Kimberly-Clark Corporation (KMB) Earnings Call Transcript & Summary

Our next presentation, we're pleased to welcome Kimberly-Clark. When Mike Hsu stepped into the CEO role, it was through a clear succession plan, but it didn't seem that there was going to be strategic change coming as well. And yet over the past several months, we've seen a most growth-oriented mindset that clearly take hold and in particular, a real focus on in-market execution. Today, we have Mike and also CFO, Maria Henry, with us. They're going to go through some prepared remarks, and then I'll host a Q&A session. So Mike and Maria, I'll pass it over to you.

Okay. Thank you, Lauren. Thank you for having us. And I hope you and certainly, everyone on this call are staying healthy and safe. I would like to spend a few minutes highlighting our priorities in the current environment, especially our recent results and our medium-term strategies. The standard reminders apply today about any forward-looking statements that we make and any reference to non-GAAP financial measures. So I'll refer you to our latest 10-K and website for any further information. Our four key messages for today: one, we're prioritizing the health and safety of our people and our consumers. We're executing our strategies well. We're delivering excellent financial results, and we're very optimistic about our opportunities to generate long-term growth and create shareholder value. Now we have three operating priorities in the current environment, and we're managing them well. First and foremost, we're focused on the health and safety of our employees and our consumers. And throughout our 148-year history, this has never been more important than it is right now. Second, we're proactively managing our global supply chain to ensure supply of our essential products, and our teams have done a great job keeping our supply chain rolling, and we haven't had any really material disruptions to date. And third, we're prudently managing the business through near-term volatility while continuing to strengthen the long-term health of Kimberly-Clark. Now we introduced K-C Strategy 2022 in January of last year, leading up to the company's 150th anniversary in 2022. The plan will enable us to deliver balanced and sustainable growth and has really three strategies: accelerate growth of our portfolio of iconic brands; leverage cost and financial discipline to fund growth and improve margins; and allocate capital in value-creating ways. The strategy is working, and we remain committed to it. K-C 2022 will enable us to achieve our medium-term financial objectives. Our top line objective is to grow sales and organic sales 1% to 3% annually, and we're striving to be in the upper half of that range. On the bottom line, our objective is to increase EPS mid-single digits annually. We expect to deliver solid operating profit growth, and we'll reinvest in marketing to fuel the top line, which we've been doing over the past 18 months. Our objective is to at least maintain our top-tier ROIC, and we're targeting dividend increases generally in line with EPS growth. We believe a strong dividend is an important part of our investment proposition. Longer term, we're optimistic about the potential of our categories and our business to grow at faster rates. We made good progress executing K-C 2022 last year. Organic sales were up 4%, driven by selling price increases and strong market execution. And that success on the top line enabled us to achieve mid single-digit-growth in adjusted operating profit and adjusted EPS. ROIC also improved nicely. Through the first half of this year, our results have been outstanding. And in July, we reinstated guidance and raised our outlook for the full year. The increase in our organic sales outlook reflects a combination of improved underlying brand performance and higher demand in consumer tissue because of COVID-19. The higher organic sales, along with increased cost savings, enabled us to also raise our outlook for operating profit and earnings. And importantly, we also raised our brand and capability investment to keep our top line momentum going. To accelerate growth, we're sharpening our focus on the consumer, and we're driving against two consumer-centric growth pillars: elevate the core; and accelerate growth in D&E markets. To execute that strategy, we're deploying a disciplined approach to invest and build commercial capability in the four areas that you can see on this slide. We're applying greater focus, driving more enterprise scale and improving execution, and this is similar to how we approach cost management over the years. We're elevating our core by delivering premium innovation that solve bigger problems for consumers and make our brands worth more, and I'll touch on three examples. Last summer, we launched Huggies Special Delivery, our most premium diaper in the U.S. This diaper includes naturally sourced materials and has achieved about 1 point of market share even with limited distribution. We're currently launching Pull-Ups New Leaf in the U.S., which also features supersoft natural materials and is the most premium training pants in the market. Outside the U.S., we have our Huggies Nature Made lineup in South Korea. We've launched numerous high-end offerings here, including a super premium Nature Made organic product that we launched last year. Our diaper sales in South Korea are now nearly half super premium. We're also pivoting rapidly to pursue new growth opportunities related to health, wellness and protection, both at home and in the workplace. In consumer, we're launching KLEENEX PROACTIVE CARE in the U.K. and other EMEA markets. This includes hand towels, antibacterial hand and face wipes, sanitizing gel and face masks. These products will help protect consumers where they are most vulnerable, on their skin when they touch surfaces and in the air. In K-C Professional, we recently launched new masks that feature our superior nonwovens technology. We'll also be expanding our wipers lineup, including Scott 24, which delivers 24-hour protection from bacteria. Now let me turn to D&E markets where our biggest long-term growth opportunities exist. Looking specifically at diapers, D&E is where 90% of the world's babies are born, where GDP per capita and the middle class are expanding and where penetration and frequency are growing. In 2019, the size of the diaper category in D&E was $31 billion. That was up from $20 billion just a decade ago. And yet, the average spending per baby in D&E is only about a 15%, that's 1 5, about 15% of the U.S. level, as the graphic shows significant category potential exists as that spending rate increases over time. Now while we may not see $100 billion category in our lifetime, these markets are developing, just as China has done significantly over the last 30 years. So we're investing to build these markets and accelerate growth. We're investing in our brands, innovations and commercial capability. We're also placing strong emphasis on category building, marketing and route to market strategies. We're obviously also investing in D&E through M&A. And just last week, we announced the $1.2 billion acquisition of Softex in Indonesia. This transaction is a perfect strategic fit with our focus on accelerating growth in personal care and D&E. This acquisition significantly expands our presence in Indonesia. That includes the diaper category in which we don't compete today. The diaper market in Indonesia is already the sixth largest in the world, has been growing at double-digit rates and is expected to continue growing strongly for a long time. So Softex had sales of about $420 million last year, all in personal care, and about 80% of which were in diapers. They've built a strong business with double-digit growth, solid profitability and strong market positions. So this transaction really improves our underlying growth prospects, and we're really excited about leveraging our successful D&E growth strategies on the Softex brands. Consistent with K-C Strategy 2022, we're also accelerating our advertising investment to fuel market share momentum and better position us for sustainable long-term success. So we increased our spending on advertising by about 60 basis points in 2019, and we expect to exceed that rate of increase this year. Our focus is on digital, where our ROIs are higher. Our spending on digital is approximately 2/3 of our overall paid media spending. Our advertising is targeted to support innovation launches and also build brand equity, and these marketing strategies are paying off, both in terms of top line growth and market shares. And in fact, we're tracking to improve or maintain share this year in about 60% of our category country combinations. Now to fund all that investment and help grow the bottom line, cost savings remain a core strategy for us, and so we're executing two savings programs. The first is FORCE, which is our long-standing ongoing program. FORCE is focused on improving our end-to-end supply chain, leveraging our global supply chain organization. The second program is our 2018 global restructuring, and this is our biggest ever restructuring, and it's lowering our structural cost base by streamlining our overhead and our supply chain costs. For 2020, we're targeting more than $0.5 billion in combined savings from both of these programs. Now we also have a long-standing commitment to return cash to shareholders as part of our shareholder-friendly capital allocation strategy. So we've paid a dividend 86 years in a row and increased the dividend for 48 consecutive years. In the last 10 years, we've increased our dividend per share by more than 60%. And over that decade, we've paid out more than $23 billion in cash to shareholders between dividends and share repurchases. We've also been focused on sustainability for a long time and have made excellent progress, which you can read about in our 17th Annual Sustainability Report. Now we recently launched the next phase of our journey, which we're calling Sustainability 2030. By 2030, we expect to advance the well-being of 1 billion people through social programs, and we plan to reduce our environmental footprint by half with a focus on plastics, water, carbon and forest. We're strongly committed to sustainability and are really proud of our track record. So in closing, Lauren, we're making excellent progress in delivering strong performance this year. We're investing to position K-C for long-term success. We're driving balanced and sustainable growth through K-C Strategy 2022, and we're confident in our ability to create long-term shareholder value. So with that, I'll hand it back to you, Lauren and Maria, and I would be happy to take any questions that you might have.

Great. Okay. Good. I got the video back on. And then Mike and Maria, if you can put your video back on, that will be great. Perfect, except Mike's sitting in the dark. There we go. Okay. Perfect. So, Mike, your presentation noted clearly, you have continued optimism in the long-term potential of the categories and your business. I'd love to get a sense of how some of the things you're doing on the growth front, the investments, the focus on capabilities, people, how that ties into those longer-term growth aspirations. And also how do category conditions, sort of including projections for declining birth rates in the U.S. factor into your longer term thinking?

Yes. Well, one, I would say, overall -- and I think the long-term thesis for us is that we're still in the very early innings of category development, of our categories globally, but especially in D&E markets. And so we're really driving K-C 2022 because we believe that will enable us to unlock faster growth. Definitely, in D&E, I think we talked about Indonesia. That's just one of the markets. But certainly, if you think about it, I think we're -- I would characterize us as only being in the second inning of the game in D&E markets. For example, China is the world's largest diaper market today, but that market, the category in China will likely at least double or will probably triple over the next 10 or 20 years. Similarly, as we talked about with Indonesia, today, it's the sixth largest diaper market. But over the next 10 years, we expect it will become the third largest diaper market, will more than triple over that time period. Once you get past those two highly developed ones now, then we have India and Africa, and there's many other markets that are coming up the development curve on top of that. So that's one part of our strategy, which is to expand our presence and develop markets in developing emerging markets. The other, we still think there's a lot of opportunity for us to premiumize markets and develop markets along the dimensions of comfort, health, which is critical in this COVID environment; natural, organic or sustainable; and providing those offerings that make our brands worth more. So we're excited about both those opportunities. And then, Lauren, the way that I think you've observed over time that we're really trying to drive that execution is really a systematic approach, which we're calling kind of commercial capability development. And that really encompasses innovation, marketing or digital marketing, especially sales execution and then revenue management for us.

So I'm going to come back to one part of my question. But on the commercial capabilities piece, I think under the 2022 plan that you referenced in your introduction, I think there's just sort of a lot more to it than maybe was initially perceived externally. And some of the changes you've made are across your team. And I think you've made some pretty interesting hires, Chief Growth Officer, Chief Digital Marketing Officer, both of them with pretty tremendous background. So if you could talk a little bit about some of the capabilities you're hoping to develop in even having these two newer positions and how these two people kind of fit in with that broader senior leadership team that you've really put together in the last, I guess, now almost three years.

Yes. We have actually made a lot of thoughtful changes on the leadership team. I probably didn't realize how extensive it was until you raised the question. So it was -- I think out of 13 directs, I think we have 11 that are in different roles. And I would say, I'm really proud of the leadership team. I think we have a diverse and collaborative leadership team in our recent additions that you know are bringing, I think, really world-class experiences, at the same time, leveraging strong K-C competencies. And what we're really focused on, in Alison's words, are -- is we're really trying to build powerhouse capability here. So we have made a lot of changes. I think the key attributes that we've been looking for in our leadership are around really having strong conviction around a brand-building mentality, and that's one piece; second, deep expertise in their core area; and then the critical last piece is highly collaborative. And I think we really have that on our leadership team right now. Now with the recent additions, I would say, I think we're pretty fortunate between Alison; Zena Arnold, who's our Chief Digital & Marketing Officer; Gustavo Ghory, who just joined us as our Chief -- Global Chief Supply Officer, really bring that expertise. And as I think you all know, and Russ Torres, who joined our K-C Professional business, he came up from the outside as well, really a strong seasoned operator with a lot of experience in different types of categories. Just to kind of give you an example of Alison, I think she was in a similar role at J&J and then in a similar role at Coca-Cola before that, so she brings really world-class experience from world class companies and I'll tell you a funny story. I had just made the offer and had got positive signals, and then I was at a top meeting out in Silicon Valley with Google. And so we were having a great meeting with Google and they said, "Hey, you guys are really a great partner. But just so we're clear, Mike, you're not the best. And so hopefully, we can call you one of our best partners by this time next year. And just for reference, our best partner will be presenting at our Google Live conference, and it's a woman named Alison Lewis." And I was thinking to myself, "Well, I hope it's the same presenter next year." So I do think she does bring a wealth of experience, whether it's digital or a fundamental brand marketing or insight development. And she started to bring that change to our team. And you know Zena, who has great experience, who actually came and joined us from Google, where she was running the Chromebooks business most recently. But she's brought other leaders in as well, who have great experience, particularly in D&E markets. Our global category leader on baby and childcare right now joins us from deep experience. I think he spent the majority of his career in Japan and Istanbul, and so he's really focused on building out international markets. And so we're really excited about that capability. Similarly, I think the overall theme that I get from Zena, Gustavo was -- wow, there's some really strong capability and some really great tools. I think Gustavo pointed out in manufacturing, like we have some world-class tools, and so I give you an A on some of that. Where I give the team a C or maybe a D is we're not great at standardizing or rolling out those tools broadly across markets. And that's some discipline that I think Alison and Gustavo will bring from a functional perspective. So I'll pause there. I don't know if you have [indiscernible] to answer questions there.

No, no. That's great. Let me shift gears a little bit. I wanted -- do you to talk more about Softex. And maybe, Maria, you could take this one. So you gave us some statistics on the size of the market already, but I was curious about kind of GDP per capita, how that ties into diaper category development. And then also, Maria, just profitability, in particular, my sense is that Softex has pretty attractive profitability, but I wanted to just understand maybe more about their main strength, whether that profit profile should remain sustainable as you invest to grow the business. So it would be great if you could answer those.

Sure, sure. Well, we are very excited about the Softex acquisition as Mike talked about. And, Lauren, you've heard me say for years now that we do have an M&A group, and we do look at everything that moves. So it's nice that we were able to find an asset that is such a perfect overlap with our strategy, and 100% of their revenues are in the personal care categories that we're looking to expand in the D&E market. So a really great strategic fit as a company. And Mike talked about some of the highlights of the company itself. But when you look at the Indonesian market, as you mentioned, today, the GDP per capita is about $4,000. That's a great point in a diaper category, kind of an inflection point because it takes about $4,000 to $5,000 GDP per capita to come into the categories. And then as that grows, the usage grows over time. And China is a great benchmark for that. When we look at where China was 10 years ago, I think it was $4,500 GDP per capita. Today, it's over $10,000, and we've seen the rapid growth in China diaper market tripling over that same period of time. So it's kind of a perfect time to get into the Indonesian market, given that it's at a bit of an inflection point. In terms of their GDP per capita, Indonesia is expected to double over the same period of time, and as Mike mentioned, the -- in terms of the size of the diaper market, it's expected to go from the sixth largest diaper market today to the third largest diaper market in the world by 2030. So really, really strong growth market, growth potential with the right macro economics, looking at it and the perfect strategic overlap. It's also a very well-run company and has good profitability as a company. It's -- there are a few things that we'll need to do to it. We'll need to add a bit of cost around transitioning it from a stand-alone Indonesian company into a part of our portfolio as a global U.S.-based business. That's all been incorporated into our models. We will look to preserve the way that they operate the company today. So they've been able to craft a very successful, functional company on a low-cost structure, and we will look to preserve that. The majority of where we'll be having synergies on this deal are on the revenue side, more so than the cost side, where we have some expertise that we can bring, that can fuel and continue to accelerate the growth on Softex. So good company, well run, profitable, and we'll look to continue that as we move forward. And from a shareholder value creation standpoint, this deal has strong double digit returns, and we believe is a winner for shareholder value creation over the long term.

Great. And so I'm going to switch gears entirely and I'm going to talk a bit about the U.S. First thing was just going to be -- we've seen projections for declines in the U.S. birth rate in 2020 and probably for the next two years, I guess, all dependent on how COVID persists and so on and the resultant recession. So Mike or Maria, either one of you that want to take this, just how should we factor that -- these thoughts on the U.S. birth rate into the projections for the next year or two, three, whatever is the appropriate conversation? But it is a question we've been getting increasingly from investors.

Yes. Lauren, we are hearing the same thing, although we haven't seen it in the data yet. And the last set of data that we had on birthrate was actually a slight improvement at the beginning of this year. I think the category -- the births had been down, I think, the prior year or so, about 2%, and I think we had seen an improvement to be down 1%. But I see -- I read the same articles that say -- that predict a birth rate decline. I also read some articles that say, hey, given everybody being at home, that you should see a growth rate tick up as well. But in either case, I don't think we've seen anything in the data thus far. If you look at the last four weeks, there's been a little stock up, destock effect in child care. But in the last four weeks, I think the category was up about 2% overall revenue. So kind of about where it had been historically, I think, over time. That said, I think we feel very good about our business. Our business is performing well. Our team is doing a great job driving the elevate strategy on Huggies and I think driving the category up, and our customers are really supporting the strategy. So we feel good about kind of where we are right now.

Okay. Great. And if I recall, I was actually looking back some of my old, very old stuff. But the last time that there was a sustained decline in the birth rate, I mean, Kimberly-Clark's personal care business in North America grew right through that and arguably, with a less growth-focused strategy. So not a lot of precedent, I guess, for being a big factor, too.