Kimberly-Clark (NYSE:KMB) is due to announce its Q1 results this Friday. The high-cost environment and weakened demand in the developed markets took a significant toll on the company’s sales and margins last year. Despite some cost moderation in the latter half of the fiscal, the company-wide EBITDA margin fell to 19% in 2011 from 20.6% in 2010. The personal care segment suffered most with a four-percentage point margin decline last year after seeing five continuous years of stable EBITDA margins. During the upcoming earnings, we will watch for updates on the improvements in the cost environment and margins as well as its sales trend, particularly in North America. Kimberly-Clark competes with Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL).
Input Inflation Trend In Focus
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The company-wide EBITDA margin for Kimberly-Clark fell to 19% in 2011, despite a 2-3% increase in selling prices and $265 million in cost savings. This fall can be attributed to high input commodity inflation, which increased input costs by $580 million during the year. Nonetheless, input costs moderated over the second half of 2011, which helped gross margins improve by 1 percentage point compared to the first half of the year, supported by higher prices. This quarter we will look at trends of further input cost moderation and improvements in its bottom-line.
Personal Care Segment Hard Hit
The company sales have suffered due to weakened demand, and the sales volumes for its personal care products in the core markets of North America and Europe have been declining. The division’s margin also suffered a sudden four-percentage point decline last year after seeing stable EBITDA margin for five prior years. The tissue segment, nonetheless, managed stable results. This quarter, we will particularly watch for improvements in the personal care segment demand and margins. Kimberly Clark’s personal care division (which includes Baby Care and Feminine Care and Adult Incontinence products) contributes to more than 48% of its stock value.
We currently expect input costs to ease and the personal care division to recover some of its margins, going forward. There could be a 10-15% upside to our current price estimate if the margin improves to the 2009-2010 levels of 24-25% by 2018. However, KMB’s strategic marketing and R&D spending is likely to increase faster than sales this year, primarily supporting product innovation, targeted growth initiatives and overall brand equity, which could eat up some up the margin improvement.
We have a $76.54 Trefis price estimate for Kimberly-Clark, almost in-line with the current market price.