Unilever’s CEO, Mr. Paul Polman, told investors in September last year that the emerging economies were slowing due to currency devaluation in many countries including Brazil, India and South Africa. Currency depreciation creates inflationary pressures which force consumers to reduce buying activity. In December, Mr. Polman added that the slowdown was here to stay for a long period, due to the lack of economic reforms in these countries.  Since then, consumer products giants have seen a re-rating of their stocks to account for the slowing growth and their high exposure to the emerging markets. Scrips like Colgate-Palmolive (NYSE:CL), Unilever (NYSE:UL) and Procter & Gamble (NYSE:PG) have lost up to 5% of their value on a year-to-date basis.
One Fast Moving Consumer Goods (FMCG) major which has managed to please investors despite expectations of a slowdown is Kimberly-Clark (NYSE:KMB). The company’s stock is up by over 5% this year. We have a price estimate of $112 for Kimberly-Clark, nearly in line with its current market price. In this article, we discuss the most important factors that have created a positive sentiment surrounding the company’s performance. We will follow this with a brief analysis on how a prolonged slowdown would affect FMCG leaders.
Better Resource Allocation With Restructuring Activities
Kimberly-Clark decided to make strategic changes to its Western and Central European businesses in October 2012, to improve profitability and to channelize resources towards stronger markets that have better growth opportunities. The restructuring involved exiting the diaper business in both the regions with the exception of the Italian market.
By Q1 2013, Kimberly-Clark had stopped selling Huggies diapers in 13 countries and exited its remaining five markets in Q2 2013. Exiting these markets allowed the company to divert resources towards China, Brazil and Russia, few of the fastest growing diaper markets. In the second half of 2013, Kimberly-Clark’s diaper sales rose by more than 35% in China and by 20% in Brazil and Russia.  
With an increase in purchasing power, a large population, persistent product innovation and greater brand awareness among consumers, countries such as Brazil and China are experiencing deepening penetration of baby care products i at a fast rate. 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 the 2012–2017 imte-frame; the rate in Russia and Brazil should be near 5%.   
During its fourth quarter earnings call, Kimberly-Clark briefly laid out its plan for diapers for the current year. The company identified China as a key growth market and announced that it will expand into 10 more cities by the end of the year. It will launch new diaper innovations in Brazil, China and Russia, and also support these by increasing its advertising spend. We think that these factors put the company on track to deliver strong growth in baby care this year. 
Increased Focus On Core Business With Spin-off Of Healthcare Segment
Kimberly-Clark’s health care division sells surgical and infection prevention products for the operating room. It also owns a portfolio of innovative medical devices that focus on pain management, respiratory and digestive health. The division generated close to $1.6 billion in net sales in 2013, representing about 7.6% of total company net sales. It has been a part of Kimberly-Clark’s portfolio since 1970 and accounts for slightly more than 7% of the company’s value, as per our estimate. However, the company now feels that the division’s strategic fit and growth priorities have changed over the course of time. Hence, it intends to spin-off the division by the second half of 2014. 
The healthcare segment suffers from various weaknesses, such as its flat market share in a slowing domestic (U.S.) market. The division’s profitability is also an issue. We estimate that health care EBITDA margins stood lower than 18% in each of the last three fiscal years, while company-wide EBITDA margins were 19% or higher. EBITDA represents profits after factoring in typical expenses, such as cost of goods and services sold, SG&A expenses and R&D expenses. Kimberly-Clark conducts the majority of its health care manufacturing operations from low-cost sites in Latin America and Asia. This restricts the scope for further reduction in operating expense to improve EBITDA margins.
According to Kimberly-Clark’s management, the spin-off could slow the rate of dividend increases in the short term. In the long term, we think that the spin-off will create greater shareholder value by allowing the company to further increase its focus on its core strength, the personal care business. Spinning-off health care should be easy for the company as it is the company’s most independent business and has the least overlap with other businesses.
Higher Operating Margins Helped By Cost Savings And De-sheeting Exercises
Kimberly-Clark is pursuing a FORCE (Focused On Reducing Costs Everywhere) program which is aimed at containing costs and keeping the company on track for sustainable growth. The program delivered $310 million in cost savings in 2013, allowing the company to absorb currency translation losses and commodity cost inflation. Identifying and delivering cost savings in areas where consumers are not much concerned allows the company to invest more in innovation and strategic branding. The company expects significant currency headwinds and higher commodity costs this year. However, it also expects to save at least $300 million from the FORCE program which should help it overcome these problems. 
In mid-2013, Kimberly-Clark conducted a de-sheeting exercise across its Kleenex and Cottonelle line of tissue products, when it reduced the number of tissues per box by 13% without changing the price of the box. The effective rise in price per sheet helped the consumer tissue segment to register 17% year-on-year increase in operating profits in Q4 2013, the highest for any business segment of the company, even though net sales were even with the year-ago period. (Read: Kimberly-Clark Plans Bulkier But Fewer Tissues Per Box To Fatten Margins)
Kimberly-Clark is conducting a similar exercise across the Huggies diapers range. The shipping of the new packages began in February. We think this downsizing activity will have an effect similar to the de-sheeting exercise. In our view, it will help the company to post margin expansion in baby care. The exit from Western and Central European diaper markets should also help boost margins, in turn allowing the company to invest back in innovations and promotional activity.Notes:
- Unilever CEO Says Emerging Market Slowdown to Last for Years, Bloomberg, December 02, 2013 [↩]
- Kimberly-Clark’s CEO Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 22, 2013 [↩]
- Kimberly-Clark’s CEO Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, January 24, 2014 [↩] [↩] [↩]
- Nappies/Diapers/Pants in China, Euromonitor, July 2013 [↩]
- Nappies/Diaper/Pants in Russia, Euromonitor, July 2013 [↩]
- Nappies/Diapers/Pants in Brazil, Euromonitor, July 2013 [↩]
- Kimberly-Clark Pursuing Spin-Off Of Health Care Business, Kimberly-Clark Investor Relations, November 14, 2013 [↩]