Kimberly-Clark’s (NYSE:KMB) plans to report its fourth quarter earnings in January 25. We believe that its top line will be helped by continued growth in emerging markets such as China, Brazil and Russia, which will be partially mitigated by slower sales in western markets. In addition, Kimberly-Clark has made meaningful gains in its cost cutting efforts including selling some pulp and paper manufacturing assets as well as meeting its goals as part of its FORCE (Focus on Reducing Costs Everywhere) efforts. It decided to exit the diaper business in Europe, and so we will watch this unit as well for updates.
Here’s a brief overview of the factors that we think will be the most influential in determining the upcoming results.
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Top Line Factors
The company’s net sales for the nine-month period period ending September 2012, stood at $15.75 billion, only a marginal increase over $15.67 billion in the previous year. We expect the company’s Q4 2012 results to be along the same lines with a slight increase in net sales over Q4 2011, when it earned around $5.1 billion in revenues. Here are the two major trends in the top line.
Growing Demand in Emerging Economies
With surging demand for paper-based sanitary products in emerging economies, Kimberly-Clark has seen its international sales outpace domestic sales growth in 2012. In Q3 2012, the company reported organic sales growth of 3%, with international sales growing by as much as 9%. The company’s range of diapers in particular has seen very good traction internationally with volumes surging by 45% in China and nearly 15% in countries like Brazil and Russia. With significant investments in scaling up production  and a $25 million increase in marketing and R&D in emerging economies over the third quarter, the company should maintain this momentum over the Q4. Intense competition from cheaper private labels remains a concern, but the overall growth in these markets has been solid enough to accommodate a diverse range of product prices in the past.
Decline in Sales in Western Markets
The growth Kimberly-Clark is seeing in its top line from emerging economies, is being mitigated by consumers in developed economies switching to cheaper labels. Pressure from private labels led to Kimberly-Clark announcing its decision to quit its diapers business in Western Europe entirely by the end of 2012. We expect this to be a drag on the company’s top line for Q4 2012. Meanwhile, in segments such as tissues and medical disposables, intense competition from these private labels means that Kimberly-Clark won’t have much scope for strengthened pricing, another major headwind for the company.
Bottom Line Factors
The highlight of Kimberly-Clark’s performance through Q3 2012, has been the strong improvements made by the company in its bottom line. Thanks to the success of cost trimming initiatives, operating profit for the nine-month period ending September 2012, increased by as much as $400 million compared to the previous year. Operating margins stood at around 14%, compared to 12%year-on-year. Some of the key initiatives that should influence the company’s performance in the Q4 results are:
1. FORCE cost reduction program – The company’s general cost trimming program called FORCE (Focus on Reducing Costs Everywhere), has been very successful for the company so far. By Q3 2012, the company had achieved $215 million in cost savings, with a full year target of $250 million.
2. Pulp and paper restructuring – The company continues to distance itself from raw material prices with the pulp and paper restructuring program. By selling off assets directly associated with the manufacturing of paper and pulp and outsourcing its requirements to third-party providers, the company expects commodity cost savings of $150 million for the year. Of this $100 million had been achieved by the third quarter.
Kimberly-Clark certainly has confidence in its own ability to achieve these annual targets. During the Q3 results, the company’s management increased its annual earnings per share estimate for 2012, from a guidance of $5.05 to $5.20 per share to $5.15 to $5.25 per share, mostly on the basis of bottom line improvements. This was the second upward revision for the year, and the estimate stands well above 2011’s annual earnings per share of $4.80. This should give investors good reason to expect that the company can meet its targets.
However, with an increasing share of revenues coming from emerging economies, investors should also be wary about the effect of currency fluctuations as a major headwind, particularly because the U.S. dollar has been quite strong in the last few months. The company’s decision to stop selling diapers in Europe means that this will be one of the key segments whose performance we will be watching closely.
Based on the company’s performance in the upcoming Q4 2012 results, we will revise our price estimate of $86 for Kimberly-Clark, which is in line with the market price.Notes: