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

Hi. Good morning, everyone. I'm delighted to welcome Mike Hsu, CEO of Kimberly-Clark; and Maria Henry, who is the CFO. [Operator Instructions] We'll try and integrate the best of those questions as we go through the question today. Without -- with that and without much further ado, I want to hand over the mic to Mike, who is going to make a quick presentation before we dive into the Q&A. So Mike, over to you. Welcome.

Okay. Thank you, Callum. Thanks for having us. We're certainly happy to be here with you today and appreciate the opportunity to discuss our business, our company with you today. I'll start by sharing some strategy -- some of our strategies for growth and long-term value creation. And I'm going to also touch on some of the specific challenges we're facing this year. First, as I get into it, the standard reminders apply today. I'm not going to read this all to you, but about forward-looking statements we make in any reference to all non-GAAP financial measures. I refer you to our latest 10-K and our website for further information. Kimberly-Clark has a long history and successful history and a number of key strengths. These include our global reach, our innovation, technology and leading market positions. We compete in 3 segments, the largest being personal care with about half of our overall sales. And we have a portfolio of iconic brands and trusted brands, including Huggies, Kleenex, Kotex and Scott. Our brands hold the #1 or #2 market share position in about 80 countries, and we believe our brands, categories and markets have significant growth potential. We introduced K-C Strategy 2022 when I assumed this role back in 2019. And Strategy 2022 was our medium-term plan to drive balanced and sustainable growth and create shareholder value. And it really has 3 components: one, driving growth of our portfolio of iconic brands; leveraging our cost and financial discipline; and allocating capital in value-creating ways. And we're making strong progress on this plan and it's enabling strong results. Underpinning that strategy is our talented and dedicated team at K-C. Our organization is really passionate about serving our consumers and our customers, and we strive to delight them with a value-added innovation and also believe that superior local execution is a hallmark of the K-C way. We also have a refreshed and seasoned senior team that brings a wealth of market, technical and functional expertise, both developed from within Kimberly-Clark and from other leading companies. Our team is driving a winning culture that value is growing for good. I would like to highlight our first strategic pillar, which is growing our portfolio of iconic brands. Now when I joined K-C nearly 9 years ago, I saw a long runway of growth, and I see that even more clearly today. Accelerating growth and enhancing commercial capabilities to enhance sustained top line growth has been and will continue to be my #1 priority. We intend to grow by elevating our categories and expanding our markets. Elevate our categories means driving premiumization, especially through innovation that delivers enhanced consumer benefits. Expand our markets is accelerating development of our D&E markets, and our focus is on personal care, which is still in the early stages of development across D&E. There remains tremendous opportunity for us to expand category penetration. Now to enable these strategies, we're also investing more in our brands and in strengthening our commercial capability. And our focus is on building powerhouse capability and innovation, digital, revenue management and sales execution by more fully leveraging our global scale. Now I'd like to double-click on how we're enhancing our commercial capability and leveraging our global scale to enable superior local execution. Our program here to deliver valuable consumer-inspired innovation has made strides in really 3 big areas: First, we're developing deeper insight on the most salient consumer needs; second, we're focusing on technology development on solving the consumer's biggest problems. These technology platforms are coordinated across our global network; and third, we embrace localization. Globally, our teams are leveraging common technology platforms but they're really skilled and tailoring our innovation to win in their local markets. Now our market share performance in infant child care provides, I think, a pretty good example of how this approach is working. The strong share gains that you can see in this page across the U.S., China, Russia, Argentina, Korea and Australia are all driven by innovation launched off the same platform. While these products aren't identical, they are definitely siblings. Through digital, we're reinventing our consumer relationships. Our consumer targets are very identifiable, and we can reach them more efficiently online. As a result, we shifted the majority of our advertising mix to digital, over 70% this year. We're a preferred partner with the major e-commerce retailers and as a result, our business, especially in personal care categories like Huggies Diapers, is highly developed. In South Korea, 85% of our diaper business is transacted online. In China, our e-commerce penetration has grown over 70%. The U.S. remains our biggest e-commerce market and was also our fastest-growing major market last year. Now beyond these big 3, we are also realizing explosive e-commerce growth in markets as diverse as Russia, Brazil and India. The key enabler to our strong retail partnership is investment in data analytics and our agile local empowerment approach. These markets are evolving rapidly, and our teams are out front. Their ability to continuously refine consumer acquisition and retention models results in stronger category growth and value for our online partners. Our strategy is working. While the global environment remains volatile, we're encouraged by the strong underlying performance of our brands. In Personal Care, which has been less impacted by COVID demand dynamics, we delivered 5% organic growth last year. Despite COVID and economic headwinds, our D&E market growth remains robust, it was up 6% throughout 2020 and remains up 6% through the first quarter of this year. Our market share performance in 2020 was enhanced by significant gains in most of our key diaper markets. This included multi-point share gains in markets as diverse as Korea and Kazakhstan, the U.S., Russia, India and Peru. We continue to see robust share performance in China, Brazil, Argentina and South Africa as well. And this momentum is carried into this year, especially in China, where our Q1 market share was up almost 3 share points year-over-year and where we now hold the #1 diaper market share position. Now since the inception of K-C Strategy 2022, we have delivered strong results ahead of the medium-term targets for the top line and in line with adjusted earnings. Our robust top and bottom line performance last year was meaningfully impacted by COVID dynamics, especially in our consumer tissue and professional segments. And the cycling of last year's COVID demand and supply disruption this year has impacted our outlook for this year. Given the COVID-related volatility, we believe a look at the combined 2020 and 2021 2-year period provides a better perspective on the underlying performance of our business. So our outlook for the combined 2-year stack is approximately 3% organic and 4% EPS and remains in line with our medium-term objectives. We're proud of our organization's ability to navigate the volatile environment, and we remain confident in our ability to deliver our K-C 2022 medium-term targets. We continue to experience elevated volatility with macros more challenging than we anticipated at the start of the year. Our first quarter results and outlook for the year have been impacted by our sharp rise in input costs, weather-related supply chain disruption and faster-than-expected consumer tissue destocking. While I'm not pleased with the Q1 results and our outlook, we have taken decisive action. We have increased our selling prices to offset commodity headwinds. We've done this effectively in past commodity cycles and believe our teams will continue to execute well in this cycle. As we communicated in April, we expect second quarter conditions to remain challenging, resulting in a profit low point as additional cost inflation is expected ahead of realization of newly implemented pricing. The timing lag of cost versus price realization will likely result in at least a $0.20 drag sequentially in our second quarter. That said, we remain encouraged by the underlying performance of our brands, and we continue to invest in brand building to ensure we're able to grow both in the near term and in the long term. So our strategy is working. We're providing our consumers with strong value-added innovation, building stronger, digitally-enhanced relationships and executing well locally. Our execution of K-C Strategy 2022 is yielding an improving top line, market share gains and is positioning the company well for long-term success. I remain confident in our ability to deliver balanced and sustainable growth and create long-term value for our shareholders. Now with that, I'll turn it back over to you, Callum.

Thanks very much, Mike. Look, I want to focus almost entirely on the long-term strategic issues and questions today. But as you guys know, and as you touched a little bit in your presentation, Mike, there is a lot of focus in the investment community today on the inflation backdrop and especially in staples. So I'd maybe just like to start by kind of getting some of the short-term questions out the way, if that's okay. And maybe this one is probably for Maria, I would guess. I wonder if you can just walk us through over the course of the next 12, 18 months. Obviously, Q1 was tough. You've called out Q2 and the headwinds there in terms of the $0.20 drag. Can you walk us through some of the puts and takes in terms of -- you have pricing coming at the end of June. Presumably, some of the hedges roll off in the second half of the year. There's some big kind of comp issues between Q2 and Q3 as well given the volatility last year. So I wonder if you can just walk us through at a high level, what are those big factors that we should all be aware of over the course of the next 2, 3 quarters.

Sure. Let me kind of give a broad answer and then I'll narrow it in. Clearly, commodity prices are a result of supply and demand dynamics. And with COVID, there has been more volatility than we would normally see in the commodity environment. So as you recall, last year, we benefited from sustained low pulp prices. Given the low prices, some of the volume actually -- or capacity came out of the market. And so when demand recovered, we saw the pulp prices escalate pretty quickly coming into this year. On resin, pricing has been more volatile throughout last year. We started last year with high supply. And then when COVID came in, a significant drop-off in demand, causing very low pricing in the first half of last year. As demand recovered in the second half of last year and resins became inflationary, we have the weather shocks that Mike referenced that not only affected our manufacturing operations, but also a number of the resin suppliers. So then we had these recent supply shocks on the polymer resin side of the house, and that created a very meaningful spike in prices in the first half of this year. In the first quarter, we had resin pricing up over 100%. So very dramatic increases and a lot of volatility looking over the last period of time. So for us, inflation has really escalated over the last 6 months. And as we discussed in April, inflation for us is much higher than we expected coming into the year. Most of our primary input cost forecast inflation is on the pulp and polymer-based resin side of the house. In our April outlook, North America, market prices for pulp were expected to be up more than 20% for the year and polypropylene resins was expected to be up more than 60%, which are pretty dramatic numbers. The last time we saw a big commodity spike was in 2018, and we were talking about record levels, our inflation for this year is even more significant of that. When I look past 2021, while -- we're not talking about a forecast, there is some good news in that we are expecting to have additional capacity coming online in the fiber market beginning at the end of this year with some further capacity expansion that's already been announced through 2024. And then we're also expecting to see additional capacity on the resin side in 2022 and 2023. So we should be getting more help from the supply chain or from the supply side of the house on commodities, the end of this year and moving forward. And that should help stabilize the commodity markets, which right now just have demand far exceeding the supply. And then on this year, as you mentioned, we've got the dynamic running through our P&L where we've got these rapidly escalating commodity costs and the pricing that we announced really isn't going into the market until the end of the second quarter. And so the -- you saw the results in the first quarter. The second quarter, that dynamic is exacerbated as commodities continue to inflate in advance of the pricing. And so when that pricing kicks in, in the second half, we're expecting a much better financial performance in the back half of the year than we expect to put up in the first half.

Super helpful. But maybe just as a bridge between that and some of the longer-term strategic questions, maybe this one is probably for you, I guess, Mike. I think you've been with the business about 10 years or so now.

Yes. Just about 9. Yes.

How do you -- given the importance of pricing to offset some of these cost headwinds, especially in the second half of this year, how do you see the pricing power of the Kimberly-Clark business having evolved over that 9-year period since you joined the business? Do you think it's got worse? Do you think it's gotten more competitive in these categories as private label shares have grown? We see a lot of talk in the kind of broader industry about shift of power to the retailers? Do you find it more difficult today to push through pricing than you did 8, 9 years ago?

Yes. Maybe I'll touch on that, Callum, in a couple of different ways. One is what I would say is we have strong support for our strategies, and that's to elevate our categories, premiumizing our categories and expanding our markets by developing them. We have strong support from our retail partners on that. And I think one of the things is that I think they're very cognizant of, one is that obviously, baby is an important gateway to the family. And families are very important and valuable shoppers to our retail partners. And because of that, it's important for them to win those categories. And we tend to operate, for example, in baby or tissue. These are very, very large categories. And so our partners recognize that they're focused on growth and they recognize that to grow, they really want us to be growing and helping them grow. And so really, that's what our elevate and expand strategy is all about. We're trying to create what I would call the high-road approach or a virtuous cycle. And the best way to grow from our perspective is to invest in innovation the consumer really wants, right, to solve some of their biggest problems, to bring attention to that through effective marketing and to drive superior retail execution. And to do that, I think we have to have the investment that we've been putting forth into the brands. And so I think our customers kind of recognize that. I think they like the virtuous cycle of growth versus what I would say, versus cutting cost and creating a -- some would say is a doom cycle, right? And so that's the path we're on. And therefore, I think -- while I think the pricing discussions are never easy. I would say, people understand the rationale. The other part of the pricing that I would say is where there remains sensitivity is relative price versus other retailers. And we take a very balanced approach. In a market like North America, all of our customers are on identical programs. And that doesn't mean that their funding is identical, but their access to funding is identical. And so because of that, I think some of that sensitivity on relative price is a little bit less because I think they trust that we're treating them equitably.

That's interesting. Look, I want to sort of dive into growth, right? I think it's the first big pillar of that 3-pillar strategy you spoke about. So I mostly want to focus today on the kind of the big growth angles. The first question I have here is I think some of the categories that you're operating in, they have been tough for us for some time, right, in terms of the kind of innate growth that's being driven. And some of those challenges are things that are outside of your control, right? A lot of talk over the course of the past 12 months about birth rates and birth rate pressures intensifying through the pandemic. So the question here is to what extent do you think that the business can drive relevance of your categories? And to what extent are you just at the mercy of these exogenous factors like birth rates?

Yes. Well, Callum, I'd say it's all based on your perspective going in. And so I've worked in a lot of categories and a lot of categories that are proverbial tough. And so on a relative basis, I'd say there's a lot of opportunity in our categories, and I'm excited about our categories. And I think the reason why is there's -- it's really the core strategy that we have. We develop these strategies kind of in the context of what's happening in the environment, right? And so really, 1 big piece is elevate our categories. I think there remains a big opportunity for us to premiumize our categories, both in developed markets and developing and emerging markets. And if you look at it on a price per diaper basis, the spread between value diaper to the most premium diapers have relatively narrow spread, right? Somewhere -- I think when I was looking at a couple of years ago, in the U.S., it was somewhere in that $0.20 range, right? And if you look at other categories, and I used to work in the coffee category, there would be a $12 spread per pound. Or if you look at shampoos, which I happen to use an $0.08 per ounce shampoo, and I've talked to some people who use an $8 per ounce shampoo. So I think -- so the notion is for me that a lot of categories have premiumized significantly over time. I think we still have that opportunity in our categories. Now how do you do it? It's all the things that we're talking about, which is I think we're really focused on getting better insights to crack the big problems that consumers have. And then by doing that, we can make a better product that the consumer is willing to pay a little bit more for, but still being a very good value proposition. So that's kind of the one. And then the other that I think is pretty unique to us and our categories is because of the high frequency of usage, consumers in our categories tend to spend a significant amount of money in our categories. So for example, in diapers, whether you live in a developing emerging market or in a major developed market, you're going to spend somewhere between $500 to $1,000 a year on diapers once you're in that category. And so because of that, the math of it is, there's a lot of markets where people cannot afford to be in the category fully yet. India would be an example or an Nigeria would be another one. And part of our responsibility and our vision is that we want to develop these markets and accelerate the development of these markets over time. We've seen that in China. So for example, in 2010, the GDP per capita in China, Callum, was about $4,000, which tends to be an inflection point for our category. Our business more than doubled, probably close to tripled over between 2010 and 2020. Last year, the GDP capital was over $10,000 in China. So I think that's kind of the math of it. And because of that, you can look at all the countries and economies where the household incomes are a little bit lower. Indonesia, which we just made an acquisition of Softex last year, they're at $4,000 right now. And so that's the reason why today, it's the sixth largest diaper market in the world. We expect that will be the third largest within the next 10 years. And so there's still a lot of opportunity for us to develop our markets over time.

There are a couple of different threads that I want to pull on. So -- and firstly, you spoke about the kind of better insights, I think is the way you put it. So I guess the question is, from that perspective, how are you leveraging those better insights? Can you kind of bring that to life for us a little bit? I guess you're talking about capturing digital data and throwing that fluid through into your R&D teams and things like that. And then the second part of that is how much of that do you think you are doing today? And how much of that improvement in terms of leveraging those better insights is still to come? And how much of it do we still have to see?

Yes, I'll answer the second part first. We're doing a much better job today, but we have a long way to go. But this is what it takes to be in the CPG business. And I think one of the things that attracted me to K-C is we're pretty good at technology. I mean this is an engineering-centric company. Our products, it's not like some of the other -- I worked in food for a long time. And so what I would say, a lot of food tends to be recipe-based or flavor-based. But for us to make a diaper, it takes a lot of engineering because not only do you have to design the product, then you have to figure out a way to be able to manufacture it at speed, right? And so there's a lot of technology involved. And maybe the example I'll give you just to make it a little bit real without over sharing kind of what we're working on, but as an insight around, you could say -- I could say to the team, "Hey, make me a thinner, more absorbent diaper." And that will send all the R&D teams off in directions. It's something that the industry has been doing, Callum, for 50 years, probably since its inception, right? You could see the -- we're probably approaching Moore's law, like how much thinner can it go, right? But thinner and more absorbent? Okay, great. But if I say, "Hey, make me a diaper that delivers healthy huggable skin." That will send you in a fundamentally different direction. And I think that's when I say the bigger problems that mom is interested in solving, I think we can do a better job. And so if I push around, let's say, in our personal care business -- or this is going to include our tissue business, things around health and development or healthy development or natural and sustainable, we still think there's a lot of vectors for us to grow. Comfort occasions. So I think there's a lot of avenues for growth and it just requires more inventing.

And in terms of the hows, sort of leveraging the data, is that -- is it super connected now within the business, capturing that data, it all sort of flows through automatically? Or still improvements to be made in terms of digital and integrating that within the business?

Well, we're advancing. And one of the things we're excited about and -- we've refreshed our team, as I mentioned in our presentation, and we brought in Alison Lewis as our Chief Growth Officer. She had 1 career at Coca-Cola and J&J in Chief Marketing Officer type roles. And it was funny, one of the reasons why I was insistent on Alison is when we were interviewing her, I was -- she asked me, "Well, Mike, what are you looking for in innovation?" And I kind of describe kind of where I was trying to get to. And she said, "So let me get this right. You're trying to design an innovation process that's designed to win in the 1990s?" Right? So once she said that, I said, "Well, she must be the one." Because that's kind of what we're looking for, is -- she and her team bring a wealth of, I would say, the best practices. And she was right in her statement because the last time I actually physically, personally launched a product was in 2002, right? And so it had been a long time since I was active in that role and the techniques come particularly around insights have really evolved. I mean it is all online now, which we didn't have any of that back then. And back then, 15 years ago, it was all -- base season, it took you 12 weeks to get 1 part of the study, and it took you a whole year to kind of get something done. So it's real time now and you can get daily feedback. And so I think that's 1 thing. But I think the other thing that's changing in addition to, I would say, more advanced techniques is we're trying to leverage our scale better as a company. And so that means we are historically a very decentralized company. That is our heritage. And I think that's one of the things that makes us special, is our agility locally. But I think we were reinventing the wheel too often, right? And so we had -- a little less coordinated than I would like. Same people in different markets working on the same thing or different people in different markets all working on the same thing. And so I think where we're getting better and it's why we brought in Robert Long, as our Head of R&D, is -- who's spent a long career from Coca-Cola and P&G, is we want to get more discipline in our resource allocation and put our bigger bets behind some of our bigger opportunities. And so we're really excited about that and really excited about what new thinking is bringing to us.

I'm fascinated about the kind of the real-time insights that you were talking about. And one of the kind of facets that we think has maybe changed in the industry is when we talk to some of the start-up competitors, they talk about product development cycles that are maybe in some of your categories, you'd be looking at only a couple of months long, which I guess is a lot quicker than historically the big companies would have been. Do you think that you've got better at integrating those real-time insights into real-time faster development of products and maybe being a little bit more iterative in getting it out onto the shelf quicker and innovating as you go?

Yes. I mean we can at speed. And actually -- So -- and actually, most markets, I mean, we have cut our cycle times significantly. I think what's changed is a couple of things. Certainly, the insight and the speed of the insight that comes through where you're testing and everything else. But also, I would say the rise of the online penetration that has perhaps made it easier to get products to market faster. The reduction in the use of listing fees where it became quite a financial kind of calculation on whether you're going to launch or not. And so some of those things have changed. And so I think it's lowered the barriers to bring in a wider variety and array of innovation to market. And so we've adjusted accordingly. And so I would say we've -- while I'll say there's still opportunity to improve, we've gotten much faster. The diapers that are winning in China right now, I think I mentioned that we're up about 3 share points in the first quarter. We -- that was an innovation that we launched in response to some of the things that we were seeing locally. Our team, I think, had the first prototype done within like 3 months of seeing the product for the first time, and we were rolled out and launched in 6. I think it's been a couple of years since we launched it. We're probably on our fifth iteration from a technology perspective internally. Now we don't talk about that with consumers, but we're continually upgrading and moving at speed.

That's really interesting. There's something else you said a little bit back where you were talking about the kind of a tipping point in China, the $4,000 GDP, I think you said was the kind of what you consider to be the tipping point and how Indonesia is coming up on that now. And you spoke about how the innovation, you're using that to premiumize. I guess my question is, can you not go the other way as well in these low-income markets, in some of these D&E markets where the penetration where consumers don't earn enough money to be able to afford that? I think you said $500 a year on diapers. Can you not kind of downwards innovate as well into cheaper products? And expand the addressable markets into low-income markets?

Yes, yes. You're exactly right. The -- there's a couple of things. The core strategy is to elevate. Elevate is kind of the growth opportunity for big developed markets. I actually will also say there's quite an opportunity for us to elevate developing emerging markets. I mean China, China is actually the most premium market in the world for us right now, right? So I think that exists for everybody. But what we haven't said this publicly is our goal is to lead our categories. And so that means playing in multiple tiers, right? And so we're not going to be premium niche players. And so -- and because of that, I will tell you, and we're share leaders in Latin America generally, and including in markets like Brazil and Argentina, but all across Latin America, the recipe for that success is because we're leaders in all the tiers. And so in Argentina, we're the leader of premium, and we're also the leader in value. And that's an important pivot that I would say, maybe 3 or 4 years ago, we were not as focused on because we were a little more focused on premiumization. But recognizing, especially with the economies moving both up and down in a market like Latin America, being able to serve consumers in a variety of environments was really important to us if we wanted to maintain our leadership. And so that's something that we're really focused on. It's also why we're very excited about our acquisition last year of Softex. And Indonesia, right now, it's the sixth largest market. It's a fairly low-priced market. And the majority of their business is in the lower-value tiers. But they have strong margins, and they have figured out a different way to operate at low cost than we traditionally have. And so we're learning a lot from them. And we do think there's a lot of opportunity to apply how they do things to markets like us for Latin America or whether it's Africa, Vietnam and other markets.

Is that like a revenue synergy where you think you can introduce new sort of lower-cost SKUs to expand the market? Or are you talking about a cost synergy of stripping out costs from those markets?