Currency Headwinds Drag Down Kimberly-Clark’s Revenues As FORCE Continues to Generate Outsized Savings

Manufacturer of popular brands like Huggies and Kotex, Kimberly-Clark (NYSE:KMB), reported its fiscal 2015 second quarter earnings on July 23rd. ^[1] Currency headwinds exerted a drag of 10 percentage points on Kimberly-Clark’s revenues, negating the organic revenue growth rate of 4% year on year. Nevertheless, each of the company’s three segments achieved volume growth of 3% year on year in the second quarter, which reinforces Kimberly-Clark’s resilience in the face of adverse macroeconomic conditions. ^[1]

Despite the relatively low top-line growth, robust cost savings helped the company achieve an expansion of 6% year on year in adjusted EPS. Therefore, although the top-line growth and bottom-line expansion were not sufficient to offset strong currency headwinds, we believe that Kimberly-Clark’s underlying performance remained strong in the second quarter.

It is worth noting that, unlike its competitors like Unilever (NYSE:UL) and Procter & Gamble (NYSE:PG), Kimberly-Clark has chosen to battle unfavorable currency movements by improving its profit margin through cost savings rather than price hikes. This is evident from the fact that in the second quarter, pricing growth was negative in the Consumer and Professional tissue divisions, and just 1% in the Personal Care division. ^[1]

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

Consumer-friendly Pricing Strategy Propping Up Volumes

As we previously hypothesized, Kimberly-Clark’s shrewd pricing strategy is helping it retain volume growth at a time when most global consumer processed good companies are struggling with sluggish volume growth. (Read: P&G Reports Moderate Q3 Results, Lays Out Future Growth Strategy) Instead of passing on the full impact of adverse currency movements to the consumers through raising prices, Kimberly-Clark is absorbing the currency impact and offsetting most of it against robust cost savings.

It is enforcing higher prices primarily in the Personal Care division, which is facing the brunt of currency headwinds. In the second quarter, currency headwinds dragged down the revenues of the Personal Care division by 10 percentage points, yet price hikes contributed just 1% to organic revenue growth of the division. This strategy has allowed Kimberly-Clark to achieve sustainable volume growth in each quarter despite sluggish consumption in most regions of the world.

Input cost deflation is playing a key role in letting Kimberly-Clark reduce prices even in the face of rampaging currency headwinds. In the second quarter, it benefited to the tune of $40 million from lower costs of oil-based materials. ^[2] The company historically passed on 60-70% of such benefits to consumers, but previously stated that it plans to retain and reinvest a higher level of savings from the input costs into the company. ^[3] In other words, even though Kimberly-Clark’s cost of production is falling, it has reduced prices only marginally; thereby allowing it to weather adverse currency movements without resorting to price hikes. Full-year cost deflation is expected to range from $100 million to $200 million, providing sufficient buffer for the company to continue its pricing strategy through the rest of the year.

FORCE Program Continues to Squeeze Out Cost Savings

Kimberly-Clark’s FORCE (Focused On Reducing Costs Everywhere) program continued to generate substantial cost savings in the second quarter. Having achieved $105 million in cost savings in the second quarter, the company has raised its guidance of full-year FORCE cost savings to a minimum of $350 million, up from the original estimate of $300 million. ^[2]

These savings, along with other operational efficiencies, helped the company improve its second quarter adjusted (non-GAAP) gross margin by 140 basis points and the adjusted (non-GAAP) operating margin by 130 basis points. The sustained cost savings achieved by the company has helped it raise its full year non-GAAP EPS guidance to $5.65 to $5.80, up from the original $5.60 to $5.80. Kimberly-Clark believes that this level of annual cost savings is sustainable through further improvements in the supply chain. ^[2]

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More Trefis Research

1. Kimberly-Clark Fiscal 2015 Second Quarter SEC Filing [↩] [↩] [↩]
2. Kimberly-Clark Fiscal 2015 Second Quarter Earnings Call Transcript, Seeking Alpha, July 23, 2015 [↩] [↩] [↩]
3. Kimberly-Clark Fiscal 2015 First Quarter Conference Call Transcript, Seeking Alpha, April 21, 2015 [↩]