Will Kimberly-Clark’s Volume Growth and Cost Savings be Enough to Offset Currency Headwinds in Q2?

Leading tissue products manufacturer Kimberly-Clark (NYSE:KMB) is scheduled to report its second quarter earnings on July 23rd. ^[1] The company had a strong first quarter with commendable expansion in top-line as well as the bottom-line in non-GAAP terms. (Read: Kimberly-Clark Posts Strong Volume Growth and Margin Expansion in Q1) Kimberly-Clark’s organic revenue growth in the first quarter was primarily due to higher volumes rather than increased pricing. This bodes well for the company’s second quarter results since the macroeconomic environment has remained largely unchanged during this period. The non-GAAP operating margin likely benefited from the robust cost savings program in the second quarter as well.

Although we expect Kimberly-Clark’s non-GAAP metrics  improved in the second quarter, currency headwinds may play spoilsport on the GAAP results. In the first quarter, the company’s revenue growth rate was dragged down by 9 percentage points by adverse foreign currency movements. ^[2] We expect that this trend  continued in the second quarter also and GAAP revenues are likely to be lower compared to the previous year. However, the negative impact of currency movements on profits may be partially offset by cost savings and commodity cost deflation.

Our price estimate of $111 for Kimberly-Clark is nearly the same as its current market price.

See our complete analysis for Kimberly-Clark here

Shrewd Pricing Strategy Protecting Kimberly-Clark’s Volumes

Kimberly-Clark, like all other global consumer processing goods companies based in the US, has been facing the brunt of a strong dollar. Its revenue growth took a beating of 9 percentage points in the first quarter due to significant negative currency impact on the revenues of each of its four divisions. However, Kimberly-Clark was able to offset much of the currency headwinds by a clever pricing strategy.

The company is selectively raising prices to counter the currency impact, but is taking care to keep the price hikes in check so as to not drive customers away to cheaper alternatives. This is clear from revenue growth of the Personal Care division, which suffered the highest currency headwind of 10 percentage points in the first quarter. Yet, volume growth contributed 4 percentage points to organic revenue growth of 7% year on year, despite higher pricing. ^[2]

Separately, Kimberly-Clark has also stated that historically, it passed on 60-70% of the benefits arising from lower commodity costs to consumers, in the form of lower prices. However, this time around, the company will retain a higher proportion of the benefits and will not lower prices as much as before. ^[3] This move is expected to help Kimberly-Clark weather the severe currency headwinds without risking volume growth by raising prices.

Robust Cost Savings Program and Cost Deflation Likely to Bolster Margins

Kimberly-Clark’s FORCE (Focused On Reducing Costs Everywhere) cost saving program is still going strong and is expected to reap more benefits in the second quarter. The company achieved cost savings of $90 million in the first quarter alone, putting it well on its way to achieving the annual target of $300 million in cost savings. ^[3] This trend is expected to continue in the second quarter as well and further improvement in margins is likely.

Further, Kimberly-Clark also benefited from lower commodity costs in the first quarter, marking it as the first occurrence of cost deflation in over two years. The company expects total benefit from commodity cost deflation to be in the range of $50-$100 million in fiscal 2015, of which $10 million benefit was realized in the first quarter. Since a large chunk of the benefit realized from the lower input costs will not be passed on to the consumers and prices are expected to remain sticky, it could result in higher margins for the company.

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1. Kimberly-Clark Press Release, July 9, 2015 [↩]
2. Kimberly-Clark Fiscal 2015 First Quarter SEC Filing [↩] [↩]
3. Kimberly-Clark Fiscal 2015 First Quarter Conference Call Transcript, Seeking Alpha, April 21, 2015 [↩] [↩]