Kimberly-Clark’s Revenues Hammered by Currency Headwinds, Finds Solace in Cost Savings

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KMB: Kimberly-Clark logo
KMB
Kimberly-Clark

Kimberly-Clark (NYSE: KMB) posted its 2014 fourth quarter and full year results on January 23rd. The manufacturer of globally renowned brands like Huggies, Kleenex, and Scott was heavily impacted by strong currency headwinds, which pushed fourth quarter revenues down by 1% year on year. Its annual performance was only slightly better, with revenues expanding by 1% year on year. The only silver lining was the full year adjusted (non-GAAP) operating profit, which grew 5% year on year as the company’s cost savings program bore fruit.

Kimberly-Clark’s full year revenue stood at $19.7 billion and adjusted operating profit was $2.5 billion, representing an adjusted operating margin of 12.7%. Adjusted EPS was $5.51, up 5% from 2013 due to higher operating profit and a lower share count.

The company’s prospects in 2015 appear bleak as it expects to be weighed down by severe currency headwinds and the worsening of the Venezuelan currency crises. It guides revenues to decline by 3% – 6% next year, primarily due to a negative foreign exchange impact of 8 to 9 percentage points. Organic sales growth is expected to be 3% – 5%, in line with the 2014 organic growth of 4%. As in 2014, the only bright point in 2015 is expected to be adjusted operating profit, which is guided to improve by 1% – 4% on the back of cost savings and cost deflation in the domestic market. The expansion in operating profits is expected to push the adjusted EPS up by 2% – 5%, to reach $5.60 – $5.80 in 2015.

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We are currently updating our price estimate of $112 for Kimberly-Clark to reflect the 2014 results.

See our complete analysis of Kimberly-Clark here

Underlying Growth Eclipsed by Foreign Exchange Impact

Kimberly-Clark achieved organic revenue growth of 4% in 2014 on the back of impressive volume growth in its Personal Care and K-C Professional segments. The Personal Care segment, which comprises diapers, feminine hygiene products and adult incontinence products, led from the front and achieved 6% organic revenue growth in 2014.

In comparison, in 2014 the global market for diapers is expected to have grown by 4%, [1] feminine hygiene products by 5% [2] and adult incontinence products by 7%. [3] Put together, Kimberly-Clark’s Personal Care business outperformed the market despite a host of adverse factors. The company faced not just rising competition from Procter & Gamble (NYSE: PG) and Amazon (NYSE: AMZN) in North America during the year, but also battled deflationary conditions in Europe. Despite this, Kimberly-Clark achieved volume and pricing growth of 3% each in the Personal Care category. This indicates that while the overall performance of the company may have suffered due to uncontrollable factors like foreign exchange movements, its underlying business remains strong.

On the other hand, K-C Professional posted organic revenue growth of 4%, while that of the Consumer Tissue segment was 2%, which was lower than the estimated global tissue market growth of 5%. [4] The lower growth was because, unlike the Personal Care segment, which derives a bulk of its growth from the emerging markets, the Consumer and Professional Tissue segments are largely driven by the developed markets, where spending is yet to recover fully. However, given that Kimberly-Clark derives nearly half of its revenue from the Personal Care segment, its good performance bodes well for the company in the long term.

K-C International Continues to be Beacon of Growth

Kimberly-Clark derives about one-third of its revenue from developing and emerging markets. [5] Organic revenues from KC International expanded by 10% year on year in 2014, thanks to double-digit growth in diapers in China, Eastern Europe and Brazil. K-C Professional, feminine care and adult incontinence products also expanded by double digits under KC International. In contrast, none of the categories achieved double digit growth in North America.

This indicates that the potential for growth in Kimberly-Clark’s top line lies outside of North America, especially in the emerging markets. Accordingly, the company has stated that it intends to make additional investments in KC International to maintain a sustainable growth rate. It plans to back up such investments by increased advertising activities, and expects a slight upsurge advertising costs as a result of this. ((Kimberly-Clark Q4 2014 Earnings Call Transcript, Seeking Alpha, January 23, 2015))

Management Devoted to Bottom Line Improvement

Kimberly-Clark’s management appears to be on a constant lookout for potential organizational improvements. The company wrapped up the European restructuring process during the year, under which it had been divesting its lower-margin European businesses since 2012. Separately, it commenced another organizational restructuring plan in 2014 to contain the overhead costs resulting from the spinoff of the healthcare and improve overall profitability. These plans were in addition to the concurrent FORCE (Focused On Reducing Costs Everywhere) cost saving program, which alone generated $320 million in cost savings during the year. The ongoing pulp and tissue restructuring measures provided another $30 million in cost savings in 2014. These measures helped the company improve the full year adjusted operating margin by 70 basis points compared to 2013.

This indicates that the management has taken cognizance of the difficult macroeconomic environment, including uncontrollable factors like adverse currency movements. Given the sluggish market growth, the management is instead attempting to rein in costs in order to maintain a stable bottom line and preserve shareholders’ value.

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Notes:
  1. Global Diaper Market 2014-2018, March 4, 2014 []
  2. Global Feminine Hygiene Products Market 2014-2018, October 22, 2014 []
  3. Incontinence Care and Management Market 2013-2019, March 11, 2014 []
  4. Global Tissue Paper Market 2012-2016 []
  5. Kimberly-Clark Q4 2014 Earnings Call Transcript, Seeking Alpha, January 23, 2015 []