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

Good afternoon, and welcome to Kimberly Clark's virtual presentation at the CAGNY Conference. I'm Mike Hsu, Chairman and Chief Executive Officer at Kimberly-Clark. And this afternoon, you'll hear from me; our Chief Growth Officer, Alison Lewis; and our CFO, Maria Henry. Let me start by talking about our strategies and how we plan to create long-term shareholder value. Now as a backdrop, K-C had a long history of success and a number of strengths. And that includes our global reach, our innovation capabilities and our market positions. We're leveraging these strengths and continuing to build a better company for the long term and very confident about our future. We have our portfolio of some of the most iconic, well-known and trusted brands in their respective categories, including Huggies, Kleenex, Kotex, Scott and others that you see here. We have $5 billion brands with several others that generate annual revenue of more than $0.5 billion. Our brands hold the #1 or #2 market share position in about 80 countries. Late last year, we added Softex Indonesia to our portfolio, giving us another strong market position in a large and growing market. Our brands and categories have significant growth potential, and much of our discussion today will focus on top line growth. We introduced K-C Strategy 2022 2 years ago. This plan is about driving balanced and sustainable growth and creating shareholder value through the 3 pillars that you see here: driving top line growth, leveraging our cost and financial discipline and allocating capital in value-creating ways. Today, you'll hear that we're making excellent progress with this plan. It's delivering strong results. Underpinning our strategy is the incredible talent at K-C that executes our strategy, supports our passion for continual innovation and our drive to meet the unmet needs of our consumers and customers. We have an experienced and refreshed senior team, and that brings a wealth of industry experience from their time at Kimberly-Clark and at other leading consumer products companies. This team is driving a winning culture that values performance, speed and accountability. Let me spend a little more time on our first pillar which is about growth. When I initially joined K-C, I saw a long runway of growth potential, and I see that even more clearly today. Since I became CEO, we've been clearly focused on building sustained top line growth, and that's my #1 priority. Our 2 growth strategies are to elevate our categories and expand our markets. Elevating our categories means driving premiumization, especially through innovation, that delivers enhanced consumer benefits. Expanding our markets is a focus on accelerated development of growth in D&E markets. Our primary focus in D&E markets is in personal care where there is a tremendous potential to increase category penetration. Now to enable these growth strategies, we are investing more behind our brands; we're strengthening our commercial capabilities in innovation, digital, revenue management and sales execution; and we're leveraging our global scale. While we have more work to do, I'm pleased with our progress so far. Our top line's improving. And in 2020, we grew market share overall. I want to take a moment to talk about our purpose. And more specifically, how Kimberly-Clark is growing for good. Our purpose is grounded in our values and our behaviors and drives both our social and our environmental commitments, and our focus on creating innovative products that are a win for Kimberly-Clark, our consumers and a win for the planet. I'm going to turn it over to Alison in a moment, but first, I'd love to share a quick video that brings our focus on better care for a better world to life. [Presentation]

Thanks, Mike. I'll talk a little more about the growth strategy Mike spoke about. We are elevating and expanding and importantly, doing that by accelerating and investing in commercial capabilities, all to deliver bolder growth. Let me start by reminding you that we play in terrific categories: large, totaling more than $175 billion; essential to daily life with high penetration and frequency in many parts of the world; and with growing demand overall. They also respond well to brand building, marketing, innovation, given their intimate and personal nature. We see a positive growth outlook across our categories, which is a great place to be. And we are unlocking that projected growth by doing things differently. We are building a commercial powerhouse behind the way we innovate, market and sell our products. These areas of focus against our commercial capabilities, innovation, digital-first, in-market execution, revenue growth management are highly correlated with driving growth and winning market share. And we are seeing the benefits of this acceleration of commercial capabilities. Just 18 months ago, only 32% of our top innovation was moving from region to region. Now we are at 81% scaled across 3 regions or more, with the innovation pipeline value increasing tremendously. Today, 70% of our media investment is digital, with overall increased investments in media in 2019 and 2020. This is allowing us to target and personalize our media, leveraging advanced analytics and is delivering strong ROI. Our in-market execution work, both in bricks and clicks, is moving us towards perfect store and shelf, ultimately becoming our customers' best partner. In the U.S., we moved from #7 to #2 best partner among CPG in just 2 years. Evidence that we are absolutely moving in the right direction. And finally, we are making faster, smarter and more profitable revenue management decisions every day with balance across price, mix and volume. In fact, we have delivered positive net price and positive mix in the last 2 years, and we plan to do so again this year. We are taking this elevated commercial capability and applying it against everything we do. It becomes a multiplier effect for growth as we elevate and expand. So let's talk about elevate. There are 3 ways we are elevating, leaning into tailwinds based on where the puck is going, to use a hockey analogy, against consumer needs and demand spaces. It is very much a consumer-first view, giving people more value with innovation so they're willing to pay more. Let me give you an example of each of these areas so you get a flavor for what we are doing. Consumers are looking for us to solve true pain points in baby care. Two of these top areas of need and demand are better for you and better for the planet. Over the past 18 months in North America, we have launched both Huggies Special Delivery in diapers and Pull-Ups New Leaf in pants. Both delivering elevated product experience with the softest materials, no nasties and natural plant-based. These are the most premium diapers and pants in the category. And with so many 5-star reviews on Amazon, you can see that moms are willing to pay more for the best care of baby's delicate skin and provide natural solutions. These innovations have been a key contributor to the success in North America, with mid-single-digit sales increases and about 2 points of share growth, putting us within reach of achieving the #1 share position in the combined diaper and pants category. Let's move to the other side of the world and talk China. We have such an incredible success story in driving up our premium mix via difference-making innovation and digital-first brand building. In just over 2 years across our personal care business, we have significantly increased our premium mix to almost 70%, all behind game-changing innovation. On diapers, we have a pipeline of innovation with a thin core, a 2-millimeter thick diaper, equal to the thickness of a coin with better comfort and fit as the thinnest and most flexible diaper we have had and superior performance. On feminine care, we have true insight-led innovation with launches like paw pads, girly skin, sun-kissed pure cotton imported from Australia. And launching it all through personalized performance, marketing and e-commerce. Fueling results with share gains of 1 point in diapers and 1.5 points in feminine care, with overall organic personal care growth in the mid-teens. And with all this growth, we are nearly at leadership in diapers in China with more innovation to come in 2021. New regimens is about creating new adjacencies that increase the benefit delivery. In intimate care, nearly half of consumers are unsatisfied with their current toileting routine. We are refining what consumers can expect with our combined dry and wet system, toilet paper and flushable wipes for a better clean. This leads to significant premiumization of the category, moving from $0.05 to $0.15 per job. We have created over a $300 million business in flushable wipes with about $175 million of that in North America. Now let's look at how we are expanding. Three areas here as well. Expanding is an important part of our growth engine based on where the population or demand for our products will shift. Let's start with our current D&E stronghold and why they are critical. Three words, big, growth, winning. By 2050, 80% of the world's population will be in Africa and Asia. Developing and emerging 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 category in developing and emerging was $31 billion in diapers and pants, up from $20 billion just a decade ago. And yet the average spending per baby in D&E was only about 15% of the U.S. level. So you can understand why the growth upside is massive, both in bustling global megacities where urban baby booms are taking shape, and in newly emerging economies where access and affordability are key. Today, developing and emerging accounts for about 30% of our sales, and it remains our single largest growth opportunity. We have made very good progress in the last 2 years with a positive 8% and 6% organic growth in 2019 and 2020, respectively, in personal care in D&E. We also gained market share, broadly, in our key markets in 2020. That includes Brazil, China, throughout Eastern Europe, Peru and South Africa. And looking ahead, we're continuing to invest to further build these markets and accelerate growth. We built a number of successful businesses in developing and emerging, and continue to focus on our more established positions. At the same time, we're applying that winning model to new frontier markets for us in India, Indonesia and Nigeria. The winning model is getting the right product, channel, demand creation and execution fundamentals in place. These are very different markets in the U.S. or other developed markets. For example, winning marketing is reaching a significant number of moms through hospital education programs. And the diaper is often sold in low, cash-outlaid singles in small traditional trade outlets given the low daily wage. Nigeria, India and Indonesia represent massive opportunities with 35 million births per year, which is 1/4 of the worldwide births, yet markets with very low levels of penetration. The categories are growing at a healthy double-digit rates and forecasted to do so for a very long time as disposable incomes rise. We are investing in supply chain capacity and route to market as critical business foundations. As Mike mentioned, we're also investing in D&E through selective acquisitions like in Indonesia. The Softex transaction was a compelling strategic fit. Indonesia is the sixth largest hyper market in the world at approximately $1.6 billion. And it is expected to be the third largest market in 2030, just behind the U.S. and China. Softex has strong presence in all K-C categories with proven capabilities and annual sales of more than $400 million. This transaction improves our underlying growth prospects with double-digit growth, solid profitability and strong market positions while providing terrific leverage and learnings across our portfolio. And finally, we are looking for new ways to leverage our technologies and our brand assets for new growth opportunities. We are pivoting rapidly to pursue new growth in health, wellness and protection, both at home and in the workplace as this has accelerated permanently with the pandemic. We moved quickly, taking only 6 months to deliver a market launch of a protection portfolio. Masks, leveraging nonwovens; saturated wipers expansion with 24 hours of protection; and Kleenex, gentle, skin, surface and air solutions. We see a significant opportunity for Kimberly-Clark in providing consumers with protection solutions. We are bullish on our approach that reaches high, going for growth, building a commercial powerhouse and then simply put, growing for good. The more we grow, the more good we can do as our products and brands allow people to live better. So maybe as one last proof point that this is a different Kimberly-Clark, let me share something that was just launched on February 7. That was our new global Huggies campaign. Borne from the Huggies purpose helping parents navigate the unknowns of babyhood. It recognizes that babyhood is full of joys but lots of imperfection along the way. But at Huggies, "We Got You, Baby.” A partner buy your side every step of the way. So we debuted our first ever Super Bowl spot on February 7, which had very positive reviews with an A on Yahoo!, top 5 on CNN and 3.5 out of 4 stars on AdAge. That's bold, that's reaching high. Let's have a look at the film that inspired it all. [Presentation]

Thank you, Alison. Boy, that was amazing. Good afternoon, everyone. Let me start with our strong belief that Kimberly-Clark is an attractive long-term investment. Mike and Alison have already highlighted the advantages we have with our brands and our categories, and how we're investing and changing to accelerate growth. At the same time, we're leveraging financial discipline, generating strong cash flow and returning significant cash to shareholders. In total, we see significant value creation opportunities, and we're working to realize them. As you can see, we have delivered good financial performance since we introduced K-C Strategy 2022. Results were very strong this past year with excellent execution, healthy underlying momentum and increased consumer tissue demand related to COVID-19. In 2021, we expect some of the net benefit from COVID to reverse. Because of the different COVID dynamics in 2020 and 2021, we think it's relevant to consider our performance over the 2 years. Using the midpoint of our outlook, we're projecting to grow organic sales approximately 4%, and to increase adjusted earnings per share 7% on average over the 2-year period. These growth rates are slightly above our medium-term objectives. Let me touch on some financial highlights. Consistent with our strategy, we've been increasing investment in advertising behind our brands. Spending is up nearly 50%, including an increase of about $300 million in the last 2 years. This investment, coupled with our improved commercial capabilities, is paying off with higher organic sales growth and market share gains. At the same time, we've driven down our spending in other areas between the lines, including benefits from our 2018 restructuring program. That's helped us fund a good portion of the investments we're making behind our growth agenda. To further fund our investments and help grow the bottom line, cost savings is a core strategy. We're executing 2 savings programs. The first is FORCE, which is our long-standing ongoing program focused on end-to-end supply chain productivity. The second is our 2018 global restructuring that I mentioned. That restructuring, which will be completed by the end of this year, is lowering our structural cost base by streamlining our supply chain and our overheads. Over the last 3 years, we've averaged approximately $0.5 billion in annual cost savings between these 2 programs, and we anticipate significant savings again in 2021 and beyond. Our financial discipline extends to the balance sheet. We have made outstanding progress reducing working capital. Since 2016, we've taken 19 days out of our cash conversion cycle. Improving working capital has been part of how we have increased return on invested capital. While ROIC will come down this year because of the Softex acquisition, I expect ROIC will remain healthy and top tier in the industry. Our business generates consistent strong cash flows, which provides the foundation for us to create shareholder value. Over the last 3 years, cash provided by operations has averaged about $3.1 billion, with 2020 being an all-time record. Over the last 10 years, we've generated $29 billion in cash flow. Importantly, after we invest back into the business, we have significant free cash flow to allocate for further value creation. Dividends are an important part of our investor story, and we have a long-standing commitment to return cash to shareholders. We paid a dividend 87 years in a row, and have increased the dividend for 49 consecutive years, including a 6.5% increase announced for this year. In the last 10 years, we have increased our dividend per share on average by about 5%. And in that decade, we've paid out more than $23 billion in cash to shareholders between dividends and share repurchases. So let me close our presentation with 3 key points: We're on track with K-C Strategy 2022. We're improving our top line and strengthening our brands, our market positions and our company for the long term. And finally, we're confident in our ability to deliver balanced and sustainable growth and create shareholder value. As we wrap up today, please note that the standard reminders apply about forward-looking statements we made and any reference to non-GAAP financial measures. Thanks for your interest in Kimberly-Clark.