Kimberly-Clark Earnings Preview: Emerging Markets Will Drive Growth In Its Baby Care Division

Kimberly-Clark (NYSE:KMB), a leading personal care products company that manufactures popular brands like Huggies, Kotex and Scott, posted strong results in Q1 2013. Total sales for the quarter stood at $5.3 billion registering y-o-y growth of 1%. Driven by volume growth and higher net selling prices, consumer tissue sales in North America grew 6% y-o-y while revenues from the international segment grew by 5%, which were the main businesses behind 3% y-o-y growth in organic sales. ^[1]

Operating profit in Q1 2013 was up 12% y-o-y at $700 million although input costs rose by $35 million and administrative spend was higher. This was due to lower strategic marketing spend and $85 million in cost savings from the company’s FORCE (Focused On Reducing Costs Everywhere) program. FORCE is the ongoing global efficiency and restructuring program undertaken by Kimberly-Clark with the aim to contain costs and keep the company on track for sustainable growth.

Based on the management’s outlook, we forecast about $60 million in cost savings from the FORCE program in Q2 2013, resulting in an increase in profit margin. However, we also estimate that the growth in profit margin will be capped at 5% y-0-y due to higher input costs, and higher strategic marketing spend to support innovative product launches and targeted growth initiatives undertaken during the quarter. ^[2]

Kimberly-Clark is slated to release its Q2 2013 results on July 22. We believe a combination of organic volume growth, price hikes and an improved product mix will help the company clock near 3% y-o-y growth in organic sales, continuing the growth momentum gained in previous quarters.

See Our Full Analysis for Kimberly-Clark’s Stock

International Segment To Continue Growing On Account Of Robust Demand For Baby Care Products

The baby care division, which accounts for close to 25% of Kimberly-Clark’s revenues, experienced strong demand from emerging economies for diapers and baby wipes. Diaper volumes increased by 45% in China, 10% in Russia and 5% in Brazil. This fueled 5% y-o-y growth in international organic sales for the company in Q2 2013.

According to Euromonitor, the demand for diapers, nappies and pants in China is expected to grow at CAGR of 16% over 2012–2017. With an increase in purchasing power, a large population and greater brand awareness among consumers, the penetration of such baby care products is increasing at a fast rate in the country. ^[3]

We expect the robust demand for baby care products across emerging markets, especially China, to continue to drive growth in the international segment as the company matches the demand with premium diaper innovation launches and capacity expansion for baby wipes.

Profit Margin To Improve As Resources Are Channelized Towards High Profitability Business

Kimberly-Clark decided to make strategic changes to its Western and Central European businesses in October 2012, to improve profitability, the focus on stronger markets and capitalize on growth opportunities. The restructuring, which is expected to continue through 2014, involves exiting the diaper business in the regions excluding the Italian market. It also involves the divestment of lower a margin businesses, primarily from the consumer tissue segment. By Q1 2013, the company had stopped selling Huggies diapers in 13 countries and announced plans to exit its remaining five markets in Q2 2013.

In line with the management’s guidance for the complete restructuring, we expect the company to incur about $35 million in costs in the quarter. We also estimate sales to be affected to the tune of $120 million in the quarter due to lost sales resulting from the divestiture. ^[4] While the restructuring will have a negative impact on sales and expenses in the short run, we believe the company’s profit margin will improve in the long run as resources from the divested businesses are redirected towards more profitable areas.

The following table summarizes our forecast for Kimberly-Clark’s EBITDA margin:

Based on the company’s performance in the upcoming Q2 2013 results, we will update our price estimate for Kimberly-Clark which currently stands at $100.

1. Kimberly-Clark Announces First Quarter 2013 Results, April 2013 [↩]
2. Kimberly-Clark’s CEO Discusses Q1 2013 Results, Seeking Alpha, April 2013 [↩]
3. Country Report: Nappies/Diapers/Pants in China, Euromonitor, May 2013 [↩]
4. Kimberly-Clark Announces First Quarter 2013 Results, April 2013 [↩]