Kimberly Clark’s Net Sales Decline But Margins Improve

Kimberly-Clark (NYSE:KMB) announced its third quarter earnings on October 24. Organic sales grew 3% driven by 2% growth in volumes and 1% increase in prices. However, net sales, which include the impact of unfavorable currency movements and the pulp and tissue restructuring actions, dropped 3% to $5.2 billion. The company announced the initiation of a broad restructuring program in Europe, allowing it to focus on higher growth markets. It also saw a substantial increase in margins aided by a combination of the FORCE cost-saving program and falling commodity prices.

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Exit from unprofitable diaper business in Europe

The company has decided to exit the open diaper category and some other low margin businesses, most of which are in the consumer tissue segment, in Western and Central Europe. It will shut down five manufacturing plants and cut over 1,500 jobs in the region. This is expected to improve overall profitability in the continent while allowing it to focus more on high growth markets such as China, South Africa and Brazil. Restructuring expenses for these actions will be incurred in 2014 and expected to be in the range of $300-400 million before tax.

Kimberly-Clark’s Huggies diaper brand has a 12% share of the European diaper market, lagging behind market leader P&G’s Pampers and a number of private labels. The company decided to cut its losses in a business which has not seen a turnaround despite numerous attempts to increase profitability and gain market share. It will instead turn to regions where the diaper segment has performed impressively such as China, where diaper volumes grew 45% this quarter on a y-o-y basis. We believe this shift in focus could promote long-term growth in the division’s total volumes and global market share.

Other categories of personal care performed far better in Europe with volumes growing 9%, primarily driven by growth in non-branded offerings and Huggies baby wipes. However, this was offset by an unfavorable currency impact of 11%, leading to a net sales decline of 2%. Other geographic segments of the division saw similar results with growth in volumes being offset by unfavorable currency swings. Overall, the division reported net sales growth of 1% y-o-y with volume growth of 4% and price increases of 2% partly offset by a currency impact of 5%.

Margins boosted by falling commodity prices

Kimberly-Clark saw a significant improvement in margins with adjusted gross margins and operating margins growing by 290 and 140 basis points, respectively, on a y-o-y basis. Margin expansion was driven by organic sales growth, cost savings of $85 million under the FORCE program, and a decrease in input costs due to a fall in commodity prices.

The FORCE program has led to cumulative cost savings of over $1.6 billion over the past eight years and continues to gain momentum. The company expects to save $515 million for the two years ending 2012, which exceeds its initial saving target $400-500 million from 2011-2013.

We will soon update our $86 price estimate for Kimberly-Clark based on the earnings release.

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