Kimberly-Clark Will Hike Prices on Health Care Products to Protect Margins
After the price hikes for several of its popular global brands such as Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend earlier this year, Kimberly-Clark (NYSE:KMB) has announced further price increases on its medical disposable health care products. The firm will soon implement double-digit price increase on synthetic exam gloves due to increased demand and higher input costs. Kimberly-Clark competes with the other leading players in tissue products such as Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL) as well as other local players and supermarket private labels. It holds the first or second position in terms of market share for a number of personal care products that it sells in over 80 of the 150 countries at the same time touching the lives of nearly a quarter of the world’s population.
The company makes medical disposables such as surgical drapes and gowns, infection control products, face masks, exam gloves and respiratory products which are sold under the Kimberly Clark, Ballard, ON-Q and other brand names, which together make up over 5% of our $65.80 Trefis price estimate of its stock.
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Input Inflation Compels Pricing
Struggling with high input-cost inflation, Kimberly-Clark raised prices of baby care products in the range of 3-7% and around 7% for consumer tissues in March 2011. It has again announced a double-digit price increase on synthetic exam gloves. Despite aggressive cost-reduction measures, Kimberly Clark faces significant inflationary pressure due to higher cost of producing raw materials as well as steep growth in the demand of these raw materials, particularly butadiene and acrylonitrile.
Medical Disposables Profit Margins Under Pressure
Despite revenues from medical disposables sales rising by a healthy 7% in 2010, its EBITDA margin took a hit dropping from over 21% to less than 16% on account of inflation in key inputs, higher selling and general expenses and overall lower selling prices. This was further exacerbated by the ongoing litigation expenses related to the I-Flow acquisition. To add to this, Congress in 2010 passed a law imposing 2.3% excise tax on the gross sales amount for medical-device manufacturers that would go effect in 2013 and would put further pressure on EBITDA margins.
As cost pressures continue to persist despite several cost-cutting measures, Kimberly-Clark will likely need to resort to higher pricing to protect its EBITDA over the coming years. If EBITDA margins were to flatten out at 13% by the end of our forecast period instead of near 16% according to our forecasts, Kimberly-Clark’s stock could see just under 5% downside to our current estimates.