, good morning. Hey, guys. So first thing I wanted to ask about was the productivity in the release. In the prepared remarks you called out $120 million realized this quarter. And I was just curious how to think about that in the context of the $3 billion in productivity and also $200 million of SG&A savings that you articulated at the Investor Day? So that’s just my first question.

Mike Hsu: Nelson will comment. I will say a good start and we’re tracking well.

Nelson Urdaneta: Yes. And then just to give a little bit of color on the $3 billion and the $200 million, Lauren. So overall, first, it’s based on the integrated margin management process that we unveiled in our Investor Day at the end of March. This has really given us a new enterprise-wide visibility, discipline, accountability, end-to-end across the whole value chain. And really, it’s about a focus on driving lower costs at a total deliver cost, which is a very different approach as what we had in the past, and we’ve been working on it for the last year or so. As you said, and we had a strong start to the year on gross productivity, I’ll reiterate, this is non-procurement-related savings, and this is the $120 million that we talked about in the release and in our prepared remarks.

And we also had additional savings that were delivered from the procurement side of the house, and that’s embedded in our net input costs, which again were and net not that much of a headwind in the first quarter because of all these efforts. As we think about the cadence and what we expect to have on the $3 billion, we’re off to a good start on that number. And we would expect that to be roughly about linear over the next few years as we deliver the whole $3 billion. In terms of the $200 million of SG&A savings, as a reminder, we will go live with our new operating model on October 1st of this year. So we don’t expect much of that $200 million in savings in SG&A to materialize this year. That will really come into play more in 2025 and 2026.

But again, really a good start to the year in productivity and procurement-related savings.

Lauren Lieberman: Okay, that’s awesome. So just as a follow-up, on the SG&A side of things, what was interesting to see this quarter is that you saw pretty good operating leverage there because in the prepared remarks also, you’ve called out a 50 basis point increase in advertising as a percentage of sales this quarter, which implies some pretty — again, like I said, solid operating leverage on SG&A. And that’s different than what we’ve seen, I guess, the last couple of years, frankly. So where do you stand, let’s call it, on sort of reinvestments because one of the things that struck me and some of my follow-up conversations with people at the Investor Day was a lot of the things you talked about doing going forward, a lot of questions I got from people were like, well, why haven’t they been doing it yet.

And my thought was perhaps it’s been about investing to get the capabilities to be able to do these things going forward. So is that a reasonable way of thinking about it, is that reinvestment level kind of now, I don’t want to call it complete, but like where it needs to be such that we should see operating leverage on SG&A ex-advertising even before you start to get some of those — that $200 million in savings in that 2025 and 2026?

Mike Hsu: Yeah, I mean, one, I’ll start, Lauren, and — but one, we feel great about our investments in advertising and I think we’re — we’ve made significant progress. I think we’re up 200 to 300 basis points since I became — came into this role. However, I’d say we’re probably still underspent relative to our peer set. And so do we need — and I think I said this in Investor Day, I don’t know that we have to match them right. But I would like to continue to increase our investment. I think you’re exactly right on kind of, hey, well, there’s two factors that kind of caused us to phase our investment. I would say, if you recall, back in 2018, 2019, I did not feel like we had all the capability we needed to spend that significantly.

And I think you may recall in some sessions we had or some calls people were asking, why didn’t you reset invest harder, at that point, I wasn’t confident what the advertising was going to do, right. And so in the last five years, I think we’ve really built what I would characterize as kind of world-class capability on the commercial front through the help of Alison as you’re well aware. And so we’ve done that. We have made progress. So that was one factor we were building the capability. And right now, our returns on investment on our advertising particularly on digital and we’ve migrated from not having a whole lot of digital maybe 5 or 10 years ago to almost being entirely digital and those returns are significantly higher than we’re driving now.

So that’s one factor. The other big factor, I think, that people forget is we had two years of a super inflation cycle. We had more than offset — more than a full year of operating profit in that cycle. And so we are busy doing trying to recover margins as well. And so there’s a lot going on in addition to all the geopolitical issues that I think Lauren you are really well aware of. So there’s a lot of things going on. And so we’re making steps in the right direction. We’re not all the way to where we want to be, but we think we can kind of manage the business in the right way to kind of deliver both a healthy top line, healthy bottom line, while continuing to invest in our business for the long term.

Lauren Lieberman: Okay, great. Thanks so much.

Operator: Your next question is coming from Nik Modi from RBC Capital Markets. Your line is live.

Sunil Modi: Good morning. Just a quick clarification, if you could just provide context on the destocking in terms of where you saw it? And then the actual question is obviously, the feedback broadly speaking, has been the consumer is under pressure though your results today, obviously, you seem to have outperformed a lot of that backdrop or commentary. So just Mike, would love to get your perspective on kind of category health, consumer health, kind of what you guys are seeing, I sense part of the guide and not flowing everything through is because maybe there is some uncertainty, but I’d love your thoughts on that?

Mike Hsu: Yes, thanks Nik. Great questions. Yes, we did see a retail inventory reduction in the first quarter as expected, and we were given the heads up on that. And so we planned for it, it was about an 80 basis point headwind to global and about 170 bps of North America sales. And so I’d say the behavior is typical. I don’t think it’s unusual. We tend to see in that December, January time frame, retailers trying to get a little more efficient with how much inventory they’re carrying. We tend to be very, very efficient with retailers, and I think they like our logistics capability. And so we’re kind of generally early adopters of all the new systems that retailers go on to kind of try to manage their inventories better. So we’re kind of on top of it.

It’s been baked into our outlook for the full year, but I don’t know that I expect a whole lot different going forward, but it’s — what we expected in Q1 did in fact happen. I think I said earlier, our volume was a little bit stronger than we had anticipated. So more than fully offset that. So I think that was the first part. Is that enough — clear enough on your retail inventory part, Nik?

Sunil Modi: Yes, Mike, I just — what — any specific categories you can call out, was it Femcare because that’s T&G called that out, but I was just trying to get a category perspective on destock?

Mike Hsu: No, for us across the board. And just to note, nothing unusual in our mind. So like typical for what we see every year. So I think that’s part one. I think your question on the consumer, I guess I would characterize the consumer environment overall for us globally, but especially in North America, is resilient. Still bifurcating, but part of that bifurcating is actually adding to category growth as well. So the category demand overall remains very, very robust. As you could see in North America our categories, on average, overall, were up about 5% or mid-single digit. I think that — as you well know, we make daily essentials. And so there is low substitution in our categories and so I think that’s reflected in the overall category demand.

Importantly to note Nick is, premium continues to grow very, very robustly, especially in developed markets like the U.S., like in China, UK, South Korea, but also premium is growing and developing in emerging markets like Brazil. And so we’re continuing to see that demand there. That all said, clearly, I would say, middle to lower income households look like they are — they’re becoming more stretched based on all the economic data we’re seeing. So I would say the bifurcation is I see a limited trade down in a few categories, notably adult care, some in household towels, but we have a very, very detailed tracker across every category. I think we’re tracking like nine different dimensions. And I’d say — so we’re very vigilant about monitoring that.