Kimberly-Clark Posts Strong Volume Growth and Margin Expansion in Q1

Leading tissue products manufacturer Kimberly-Clark (NYSE: KMB) reported strong first quarter results on April 21. The company got off to a good start to the year with revenues of $4.7 billion in the first quarter, beating consensus revenue estimates of $4.6 billion. In GAAP terms, revenues contracted by 4% primarily due to a negative currency impact of 9 percentage points. Organic revenue growth was 5% year on year, led by 11% organic revenue growth in developing and emerging (D&E) markets. Among the business segments, personal care led from the front with 6% organic revenue growth, owing to a 4% year on year expansion in volumes.

Kimberly-Clark continued its track record of strong margin improvement in the first quarter of 2015 as well. Non-GAAP gross margin expanded by 140 basis year on year to reach 35.6% in the first quarter, while non-GAAP operating margin increased by 180 basis points to reach 17.4%. The improvement in gross margins was primarily due to better-than-expected cost savings from the FORCE (Focused on Reducing Costs Everywhere) program, which yielded $90 million in cost savings during the quarter. ^[1] Consequently, non-GAAP EPS expanded by 8% year on year to reach $1.42 in the first quarter.

In 2015, Kimberly-Clark guides organic sales growth to remain in the 3% to 5% range. Negative impact of currency headwinds on top line is estimated to be 9% to 10% in 2015. Full year non-GAAP EPS is expected to be between $5.60 to $5.80, up 1% to 5% compared to the previous year.

We are currently revising our price estimate of $101 for Kimberly-Clark to reflect the first quarter results.

See our complete analysis for Kimberly-Clark here

Developing and Emerging Markets Plow Revenues Forward

As in the past, a bulk of Kimberly-Clark’s revenue growth in the first quarter was derived from the D&E markets. Organic revenues from D&E markets expanded by 11% year on year, compared to 1% growth in North America. D&E markets are becoming an increasingly crucial region for the company and accounted for 30% of its total revenues in 2014. The importance of this region is further underscored by the fact that Kimberly-Clark’s diaper business in D&E markets is now 1.5 times the size of its diaper business in North America. ^[1]

Further, the personal care business in the D&E markets grew by as much as 16% year on year during the quarter. This was led by rapid expansion of organic sales of diapers, to the tune of 55% in Eastern Europe, 35% in China and 15% in Brazil. The K-C Professional segment also did well in D&E markets and expanded by high-single digits during the first quarter.

It is encouraging to note that most of the organic revenue growth was derived from volume expansion rather than price hikes in all segments. This is in contrast to the ongoing trend at personal care behemoths, Procter & Gamble (NYSE: PG) and Unilever (NYSE: UL), which are deriving much of their top line growth through higher pricing.

Robust Cost Savings Continue

Kimberly-Clark’s FORCE cost saving program continued to pay dividends and yielded $90 billion in cost savings during the first quarter alone. This puts the company ahead of its target of cost savings of at least $300 million in the full year 2015, especially since Kimberly-Clark typically builds upon its cost saving program as the year progresses. ^[1]

The company attributed the healthy cost savings during the first quarter to a number of factors, including operational efficiencies, lower advertising expenses as a percentage of sales and a marginal positive currency impact on SG&A expenses.

The improvement in margins was further helped along by commodity cost deflation, which added another $10 million in savings during the quarter. Moreover, Kimberly-Clark also achieved market share gains in higher-margin super premium products, which further added to the margins. Kimberly-Clark believes that deflationary conditions in commodity costs are likely to continue through 2015 and may add $50 million to $150 million in savings over the full year. Also, the company believes that it will be able to hold on to its higher prices despite lower commodity costs in the near term. This is likely to further boost gross margins in 2015.

Cash Flows Hit by Pension Obligations

Kimberly-Clark announced in February that it will transfer its pension obligations to two insurance companies through the purchase of an annuity contract (Read: Kimberly-Clark Offloads Pension Obligations to Insurance Companies) To support this transaction, Kimberly-Clark expected to make a contribution of $400 million to $475 million to its U.S. pension plan.

The implementation of this strategy took a toll on first quarter’s cash flows, which fell to just $20 million compared to $437 million last year. Currency impact, higher working capital and charges pertaining to the healthcare spin-off further exacerbated the pressure on cash flows. Kimberly-Clark expects that the debt taken to support the contributions to the U.S. pension plan, combined with the annuity payments, will drag down cash flows in 2015 compared to the previous year.

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Kimberly-Clark 2015 First Quarter Earnings Call Transcript, Seeking Alpha, April 21, 2015 [↩] [↩] [↩]