Kimberly-Clark Corporation (NYSE:KMB) Q3 2023 Earnings Call Transcript

Kimberly-Clark Corporation (NYSE:KMB) Q3 2023 Earnings Call Transcript October 24, 2023

Kimberly-Clark Corporation beats earnings expectations. Reported EPS is $1.74, expectations were $1.58.

Operator: Good day and welcome to the Kimberly-Clark Third Quarter 2023 Earnings Call. [Operator Instructions] 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 third quarter 2023 earnings conference call. Before we begin, please note today’s presentation will include forward-looking statements. Actual results may vary materially from those expressed or implied in our forward-looking statements and you should not place any undue reliance on our 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 materials which are found in the Investor Relations section of our website. Participating in today’s call are our Chairman and Chief Executive Officer, Mike 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 on our Q3 results and our outlook before we open the floor to Q&A. With that, I will turn the call over to Mike.

Michael Hsu: Thank you, Christina. We delivered another quarter of strong results. I’m proud of how our teams around the world are executing our growth strategy. Our innovation and commercial programs are contributing to the top line momentum with improving volume and market share trends and strong gross margin expansion. Based on the strength of our year-to-date performance, we are raising our full year outlook. Third quarter and year-to-date organic sales increased 5%, with growth across all segments. Personal Care, our largest business, led the way with 7% organic growth and importantly, 2% volume growth. Further gains in price and mix were enabled by strong revenue growth management capability, while volume improved sequentially for a third consecutive quarter.

We expect volume trends to continue improving as we cycle prior pricing actions and continue to invest in our brands. We also continue to make excellent progress on margin recovery. Gross margin was up 530 basis points and exceeded 2019 levels, an important milestone in our commitment to restore our gross margin. Operating profit was up 18% and adjusted earnings per share grew 24%. Given the strength of our year-to-date performance, we’re raising our 2023 outlook. We now expect organic sales to grow 4% to 5% and adjusted earnings per share to increase 15% to 17%. Global demand in our categories and for our brands remains resilient. In key markets, we’re seeing a healthier balance of growth in both price and volume. In North America Consumer, organic sales were up 7%, with volume up 3%.

Dynamics were similar in EMEA. In China, organic sales and volume were both up double digits despite ongoing category softness. While growth across D&E continues to be mixed, consumption increased double digits in Latin America. In our largest markets, our market shares are improving. In North America, we saw a sequential improvement in 6 of 8 categories. This was enabled by strong commercial execution, marketing activation and a significant easing of year-to-date supply constraints in personal care and facial tissue. In the U.K., new performance-enhancing designs, price pack offerings and digital initiatives have resulted in over 200 basis points of year-over-year share gains for Andrex. And in China, we’re continuing to see strong market share momentum with Huggies share up nearly 200 basis points in the quarter.

As market leaders, we’re raising the bar by elevating and expanding our categories with superior products and advantaged technology to address unmet needs. We’re also committed to meeting consumers where they need us by offering a comprehensive range of products across the value spectrum. I’ll highlight a few examples. In China, we introduced a breakthrough design for Huggies with innovation that whisks away both forms of babies mess to reduce the frequency of diaper rash. This is a foundational element of our global skin health platform. In North America, we launched new Poise 7-drop ultra observancy pads and 8-drop overnight. These higher-capacity designs provide better absorbency in protection than daytime pads. Also in North America tissue, Scott 1000 lasts longer and dissolve faster and this has been core to Scott’s powerful proposition among value-oriented consumers and that’s why Scott continues to deliver robust growth in this important daily use segment.

We believe our ongoing investment in advantage technology and brand communications will attract more consumers, increase usage occasions and ultimately grow our categories. I’m proud of the progress we’ve made to offset the multiyear impact of inflation on our P&L. Restoring margins to pre-pandemic levels was a milestone and not our end goal. We will continue to expand margins by executing our commercial and productivity programs to deliver balanced and sustainable growth for the long term. I’ll now turn it over to Nelson to provide more details on our third quarter and outlook for the remainder of the year.

A stack of disposable diapers in the foreground with a mother and her baby in the background.

Nelson Urdaneta: Thanks, Mike. We delivered another quarter of strong results across the company. Net sales were $5.1 billion, up 2% versus last year. Organic sales increased 5%, led by high single-digit growth in the Personal Care segment and in North America. Volume improved sequentially for the third quarter in a row to minus 1%, while price realization was 5% and mix contributed 1 point of growth. Currency negatively impacted net sales by approximately 200 basis points. The exit of our Brazil tissue business had an additional impact of 100 basis points, primarily on Consumer Tissue and our Professional business. Let me spend a few minutes on each of our segments. First, Personal Care organic sales increased 7% this quarter.

Price realization drove 4 points of growth and mix contributed 1%. Volume turned positive for the first time in 5 quarters, with an increase of 2%. North America and developing and emerging markets organic sales grew in the high single digits, with volume increases in North America. Developed markets grew low single digits. Within Personal Care, each of our subcategories grew high single digits. Operating margin for the segment improved 250 basis points versus a year ago, driven by gross margin improvement, while we continue to increase our investments in our brands. Second, organic growth in Consumer Tissue was 2%. Within Consumer Tissue, North America delivered 4% organic growth, driven by healthy demand in dry bath and towels. Outstanding results from the U.K. drove 2% growth in the developed markets on top of last year’s 11% increase.

Operating margin for the segment was up 320 basis points versus a year ago, driven by revenue growth management and improved service levels. Finally, our K-C Professional business posted 4% organic growth despite challenging comparisons against last year. On a 2-year average, organic sales growth was 7%. Demand for our washroom business remains healthy and new commercial programs drove share gains in North America. Strong revenue realization was partially offset by lower volumes which were partly driven by the timing of select planned price adjustments. Operating margin for Professional improved by 550 basis points which was broadly in line with the first half of 2023. Turning to the rest of the P&L. Third quarter gross margin increased 530 basis points to 35.8%.

Revenue growth management, input cost tailwinds and about $90 million in FORCE savings more than offset other manufacturing costs and currency headwinds. The cost environment remains mixed. With favorability in raw materials offset by higher energy prices, currency headwinds and higher labor costs. Other manufacturing costs were $30 million higher than last year. Between the lines spending was 20.7% of net sales, up 310 basis points versus a year ago, reflecting year-on-year inflation and investments in our brands, our people and our capabilities. These results also reflect higher year-on-year incentive compensation accruals. Operating profit for the quarter increased 18% and operating margin improved by 210 basis points to 15.1%. This includes a currency headwind of $135 million or a 21 percentage point profit impact, of which 4 points were due to the translation of earnings from non-U.S. operations and the balance was largely driven by transactional costs.

Lastly, the adjusted effective tax rate for the quarter was 22.5%, in line with last year’s 22.3%. Our operating results, coupled with lower net interest expense and gains in equity income drove a 24% growth in adjusted earnings per share to $1.74 in the third quarter. Turning to balance sheet and cash flow highlights. Through the first 9 months of the year, we generated $2.3 billion in cash flow from operations. Capital spending was $549 million compared to $679 million last year. We expect to end the year with CapEx of approximately $800 million. Year-to-date, we returned $1.3 billion to shareholders through dividends and share repurchases. Now let me say a few words about our outlook. Based on our strong results, we are raising our full year guidance.

We now expect organic sales growth of 4% to 5% and net sales growth of 1% to 2%, reflecting the impact of unfavorable currency and divestitures. We also now expect adjusted earnings per share growth of 15% to 17%. Currency headwinds continue to worsen given the recent strengthening of the U.S. dollar against the Argentina peso and other key currencies. Based on recent currency forward curves, we are projecting that currency will have a negative top line impact of approximately 300 basis points and a bottom line headwind of approximately $450 million, up from our previous assumption of $300 million to $400 million for the year. On input costs, we now expect headwinds of approximately $50 million versus the previous outlook of $100 million. Other manufacturing costs are now expected to increase by approximately $250 million compared to $200 million in our prior outlook.

With gross margins returning to pre-pandemic levels in the quarter, we remain focused on driving cost discipline and productivity to create more fuel for growth. For the full year, we project FORCE to deliver $300 million to $350 million, reflecting favorable results from ongoing negotiations of our materials purchases. Continued progress in gross margin recovery puts us in a great position to advance our commercial programs and we continue to expect advertising spend to increase by approximately 100 basis points for the full year. Overall, we now expect operating margin to increase 170 basis points at the midpoint of our guidance compared to an increase of 150 basis points in our July guidance. Below the line, net interest expense is expected to decline in the high single digits.

We have also updated our assumption for adjusted tax rate to 23% to 24%. These improvements result in our full year outlook for adjusted earnings per share growth of 15% to 17%. In closing, while we continue to operate in a volatile environment, we remain focused on executing our growth strategy, including continued investments in our brands and capabilities for long-term value creation. With that, we will open the floor for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question is coming from Chris Carey from Wells Fargo.

Chris Carey: So one question just around commodities. So clearly continuing to see favorability but we have seen some firming of late. And I just wonder how you see things over kind of near- to medium-term horizon from specifically the commodity basket? So basically trying to balance the fact that you’re seeing favorability this year, you have hedges and there’s timing impacts that aren’t really going to impact this year but just how you’re watching this overall commodity environment. I’m really asking this in the context of the potential need to take pricing against volumes and how that balance is going to work over the medium term?

Michael Hsu: Yes. I’ll start with a quick comment and then I’ll ask Nelson to kind of give you a lot more additional context and detail. But one, Chris, I’d say, we finally saw inflection in the cost environment for us. As you know, we’ve taken on a lot of inflation over the past couple of years. And even this year, the plan was additional, between currency and commodities, about $500 million of impact. And so in the quarter — so our first quarter were — the costs actually were favorable. And so that’s a significant inflection point for us. I do expect input cost to be a modest tailwind going forward but don’t expect necessarily that there’s going to be a lot that’s come behind that. The one thing is, though, we do believe and I mentioned this in the prepared remarks that it’s our job to expand margins over time and we believe we have a lot of opportunity to do that on an ongoing basis between what we’re doing on the revenue side and also on the cost side.

But Nelson, maybe…

Nelson Urdaneta: Yes. Just to elaborate a little, Chris, on what Mike was walking you through. So at this stage, what we’ve seen in the quarter and it’s playing out the way we had forecast back in July. In general, the savings that we’re seeing are driven by pulp, distribution and other commodities. And we’ve actually seen some increases, especially as we look forward, on resin-based materials and energy costs. We had our first quarter of a benefit, so $75 million. And as you remember, for the first half of the year, we were negative around $190 million. Based on where we stand today, we still project that we will be favorable in the fourth quarter of the year by an amount that’s not that dissimilar from what we had in the fourth quarter of the year.

And for the full year, we would be around $50 million in terms of commodities negatively impacted. One thing to keep in mind is we’ve also been driving a lot of benefits, Chris, through our FORCE program. Remember, we engage in negotiations in some of the materials where there’s no clear market for us to engage in hedging. And we’ve been actively pursuing this over the last few quarters. So that’s also been a contributor for FORCE which includes our net — our negotiated material prices and that’s flowed through. As Mike said, we don’t expect tremendous tailwinds going forward but we’re pleased with where the overall costs are at this stage.

Chris Carey: That’s very helpful. And then 1 follow-up just on Personal Care and specifically the North America part of the Personal Care division. The volume growth there, can you just talk to the durability, what year ago comps had to do with that? And then within the North America business. I wonder if you can talk about what categories are driving this?