Emerging Markets and Cost Savings to Drive Kimberly-Clark’s Performance in Q1

Kimberly-Clark (NYSE: KMB), the manufacturer of renowned tissue brands like Kleenex and Scott, is set to report its 2015 first quarter earnings on April 21st. Like all major manufacturers of consumer processed goods, 2014 was a rough year for Kimberly-Clark. The company’s performance was hammered by the dual blows of sluggish volumes and severe currency headwinds. The only saving grace was the improvement in bottom lines through robust cost savings. (Read: Kimberly-Clark’s Revenues Hammered by Currency Headwinds, Finds Solace in Cost Savings)

The status quo is expected to remain mostly unchanged in 2015, as Kimberly-Clark expects foreign currency movements to remain unfavorable in the near term. Volume growth is also expected to continue to remain slow because of lethargic consumption in developed markets. Emerging markets may provide some relief on the topline front, but much of the revenue expansion may be offset by volatile regional currencies. However, as in 2014, improvement in margins through cost savings may offer some solace to shareholders.

Consensus revenue estimates for the first quarter of 2015 stand at $4.6 billion, which is 12.7% lower than the same period previous year. Consensus estimate for non-GAAP EPS in the first quarter is $1.33, which is a marginal improvement on the non-GAAP EPS of $1.32 a year ago.

We have a price estimate of $101 for Kimberly-Clark, which is marginally lower than its current market price.

Check out our full analysis for Kimberly-Clark here

Developing and Emerging Markets to Drive Topline Growth

Kimberly-Clark will change its geographical reporting segments from this quarter forward. Earlier, it used to report its geographical segments as North America, K-C International and Europe. Beginning from the first quarter of 2015, its geographical reporting segments will be North America, Developing and Emerging Markets (D&E) and Developed Markets.

While North America commands the lion’s share of Kimberly-Clark’s total revenues, most of the revenue growth is derived from D&E markets. In 2014, organic revenue growth in D&E markets was 11%, compared to a mere 1% revenue expansion in the developed markets. On the other hand, net sales in North America contracted by 3% year on year in 2014. ^[1]

This trend is expected to continue in 2015. The company expects revenues to decline in GAAP terms due to currency headwinds, which are estimated to reduce sales by 8% to 9% during the year. Full year organic sales growth is expected to range from 3% to 5%, driven primarily by the D&E markets. ^[1] Kimberly-Clark’s high exposure to D&E markets is a boon as well as a bane for the company – D&E markets provide a much-needed boost to topline acceleration, but also expose the company to volatile regional currencies.

Focus on Margin Improvement

As in the last few quarters, Kimberly-Clark’s focus currently seems to be largely on implementing operational efficiencies to bolster its margins. The company’s FORCE (Focused on Reducing Costs Everywhere) cost savings program is going strong and is expected to contribute at least $300 million cost savings in 2015. In comparison, the program yielded savings of $320 million in 2014. ^[1]

Kimberly-Clark also expects to realize another $60 million to $80 million in cost savings from efficiencies resulting from the Halyard Healthcare spin-off. These cost savings may be aided by cost deflation of up to $150 million, resulting from lower oil-based costs.

The combination of the above factors may help Kimberly-Clark offset the impact of currency headwinds in the first quarter.

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1. Kimberly-Clark 2014 Fourth Quarter Earnings Call Transcript, Seeking Alpha, January 23, 2015 [↩] [↩] [↩]