Kimberly-Clark Q3 Earnings: Volumes And Margin Growth In Focus

Kimberly-Clark (NYSE:KMB) is scheduled to announce its third quarter earnings on October 24. The personal care company had mixed results last quarter: organic sales grew 5% y-o-y driven by robust growth in the emerging market segment while growth in developed markets was hindered by deteriorating economic conditions and lower birth rates. On the other hand, gross margins, adjusted for restructuring and other one-time charges grew 2.4%. The restructuring program can be credited for this and is expected to boost y-o-y margin growth for the third quarter as well.

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Strong Volume Growth in Europe

Europe constitutes an important part of the company’s operations, making up 16% of its revenues in 2011. The personal care segment, which includes brands such as Huggies, Pullups, Kotex, Depend and Poise, has done well this year to circumvent macroeconomic headwinds in the region with an impressive volume growth of 12% y-o-y last quarter. This was partly offset by a 2% net pricing decline and a slightly unfavorable mix.

Results in the first quarter were similar with volumes rising 11% driven by growth in child care, diapers and baby wipes, but net pricing fell 5%. We believe the company is adapting well to the shifting trends in the region with focus on driving revenue growth through volumes rather than price increases and premium product sales.

Increased Investment in Emerging Markets

Kimberly-Clark International (KCI) has seen impressive growth in emerging markets such as China, Russia and Latin America. Last quarter, KCI’s personal care segment saw a 17% increase in sales driven by volumes and net pricing increases of 12% and 6%, respectively.

The company’s operations in emerging markets (includes most of Asia, Latin America and EEMA) are gaining importance, and capital expenditures are being directed into those regions to expand operations. As of 2011, revenues from Asia, Latin America and other emerging markets stood at almost 36% of net sales compared to 32% in 2009. We believe that increased penetration in these markets will aid market share growth.

Margin Growth Through Cost-Cutting

The company has recently seen an upward trend in margins. This is primarily due to the FORCE and SCRP cost-cutting programs, which have incorporated changes to several areas such as employee salaries and supply chain, leading to cumulative cost savings of around $1.6 billion over the past eight years. As mentioned above, overall adjusted gross margins grew by 2.4% y-o-y last quarter. We expect incremental cost savings to have a similar positive impact on margins going forward.

We currently have a Trefis price estimate of $86 for Kimberly-Clark, which is in-line with the market price.

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