International Sales and Cost Efficiencies Drive Kimberly-Clark’s Outlook

by Trefis Team
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Kimberly-Clark
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    Quick Take
  • Kimberly-Clark reported Q2 2013 earnings on July 22. Sales were flat on an annual basis at $5.3 billion, as organic sales growth was offset by currency translation losses and lost sales due to restructuring activities.
  • Adjusted profit margin was up 6% y-o-y due to $80 million in cost savings from the FORCE program.
  • The international segment led with 9% y-o-y organic sales growth on account of strong demand from emerging markets.
  • We believe the international segment will continue to experience high demand in developing economies due to increase in purchasing power.
  • We also expect enhancement in profit margins resulting from the FORCE program and European strategic changes.

Kimberly-Clark (NYSE:KMB), a leading personal care products company, that manufactures popular brands like Huggies, Kotex and Scott, posted sales of $5.3 billion in the second quarter of fiscal year 2013. In line with our expectations, organic sales grew 3% y-o-y as volumes increased by 2% and net selling prices were higher by 1%. (Read: Kimberly-Clark Earnings Preview: Emerging Markets Will Drive Growth In Its Baby Care Division) The international segment stole the spotlight with 9% y-o-y growth in organic sales. On the flip side, restructuring activities and currency translation losses offset sales by 2% and 1%, respectively. [1]

Adjusted operating profit (excludes $22 million of restructuring charge) was $820 million, up 6% y-o-y, due to $80 million in cost savings from the company’s FORCE (Focused On Reducing Costs Everywhere) program. This was slightly more than our forecast which stood at $60 million. The company revised its full year target for FORCE cost savings upwards by $50 million at both ends to $300 million–$350 million. [2]

We believe that Kimberly-Clark’s international segment will continue to drive growth in the top line, while higher expected cost efficiencies resulting from the FORCE program and strategic changes in Europe will enhance profits by keeping the bottom line low in the future. However, the strengthening dollar could affect reported sales.

See Our Full Analysis for Kimberly-Clark’s Stock


International Segment Leads Growth

The international segment outperformed all other segments in Q2 2013, as organic sales increased by 9% y-o-y to make progress with the company’s targeted growth initiatives. This was in line with our expectations of strong performance in emerging markets, especially the baby care market in China. Diaper volumes grew by 45% in China and 10% in Russia and Brazil on the back of robust demand. Total organic sales in Brazil grew by about 20% due to improved net realized revenue. With feminine care, adult care and baby wipes also reporting double-digit organic sales growth, the international segment delivered broad-based top line growth. Kimberly-Clark intends to continue rolling out new and improved products, particularly diapers, premium feminine care and adult care to drive further growth in the segment.

According to Euromonitor, the demand for diapers, nappies and pants in China is expected to grow at CAGR of 16% on a volume basis over 2012–2017, and in Russia and Brazil near 5%. [3] [4] [5] With such a large population and growing purchasing power, the penetration of such baby care products is increasing rapidly in these countries.

We expect the robust demand for baby care products across emerging markets, particularly 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.

FORCE Program And European Strategic Changes To Enhance Profit Margin

The FORCE program has driven growth in Kimberly-Clark’s bottom line in the recent quarters. The program resulted in 5% y-o-y growth in adjusted profit margin in Q4 2012 and 16% in Q1 2013. According to management, the $50 million revision higher in the full-year target for FORCE will help the company to overcome currency headwinds. In addition, the company is able to invest more in R&D and strategic branding by identifying and delivering cost savings in areas where consumers are not much concerned. [6]

Kimberly-Clark decided to make strategic changes to its Western and Central European businesses in October 2012. 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 margin businesses, primarily from the consumer tissue segment. By Q1 2013, the company had stopped selling Huggies diapers in 13 countries and exited its remaining five markets in Q2 2013 for which it incurred $22 million in restructuring costs.

We believe the FORCE program and the divestment of low profitability businesses will help Kimberly-Clark enhance profitability as the company diverts resources towards higher growth markets.

We are in the process of updating our price estimate for Kimberly-Clark which currently stands at $100.

Notes:
  1. Kimberly-Clark Q2 2013 Earnings Call, Seeking Alpha, July 22, 2013 []
  2. Kimberly-Clark Announces Second Quarter 2013 Results, Kimberly-Clark Investor Relations, July 22, 2013 []
  3. Nappies/Diapers/Pants in China, Euromonitor, July 2013 []
  4. Nappies/Diaper/Pants in Russia, Euromonitor, July 2013 []
  5. Nappies/Diapers/Pants in Brazil, Euromonitor, July 2013 []
  6. Kimberly-Clark Q2 2013 Earnings Call, Seeking Alpha, July 22, 2013 []
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