Kimberly-Clark (NYSE:KMB), the manufacturer of Kleenex tissues and Huggies diapers, registered organic sales growth (excludes the impact of both foreign currency effects and restructuring activities) of 5% in the second quarter of fiscal year 2014. Despite the healthy growth in organic sales, the company’s net revenue increased by only 1.4% year over year to $5.3 billion, due to the negative impact of currency translation effects, lost sales as a result of restructuring activities, and adverse geographic mix. 
The adjusted operating profit margin increased 60 basis points to 16.1%, helped by sales growth and $85 million in cost savings from the company’s FORCE (Focused On Reducing Costs Everywhere) program and pulp and tissue restructuring actions. Through the FORCE program, Kimberly-Clark aims to identify and deliver cost savings in fields where consumers are not much concerned. 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 absorb currency translation losses and commodity cost inflation. FORCE has already delivered $145 million of savings this year. 
We are in the process of updating our $110 price estimate for Kimberly-Clark based on the announced results.
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Kimberly-Clark To Complete Spin-off Of Healthcare Business By End Of Q3
Kimberly-Clark is pursuing a tax-free spin-off of the healthcare division, which is expected to be completed by the end of Q3. The healthcare business had been a part of Kimberly-Clark’s portfolio since 1970, but the company feels that the division’s strategic fit and growth priorities have changed over the course of time. The new entity has been named Halyard Health and will be headquartered in Alpharetta, Georgia. 
The transaction will involve a tax-free distribution of 100% of Halyard’s common stock to Kimberly-Clark shareholders. Prior to the distribution, Kimberly-Clark will receive a cash distribution from Halyard Health, which the former intends to utilize for repurchasing its own shares in the open-market.
We believe that severing the healthcare business is a good move as it will allow Kimberly-Clark to focus on its consumer business. With revenues of about $1.6 billion, the business accounts for 8% of the company’s valuation, in our estimation. Also, the division has been under-performing relative to the other divisions of the company. While all the other segments grew organic sales by 3% or more in Q2, healthcare organic sales fell by 1% due to decelerating growth in the U.S. The market for healthcare utilization (such as surgical procedures) and infection prevention in the U.S has been slowing.
Baby Care Will Help K-C International To Maintain Its Growth Momentum
Like previous quarters, Kimberly-Clark’s International segment led the growth in Q2 with a 10% increase in organic sales. The segment registered double-digit growth in both feminine care and adult care and mid-single digit growth in baby wipes, helped by the company’s focus on premium innovation and category development. Growth was also strong in diapers. Organic sales of diapers increased approximately 30% in Russia and Eastern Europe, 20% in China and 15% in Brazil. This robust growth can be attributed to the company’s expansion into newer cities in these countries and the launch of new products and innovation. 
The penetration of baby care products is increasing at a fast rate in countries such as Brazil and China owing to a large population, an increase in purchasing power, persistent product innovation and greater brand awareness among consumers. Kimberly-Clark has increased its focus on these markets following its exit from the saturated Western and Central European diaper market in Q2 2013. The company has identified China as a key growth market and will expand into more Chinese 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 high single-digit growth in K-C International this year.
Kimberly-Clark’s international portfolio is more inclined towards diapers and bath tissues. In international markets, the company has greater penetration in these categories than baby wipes and adult care. This offers Kimberly-Clark the opportunity to expand its presence in the latter two product segments as well.Notes:
- Kimberly-Clark Announces Second Quarter 2014 Results, Kimberly-Clark Investor Relations, July 22, 2014 [↩] [↩]
- Halyard Health, Inc. Registration Statement, SEC website, May 2014 [↩]
- Kimberly-Clark’s (KMB) CEO Tom Falk on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, July 22, 2014 [↩]