Kimberly-Clark’s Organic Q3 Revenue Growth Likely Was Offset by Currency Headwinds

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Kimberly-Clark

Leading tissue products manufacturer Kimberly-Clark (NYSE:KMB) is scheduled to report its fiscal 2015 third quarter earnings on October 21st. [1] Currency headwinds in Q3 likely continued to drive down revenues and wipe out the volume growth achieved by Kimberly-Clark’s shrewd pricing strategy. The company is likely to report better on the margins front as its FORCE (Focused on Reducing Costs Everywhere) cost savings program is expected to yield significant benefits in the second half of the year. Input cost deflation is likely to provide further breathing room to the bottom-line. [2]

In the second quarter, Kimberly-Clark achieved volume growth of 3% year on year in each of its three divisions. This was however wiped out by significant adverse currency movements, which exerted a drag of 10 percentage points on the total revenue growth. (Read: Currency Headwinds Drag Down Kimberly-Clark’s Revenues As FORCE Continues to Generate Outsized Savings) For the full year, the company expects non-GAAP revenue growth to remain muted at 3% to 5%. In GAAP terms, its revenues are likely to contract compared to the previous year due to severe currency headwinds. [2]

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

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See our complete analysis for Kimberly-Clark here

How Long Can K-C Professional Revenues be Propped Up by Sales to Halyard Health?

We have previously posited that Kimberly-Clark’s stable volume growth in all its divisions is attributable to its shrewd and consumer-friendly pricing strategy. However, it is worth noting that there is another factor in play for the revenue growth of the K-C Professional division. In the last two quarters, K-C Professional benefitted from sale of nonwovens to Halyard Health, Kimberly-Clark’s erstwhile healthcare division which has since been spun off into a separate company. The short term agreement with Halyard Health contributed 3 percentage points to the revenue growth of K-C Professional in each of the first two quarters.

Kimberly-Clark’s explicitly discloses in its SEC filings that the sales are part of a “near-term supply agreement”. [3] The company has not provided the duration of this agreement, nor is it clear if the agreement will be renewed later. Naturally, upon the termination of this agreement, K-C Professional’s sales are likely to decline in comparison to the previous quarters. The silver lining in such a scenario is that K-C Professional accounts for less than 20% of Kimberly-Clark’s total revenues, so a termination of the agreement with Halyard Health is unlikely to have a significant impact on the company’s total revenue growth.

Margin Expansion Likely to Continue

Kimberly-Clark’s FORCE cost saving program has consistently yielded significant benefits and provided respite from the impact of currency headwinds to the company’s bottom-line. The trend is likely to continue in the third quarter as savings from the program are expected to increase in the second half of the year. [2]

Additionally, Kimberly-Clark’s bottom-line is also expected to be supported by savings from the organizational restructuring program and input cost deflation. However, the impact of these benefits is expected to be relatively minor in comparison to the savings from the FORCE program. Needless to say, a large portion of the total cost savings is expected to be wiped out by the impact of adverse currency movements. The company has also stepped up its investments in its “brands and targeted growth initiatives”, which may further offset the cost savings to some extent. [2]

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Notes:
  1. Kimberly-Clark Investor Relations []
  2. Kimberly-Clark Fiscal 2015 Second Quarter Earnings Call Transcript, Seeking Alpha, July 23, 2015 [] [] [] []
  3. Kimberly-Clark SEC Filings []