Kimberly-Clark (NYSE:KMB) recently announced its Q1 results with improved performance as demand and sales volume improved in its largest North American market and gross margins recovered due to commodity cost moderation and cost cuts. Kimberly-Clark sells paper-based consumer products like tissues, diapers and feminine care products and owns popular brands like Huggies, Kotex, Kleenex and Scott. The high-cost environment and weakened demand in the developed markets took a significant toll on the company’s sales and margins last year. Particularly hit was the personal care segment, which suffered a four-percentage point margin decline. Kimberly-Clark competes with Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL).
Margins Improve Despite Higher Spending
Last fiscal year was a rough one for Kimberly-Clark with high-cost environment and weakened demand in the developed markets taking a significant toll on the company’s sales and margins. As a result, the company-wide EBITDA margin fell to 19% in 2011 from 20.6% in 2010.
This quarter its gross margin improved by 250 bps and operating margin improved 90 bps (y/y), with improved organic sales growth, higher pricing, input cost moderation and $60 million of cost savings through FORCE (Focused On Reducing Costs Everywhere) program. SG&A expenses increased last quarter in-line with the company’s previous expectations that strategic marketing and R&D spending would increase faster than sales this year, primarily to support product innovation, targeted growth initiatives and overall brand equity, which ate away some of the gross margin improvement.
Demand Picks Up, Costs Ease
In the personal care segment, which includes baby care (Huggies) and feminine care (Kotex), sales improved with 9% organic sales growth that comprised of 6% higher volumes, 3% higher prices and strong growth in K-C International and some demand recovery in North America. The division’s margin recovered over the last quarter, after having suffered a sudden four-percentage point decline in 2011 after having maintained a stable EBITDA margin for five prior years. Nonetheless, the company expects 2012 personal care margins to be similar to the 2011 average. We estimate the personal care division contributes to half of KMB’s stock value.
The tissues segments (consumer & professional) delivered significantly improved margins, benefiting from lower pulp costs, improved demand, higher pricing and pulp & tissue restructuring program. In January 2011, Kimberly-Clark initiated a pulp and tissue restructuring plan in order to exit from its remaining integrated pulp manufacturing operations and improving the underlying profitability and return on invested capital of its consumer tissue and K-C Professional businesses. The restructuring is expected to complete by the end of 2012, and this would help save the company at least $30 million in 2012, $75 million by 2013 and $100 million by 2014.
We have a $75.48 Trefis price estimate for Kimberly-Clark, almost in-line with the current market price.