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

So next up, we have Kimberly-Clark. Through the dramatic ebbs and flows of consumer tissue demands, input cost inflation, those have been the headline stories the past year, the evolution and growth of the Personal Care business has certainly surpassed any prior held expectations even in the face of declining birthrates. Today, we're lucky to have CEO, Mike Hsu; CFO, Maria Henry, and Chief Growth Officer, Alison Lewis, with us. They're going to go through some prepared remarks, and then I'll do some Q&A. So Mike, I'm going to pass it over to you.

Okay. Good morning. Thank you, Lauren. We're glad to be here and appreciate the opportunity to discuss our company with you today. I'm going to start with -- by sharing some of our strategies for growth and long-term value creation. And we'll also touch on some of the specific challenges that you just mentioned that we're facing this year. First, the standard reminders apply today about any forward-looking statements we might make and any reference to non-GAAP financial measures. I'll refer you to our latest 10-K and website for further information. Kimberly-Clark, for those of you getting to know us, is a global company with a long successful history of innovation and category development. We compete in 3 segments, the largest being personal care, which makes up about half of our sales. We have a portfolio of iconic and trusted brands, including Huggies, Kleenex, Kotex and Scott. And our brands hold the #1 or #2 market share position in about 80 countries, and our brands, categories and markets have significant growth potential. Our purpose is to provide better care for a better world and we're really motivated to provide better care for our consumers, our stakeholders and, of course, our planet. And so this purpose drives our social and environmental commitments. We've been focused on sustainability for a long time and have an excellent track record. And you can learn more from our recently published 18th Annual Sustainability Report. And last year, we launched the next phase of our sustainability journey, which we're calling Sustainability Strategy 2030. So by 2030, we aspire to advance the well-being of 1 billion people through our social programs. And we plan to reduce our environmental footprint by half with a focus on plastics, water, carbon and force. This strategy has clearly defined objectives and we're actively tracking scorecards on every element. We're strongly committed to sustainability, and I'm proud of our track record. Now when I assumed the CEO role back in 2019, we introduced K-C Strategy 2022 as our medium-term plan to drive balanced and sustainable growth and create shareholder value. This strategy has 3 pillars, which you can see on this slide: driving growth of our portfolio of iconic brands, leveraging our cost and financial discipline and allocating capital in value-creating ways. We're delivering on all 3. And at the midpoint of our current guidance, organic sales has averaged 3% over the last 3 years. And over the last 2.5 years, our cumulative savings through force and restructuring is $1.25 billion, and we've returned over $5.4 billion to shareholders through dividends and buybacks. I'd like to highlight our first pillar, strategic pillar, growing our portfolio of iconic brands. Now when I joined K-C almost a decade ago, I saw a long runway for growth, and I see that even more clearly today. Accelerating growth and enhancing commercial capabilities has enabled sustained top line growth and will continue to be my top priority. We intend to grow by elevating our categories and expanding our markets. Elevate our category means driving [ premiumization ] especially through innovation that delivers enhanced consumer benefits, and expand our markets is making our products available to more consumers and accelerate the development of our D&E markets. Our focus there is on personal care, which is still in the early stages of development across D&E and where there remains a tremendous opportunity to expand category penetration. Now to enable these strategies, we're investing more in our brands and strengthening our commercial capabilities. We're unlocking growth by improving our commercial capability. We're building a commercial powerhouse in the way we innovate, market and sell our products to more fully leverage our global scale. These areas of focus, innovation, digital and market execution and revenue growth management are all highly correlated to growth and market share and a key driver of our global improvement in personal care. Now just 2 years ago, less than 1/3 of our top innovation was moving across regions. And today, more than 75% of our top initiatives are scaled across 3 or more regions. We've increased media investment over the past 3 years. Approximately 70% of our media is digital, which enables us to improve targeting and personalization, resulting in significantly improved ROI. Our end market execution work in both bricks and clicks is moving us towards perfect store and shelf and has helped us strengthen our customer partnerships. We're also making faster, smarter, more profitable revenue management decisions every day with balance across price, mix and volume. In fact, we've delivered positive net price and positive mix in the last 2 years and are on track to do so again this year. Our focus on enhancing commercial capabilities resulting in better and faster strategy execution in our markets. With a focus on a more relevant suite of operating metrics, our teams are creating better innovation and our markets are pulling good ideas faster. Our strategy is working. Our performance has improved, especially in personal care where our organic growth is accelerating over the past 3 years, driven by tailored local strategies and enhanced by strong execution of our commercial initiatives. Our D&E growth has also accelerated significantly. Despite cycling COVID and major economic headwinds, we have a long runway of growth in D&E, and our team has provided strong leadership and accelerated development of these important growth markets. We're focused on delivering balanced and sustainable growth and believe improving our market positions is a critical performance indicator. We're growing or holding market share in more than 60% of our 85 category market combinations, and we're performing very well in the world's 2 largest diaper markets. U.S. diapers had an outstanding share performance in 2020, which continued into the first quarter. While year-to-date performance was hampered in Q2 by supply challenges, shares have been recovering nicely. In China, our year-to-date diaper market shares were up almost 3 points, and we now hold the #1 diaper market share position. In 2020, we delivered significant gains in most key markets, including multi-point gains in markets as diverse as South Korea and Kazakhstan, the U.S., Russia, India and Peru. And as you can see on this chart, our momentum has continued this year. While we know that our strategy is working, the near-term operating environment is impacted by unprecedented volatility. The ongoing health crisis related to COVID-19 and the secondary economic impacts of the pandemic results in an environment that remains dynamic and hard to call. In addition to comping a record 2020, our first half results and outlook have been impacted by several discrete issues, including record commodity inflation, COVID-related U.S. tissue category dynamics, and unprecedented disruption in the global supply chain. I'm not pleased with our results and outlook, and we're taking decisive action. We've moved quickly to increase selling prices and continue to take additional actions as the cost situation continues to evolve. We're also accelerating cost savings. Although significant, we plan to fully offset the effects of inflation with net price realization and cost savings over time. Now despite the volatile conditions, our underlying brand performance is strong and improving. We're moving aggressively to offset record headwinds while also continuing to provide support to ensure our ability to deliver balanced and sustainable growth now and in the future. So in closing, our strategy is working. We're providing our consumers with strong value-added innovation, building stronger, digitally enhanced relationships and executing well locally. Our teams are executing K-C Strategy 2022 well, positioning the company for long-term success while also pivoting to offset near-term volatility. I remain confident in our ability to deliver balanced and sustainable growth and create long-term value for our shareholders. So with that, Lauren, I'll hand it back to you.

Okay. Great. So I have plenty of questions to follow on the discussion you kind of kicked off around personal care, but I think I need to start with tissue. So just -- has visibility improved at all into near-term trends? And where would you say we stand on demand normalizing, knowing also there's Delta variant, there's been some coverage in the Wall Street Journal recently about tissue demand elevating again. So just curious where that stands.

Yes, Lauren. Yes, thanks for that. Yes, I wouldn't say visibility is improving. That's about where it was, maybe when we talked about 6 weeks ago. We're continuing to experience high volatility in the category. The evolving -- the pandemic is evolving right before our eyes, and I think you can see that here in the U.S. And so we expect that volatility to persist for the balance of this year and even perhaps likely now into next year. I do believe, however, one, I think we've cycled the peak demand that we experienced in the first half of last year, okay? But that demand continues to be somewhat lumpy. Consumption and retail consumer stocking has been kind of tough to predict. And I think that is likely to persist. That kind of lumpiness is going to persist. I think there had been an increase, especially here in the U.S. of infection rates across much of the U.S. That does appear to have driven some recent additional consumption and/or consumer and retail stocking. I think in August, the consumption looked like it was up high single digits, low double digits. And that's an improvement versus maybe the prior 2 months, June and July, were both down high single digits. And so I think that's kind of one thing. The one -- the other thing I'll point out, though, about consumer tissue, and I think you know this, Lauren, which is, historically, this is the most stable of all consumer categories and it's tied to kind of a fixed consumption behavior. And so -- and I think it's going to continue to be stable once we normalize kind of in this post-pandemic or endemic environment, depending on what we want to call it. My personal belief is as COVID normalizes, the category should be somewhat larger than our 2019 base year, the logic being I expect remote working to be elevated versus prepandemic days, and that should result in more at-home consumption. But that said, it's been -- I recognize it's been very, very lumpy over the past 18 months or so.

Okay. And it does sound like the most recent data that you have seen consumption or at least consumer purchasing behavior kind of step back up?

Yes. Yes, high single digit, low double for the moment.

Okay. Okay. And I guess, stepping back and digging a little bit longer term, I mean, how do you think about the role of consumer tissue in the portfolio? I know you talked it's historically very stable. But how do you kind of walk the line between managing that business for cash or for profitability but still supporting the business so you maintain competitiveness?

Yes. I mean you're exactly right, Lauren, in your opening introduction for us. We have been emphasizing personal care globally as our global growth and opportunity for global growth and expansion. And that's been performing very well. I'd still say consumer tissue plays an important role for K-C, especially in developed markets where we have strong market positions like in the U.S., the U.K., South Korea. And the reason I say that, one, as I just said before, solid, stable growth with growth built in, generally with the population. I still believe there's -- being a marketer, and Alison may comment more on this, but I still believe there's room for innovation and value redesign in the category. I think there's ample opportunity, especially in developed markets, to elevate the category and improve our value position. I think the category has been stuck in kind of the attributes of soft and strong forever. And we've been moving our business more in direction of a better clean, which I think creates more value for consumers. It's certainly what I prefer. So I think on the one hand, it's still -- consumer tissue is still going to play an important role for us. That said, I'll also recognize that our performance in tissue has been less consistent in some markets. And so we are looking for improvement across all of our markets, and we need to improve our performance by getting more focused on both elevating the category strategy and then applying our commercial leverage with more discipline across the board. So I think we still want to see better improvement across other markets. And the last thing I'll say is I'll also recognize that consumer tissue for us has more -- I would say, more inherent volatility in earnings. And we're working to reduce that volatility over time through both strategic and operational actions. I'm not promising that yet, but I just want you and our investors to recognize that. We recognize that, and we're working on it.

Okay. Great. I think on the last earnings call, Mike, you did make a mention of taking a hard look at businesses that aren't additive to the company's growth profile or accretive to profitability. So can you just talk about the evaluation process you go through, kind of how regularly that happens? Maybe this is better suited for Maria, key criteria for stay or go? Because I think a lot of people heard that and said, wait, is that a comment on something related to consumer tissue? So would love to hear what you really meant in that mention.

Yes. I know it got a little attention. I think we've said the same thing in the past, Lauren. So I don't know that our operating direction has changed. But that said, I think we are going to look at our portfolio with discipline. And so maybe I'll ham and egg this with Maria a little bit. But one, I'll say, creating shareholder value is a primary objective of ours, and we believe we can best do that by consistently delivering balanced and sustainable growth. And so over the past few years, we feel good that we've been able to improve our growth profile in nearly all markets, and I think you recognize that in your commentary. On that dimension, I'll say, local agility is our secret sauce and our strategies are tailored at the local market level, but -- and our teams are doing a great job pulling great ideas from our global leaders. So I think that's one change. But balanced and sustainable growth is the expectation for all of our markets, and that means being able to balance organic growth, net sales growth, profit and share, right? And so where we can achieve that, we are going to take a hard look at the market or the category and its role long term in that portfolio. That said, we're going to remain disciplined about capital allocation. So any move we would make would have to create value. But maybe, Maria, I'll let you comment more about how we think about it.

Sure. I think with divestitures, just like acquisitions, we are very disciplined about it. And on the divestiture front, we have to consider scale effects and dissynergies, just like we look on the acquisition side, to gain scale and produce synergies especially after we've built some stronger commercial capabilities, which is really an overall asset for the company that we can leverage. But we do regular reviews on a quarterly basis, and once a year we go through a strategic planning process where we take a deep dive and broader look by country and by categories to understand where we stack on the items that Mike just talked about. So we're continually looking at it and evaluating it. And as always, it's really where can we create shareholder value with our assets in our portfolio, and that really is the guidepost both on acquisitions and divestitures.

Okay. All right. Great. I want to switch gears a little bit and talk a little bit about what drives growth. And I think there's still a perception that revenue growth is very tied to birthrate trends globally. Alison, you addressed this at CAGNY. You did a great job. It was really -- it was very interesting when you took it on. But I do think it would be helpful maybe for you all to walk through the China case study a little bit. Birthrates were down, I think, 18% in China in 2020, and your business grew double digits, the total personal care business. So -- and I think with much improved profitability. So if you could walk through kind of the changes in that business, the degree to which we can think about or should think about as a template for the way the business can grow even with a challenged birthrate backdrop would be great.

Great. So Lauren, I'll catch that one. And I'll start with saying there is a lot of growth in our categories. Even in markets where there's declining birthrates, the key is finding and following that growth. That's what we're looking to do. And I think China is a terrific example where the elevate and expand strategies combined with the competitively advantaged commercial capabilities that we're building are really delivering the growth in the overall results. So if you go back a little bit in history, 2016 to 2018, personal care growth in China was at best sort of mid-single digits. We had a low point in 2018 where organic sales were down in the low teens. Market pricing, very aggressive. And without sort of a winning product proposition, we found ourselves sort of following the market and chasing the market down, which is really not a place that you want to be. The turnaround really came from a focus on consumer preferred iterative and fast-paced premium innovation. It's been about 3 years since we launched the first phase of our thin and flexible diaper in our premium tiers. And we're now on version 5. So in 3 years, almost every 6 months, we're iterating and upgrading that diaper. And this fee that we're moving and sort of the continual improvements that we're making are all about delighting the consumer while also improving our profitability. So key to all this was sort of, yes, thin and flexible, which gave us more comfort, movement, better absorbency for the baby. But the further segmentation based on true consumer insight and benefit is really the difference maker here, where we can keep moving people up that pricing and benefit ladder. So what we've done in naturals as an example with plant-based liners, what we've done to sort of elevate the softness where we've added real silk most recently. So all of these are examples of how you can continue to tier up at added benefits based on true consumer insights and needs. We also took some bold moves, and we exited the lower end of the market, so the tier 3 diapers, given the pricing dynamics in China. It was more than 1/4 of our sales in 2017. And we did that while giving the consumer a reason to trade up with our elevated premium diapers. And so it all seems to be working, and you know that we're winning market share and we've moved into that #1 position, and we're getting more votes from the consumer every day. And then all of that innovation was sort of combined with commercial capabilities, and they come in as well here, where e-commerce has been key to our success. We have a competitively advantaged position there. It's well over half the category in diapers e-commerce sales, but we over-index. And we have strong partnerships with the online retailers, and we use a really data-driven marketing approach to really bring consumers in, drive them through to retention and ultimately drive them through to loyalty. And then getting to expand, it actually goes beyond diapers in that we've applied that same strategy to feminine care. And so in 2017, again, a reflection back, we were less than a 4 share in fem care in China. And year-to-date, Kotex is 7 share, and we've almost doubled our business in less than 4 years. And interestingly enough, China is actually getting close to being our largest global fem care market, maybe not a surprise to anyone as you just think about China and the power of China. So just great examples of sort of elevate and expand. And then even on fem care, we're taking and wrapping the commercial capabilities around that. So really awesome consumer-inspired innovation, cotton imported from Australia, Kotex Naturals, Kotex paw pads, so a small little pad that can fit in your hand. We're 100% digital marketing using, again, that data science approach. And then end market execution focus is really around city expansion, so continuing to expand within China and then all doing that while managing investments and maximizing revenue generation. So suffice to say, we're very pleased with the progress in China, and I think it gives us confidence on the elevate and expand strategies combined with the commercial capabilities that it really is a formula that works for driving the business overall on top line and bottom line.

And Lauren...

That's great -- yes, go for it.

If I could just pile on because -- Alison can say it better so. But it's clear with Alison joining the company and the team that she's brought in, both promoting from within but also bringing in some select talent externally, I would say Alison and her team, in combination with the business unit or our regional leadership teams, have really -- the big things they've done has really shifted, I think, the organization having more of a growth mindset, right, asking how could we. And the big thing -- and she -- it was really embedded in what Alison was talking about. I think the big -- one of the biggest thing was grounding it in some consumer truths or consumer insights. With clarity about what has to change in our market or our portfolio or our approach to unlock that growth, right? And I think that's a big shift because what we were doing, I think, a few years ago was probably chasing competition a little bit too much, right? So I think that's one big change. The other big change is I think I mentioned earlier, I think we have business -- or local market leaders that are more willing to pull on good ideas. And I think that's really changed. But also, we have better functional leaders that have -- are able to kind of tease out good ideas more effectively. And so I think we have both those things working and that's kind of reflected in some of the leadership changes that -- how we've evolved our leadership approach over the last few years.

So another -- a follow-on to that also would be think about that advertising. And in your slide, you highlighted the acceleration you've seen in personal care, and we've talked about innovation. But I think advertising is something that's also really interesting. Your spending in 2020 was nearly $1 billion, and that compares to $650 million, right, at the trough level between 2016 and 2018. So I guess, how does it feel up around that $1 billion level? And I guess if I make a guess on the rate of spend on consumer tissue, it feels like you've got the personal care business at like a high single-digit, even double-digit percentage of sales now. So what can you tell me about the advertising budget? How does it feel around those levels? Yes, I'd be curious about that piece of the story.

Yes. So I mean, what I would say about advertising is these personal care brands are responsive to advertising, and we're committed to continue to drive investments, obviously, balancing that with the overall P&L and what we're managing with some of the volatility. But I do believe that our approach to advertising has really helped contribute to the personal care growth. And you can't separate advertising out from everything else because all the commercial capabilities sort of work together, but I can talk a little bit more specific about advertising and sort of what we're doing that I think is different and that we're really trying to change the game on how we approach it. I've talked before, and Mike mentioned, that we're moving to a digital-first model, 70% of the investment is in digital. But I think what might be more interesting is how we're investing those dollars. And it really is in 2 ways, I would say, that are different. First, creating better storytelling and experiences for consumers across all the touch points. And the storytelling is really borne from the brand's purpose. So we've worked hard over the last couple of years to put brand purpose in each of our brand profiles overall. And then we're leveraging those stories around brand purpose in an end-to-end way to really fully unleash sort of the digital and PR ecosystem that you can use today, which you couldn't use 10 or 15 years ago to the same degree, and that really drives sort of a marketing multiplier effect on that storytelling. So just a great example, Russia just recently launched Huggies First Hugs program, borne out of the purpose for Huggies Diapers, where there's a lot of false information out there on parenting and what you should and shouldn't do. And so the rest of the team partnered with leading doctors and World Health Organizations and sort of pushed that information out through paid media but did that in a way where they got first-party data back. So they've got a significant amount of first-party data back. The thing that they pushed out with the World Health Organization leading doctors in Russia was so newsworthy that PR agency, PR publications picked up on it, and there was a lot of third-party buzz around what was happening. It was so newsworthy to consumers and so refreshing that they started posting on social media. So we got a ton of sharing. In fact, we actually saw purchase intent increase 6 points from this activity. That's huge. You don't see that on an everyday basis. And then what we did was we took this First Hugs program where we integrated into all the owned digital assets, so the chatbots; VK, which is the Russian version of Facebook; our CRM program; our loyalty programs, and really all because we brought value as a brand to that consumer through our storytelling, and then we amplified that through a digital first ecosystem. So that's a great example of what we're doing. The second exact piece of what we're doing, I think that's different, and then I'll close quickly, is really taking those digital signals and better target. Our categories and the consumers in our categories have real problems that they're facing, and we can find digital signals and use data science to really turn marketing into math. So you know that we do that in China very well, but we're moving and doing that in other parts of the world. So just taking those signals, personalizing the messages and then using that data to continue to bring people through the purchase funnel from awareness all the way through to conversion. So really exciting when you think about those 2 things coming together, where there's purpose-led storytelling that's orchestrated and amplified combined with data science and signals that drive personalized journeys through the conversion. So that's really what's different about our marketing, and it does increase the return on investment, but I think it was more interesting to tell you about the actual stuff underneath.

Absolutely, especially in markets where we don't live. I'm going to wrap up. I hate to do it short term but it's kind of my job, too. So I have to do this. But just latest thinking on commodities, freight, labor costs. There have been storms. Any relief or lack thereof over the last month or so? And as we just kind of looked at over the next 6 months or so, already announced pricing is in place. How should we think about margin progression as we look forward over the next 6 months or so?

Lauren, they all remain very difficult. This unprecedented macro volatility that's heavily influenced the near-term operating environment is certainly continuing. And frankly, it's unlike anything I've ever seen in my career. Commodity costs with both resins and pulp are at or near all-time highs. But honestly, we're used to managing the input cost volatility. But this year, we have what I'll call compounded volatility with the unusual patterns in consumer tissue in North America. And as you've likely been reading a lot about lately, other supply chain issues, which include labor shortages, labor inflation, transportation, availability. And overall, there's just log jams in the logistics systems, particularly in the United States. And then on top of that, we have the continued global effects of COVID on consumers' economies and even our own workforce. And many of these factors continue to move around, worsening, in most cases, making the year very challenging to call. And this is not just for us but these factors are also affecting many businesses and industries. And so when I look at our margins, all of this has had a significant impact on the company margins this year. So in the near term, our margins are pressured in part due to the timing of the lag with pricing but also just the absolute scale of the macro moves that are happening, and these macro headwinds are on top of some discrete headwinds that we have as a company, including lapping the elevated COVID-related demands with this year's destock and the weather disruptions have made this a really challenging year from a margin perspective. Now as you know, we're taking actions to mitigate those headwinds, including raising selling prices, as you noted, but also accelerating cost savings and reducing our spending levels. So we expect all of those actions to help stabilize our margins, and we're certainly confident that we'll improve margins over time. But we're really going to have to see how COVID plays out and how quickly the broader supply chain issues and the macro disruptions get resolved. So the timing and degree and how all of that unfolds over time, we'll certainly have to see. But we expect our strategy of elevating our categories along with our cost savings discipline to really help deliver that overall margin expansion over time.

Okay. Great. I'm going to have to wrap it there. But thank you all 3 of you. It's really great to do this. And like we were talking before we started, can't wait to do it in person. So thank you.

All right. Thank you for having us.

Thanks, Lauren.

Thanks, Lauren.

Okay. Bye.